Computerized Trading and Index Funds are Altering Liquidity Patterns and Increasing Volatility in the Process

Computerized Trading and Index Funds are Altering Liquidity Patterns and Increasing Volatility in the Process

Index funds which have grown increasingly larger over the past several years generally trade during the last half hour of the day.  Computer trading models have picked up on this trend and have funneled more of their trading volume toward this time period as well.  Seems innocent enough, but the result is that there a noticeably lower level of liquidity for stocks during the day.   That means that the cost of trading during the less liquid mid-day period is higher and the potential for big price swings is greater.  For now, most traders are aware but not overly concerned, but if we experience a highly volatile period in the Market when everyone is looking to trade at once, the problem could snowball.    

Read more here from the Wall Street Journal.