![]() The third factor is market microstructure. I think volatility scaling, if everyone is doing it, creates an instability and there are certainly a lot more people doing that,” said Rattray. This feedback mechanism has caused many to believe quantitative strategies are causing market instability. However, as markets go down, volatility tends to go up. Generally, it is not very long-term and quite short,” he noted. “One technique that has really worked for the last 20 to 30 years in systematic trading is scaling your positions by some measure of volatility: short-term, medium-term or higher-realised volatility, but usually not long vol. Second is the growth of quantitative strategies, in all their forms, within and outside volatility trading. Politicians are creating the circumstances for volatility,” he says. It doesn’t matter where you look in the world. ![]() Central banks are trying to suppress volatility while politicians appear to be playing a “very different game. Rattray sees three themes affecting volatility at the moment. Will Bartlett, Parallax Volatility Advisers The market trades up, and we’re sellers,” explains Bartlett. The market trades down and we’re buyers of whatever we bought the straddle on. Putting this gamma onto the books of firms such as Parallax that are natural hedgers has tended to make the suppression of volatility a “somewhat self-fulling prophesy where we buy straddles effectively, the sellers don’t hedge them. Looking at implied volatility on most products in the 30-day or less time frame, investors consistently trade under realised. With the prevalence of risk premia and volatility-selling strategies that dominate the front-end of the vol curve, many see these spikes as an opportunity to buy underlying assets, said Will Bartlett, chief executive officer at US-based Parallax Volatility Advisers in a panel at the Societe Generale/ derivatives conference. Over the last four or five years, investors have become used to them. Volatility spikes are becoming more frequent but are also short-lived.
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