Thursday, October 30, 2008

Historic Stock Market Volatility and the Concentration of Ownership in Stocks

Here's an update from an early October post; it helps illustrate how the recent stock market's volatility has been qualitatively and quantitatively unlike anything we've seen in years. Indeed, this is the highest level of 20-day average true range for the S&P 500 Index since my data began in 1962. That means that we've seen higher volatility than during the 1987 market crash and higher volatility during the major declines of 1970 and 1974.

The recent bout of extreme short-covering in Volkswagen stock is an illustration of the volatility that can result from a concentration of shares in institutional hands. According to recent estimates, institutions account for over three-quarters of all stock market ownership. By contrast, individuals owned 94% of stocks in 1950 and 63% of stocks in 1980. With the recent liquidations forced upon hedge funds, mutual funds, pension funds, insurers, and other financial institutions, we've seen historic levels of volatility as a function of historic levels of concentration of ownership among institutions.


FeirFactor said...

I definitely think the fact that institutions now control the market contributes to the volatility. These guys are probably much more active than individuals traditionally were.

procol said...

Not quite sure if you're counting Mutual Funds as an institution.

Of course , MF holdings are for the most part public ownership by proxy.

As far as insurance companies go, they might be regretting not having more cash in the mattress, as it were.

AKA_CES said...

It would be interesting to know the profile of those who shorted successfully this Fall. The no-short rule must have had an aberrant effect this time around, e.g. on Einhorn.

Similarly, it would be interesting to know the profile of buyers at recent lows, other than the prominent individuals.

If the declines wiped out lots of hedge funds, the distribution of different market strategies may have changed significantly, shifting, as your entry may be suggesting, to players who are more fundamentally driven.

TTmarun said...

Hi Brett, yur work is much appreciated, i can't say how much i have learned from yu and yur site. so many seeds of thought have been planted for me to research. thx.

question on the numbers. how are yu getting the numbers on large players in the futures mkt? you've mentioned that (off the top of my head) 52% of the volume on ES is 2%of the players in the mkt. how are yu gather these numbers? what is yur source?
thx again, JT

bruce said...

I don't think the shorts owned the stock. hence no concentration of ownership.