Thursday, May 07, 2009

A Look at Volatility Late in the Trading Day

A number of traders I work with have commented on volatility late in the trading session and the clear differences between the morning and afternoon trade. For a minute today, watching the prices fly by, I felt like Joey Ramone at the bar.

Here we see a unique take on the market's late-day volatility. The chart is a moving five-minute standard deviation of NYSE TICK. Recall that TICK measures the number of NYSE stocks trading on upticks minus those trading on downticks. When institutions execute program trades, large baskets of stocks will simultaneously tick up or down, moving NYSE TICK. Small traders, trading individual stocks or futures contracts, cannot move TICK.

What we see in the chart above is that, as the trading day today progressed, TICK became more volatile. We saw more extreme high and low values. That tells us that institutions are executing an unusually large number of trades late in the day compared with earlier. This affects market volatility, as anyone tracking the S&P 500 Index market in the last hour today can attest.

For all practical purposes, the late day in stocks is a different market from morning or midday. This has important implications for position sizing, placing of stops, and pattern recognition. Moves that occur over many minutes at slower times of day can occur in a single minute during periods of heightened volume and volatility. Tracking the directionality of TICK at those times--whether values over time are skewed in a positive or negative way--can be a useful clue as to whether this enhanced volatility will translate into a trending move into the close.

Another vodka and tonic, bartender...