U.S. market volatility spiked in early 2016 but settled down for the rest of the year, with only sporadic spikes resulting from Brexit and the U.S. election, according to data from Investment Technology Group Inc.
Average volatility for the Standard & Poor's 500 stock index was 28% in 2016, up 3 percentage points from the 2015 average, said Sandor Ferencz, vice president-analytics at ITG in Culver City, Calif. That average was spurred by 34% annualized volatility in the first quarter of the year, continuing a trend that began in the latter half of 2015 as markets in China and Asia-Pacific were roiled.
However, the following three quarters saw a reduction in overall volatility, with annualized percentages of 29% in the second quarter, 25% in the third quarter and 24% in the fourth. ITG measures annualized volatility as the 60-day historical volatility for the S&P 500.
In 2015, first-quarter volatility was 25%, falling to 21% in the second quarter before rising to 24% in the third quarter and then surging to 30% in the last three months of the year.
“The first quarter (of 2016) was all China, all Asia-Pacific” said Colleen Ruane, New York-based director-analytics at ITG. “There was a lot of volatility coming from there, which was an extension of the volatility they saw in a lot of 2015.”
Major events in the second and fourth quarter of 2016 — the Brexit vote in the U.K. and Donald Trump's election as U.S. president — had only a short-term impact on volatility, Mr. Ferencz said. “We didn't see a ton of overreaction,” he said.
Added Ms. Ruane: “Brexit and the U.S. election were local shocks. They were kind of contained in a short period of time before everything rebounded.”
For example, Mr. Ferencz said, average annual volatility on June 23, the day of the Brexit vote, was 24% but rose in the next several weeks to 28% before falling to 26% by mid-September.
Spreads on the S&P 500 for 2016 averaged 4.92 basis points, with higher spreads paralleling increases in volatility for the year. In the first quarter of 2016, spreads spiked to 5.76 basis points before declining to 4.82 basis points in the second quarter, 4.18 basis points in the third quarter and 4.81 basis points in the fourth quarter.
The average in spreads for 2016 was above the 4.69 basis point average for 2015 that was spurred by spreads that reached 5.06 basis points in the third quarter and 5.14 basis points in the last quarter.
Trading costs averaged 37.25 basis points in 2016, about the same as the 37.6 level of 2015. Costs in 2016 peaked in the first and fourth quarters, with 40 basis points and 38 basis points, respectively. Trading cost in the second quarter was 36 basis points, with a one-basis-point decline from that in the third quarter.
|Ranked by difference in cost/savings against the Elkins/McSherry Arrival Price universe, based on the top 50 brokers in each category by U.S. dollar volume. Rolling four-quarter data are as of Dec. 31, 2016. Source: Elkins/McSherry, a State Street company.|
|Trades by order size|
|Trades by liquidity|
|Trades by market cap|
|Commissions and implementation shortfall based on ITG's peer group.* Volatility annualized is the 60-day historical volatility for the S&P 500 index. Data are as of Dec. 31, 2016. Source: Investment Technology Group.|
|U.S. trading costs: Commissions and implementation shortfall|
|Average spread and annualized volatility of S&P 500 constituents|
|*4Q 2016 peer data are preliminary.|