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Risk Exposure Management, financial markets

How Do Financial Markets Stay Steady in a Volatile World?

Advanced trading and data technology, as well as innovation in product offerings, are what keeps financial markets from getting as volatile as world events.

While exchange-traded funds (ETFs) and funds following environmental, social and governance (ESG) principles are contributing to steadier markets, the primary driver is advancements in technology that contribute to efficient markets and superior risk management. In the operations technology realm, efficiencies from automation and digitization reduce manual work, avoid trading errors and make settling trades more efficient. High-frequency trading capability and the greater availability of data are big reasons for this stability. Similarly, front office technology and big data are making for efficient and stable HFT operations.

High-frequency trading often comes under fire and is criticized as a means of creating higher costs for retail investor. However, high-frequency trading is the main reason why retail commissions have trended towards zero cost, and have helped firms like Robinhood see exponential growth. Lower cost trading combined with high-frequency trading provides greater liquidity in equity markets. More liquidity contributes to lower volatility and thus lowers the market impact of global events like the war in Ukraine.

Data as mitigation against financial markets volatility

The more data available to financial markets participants, the easier it is for them to manage risk successfully – particularly the risk of volatility caused by outside factors like geopolitics. Today’s data infrastructure, boosted by greater willingness to use cloud resources and more sophisticated information now available, makes it easier to find ways to contend with a volatile market.

Investors are looking to manage risk and capitalize on opportunities in inflationary environments, and rising interest rates. One potential way to invest is by shorting duration using tools like interest rate futures. Such investors will also be looking for companies that do well in rising price environments. On these fronts and others, mining data helps traders find the signals they need to get an advantage and manage risks. The available data makes it possible to better target what parts of a portfolio need protection from volatility.

ETFs are a former innovation that help absorb shocks. ETFs are a low cost, liquid vehicle that give investors access to broad sectors of the financial markets that were previously limited to large institutional investors. Arriving in 1993, their popularity gradually increased until the 2008 recession, when the growth rates in both assets under management, and products launched, increased dramatically. In the years following, data infrastructure improvements helped make it possible for ETFs to be used as a hedge against volatility. Enterprise data management (EDM), as a method of operations, is a key data operations improvement that gives front offices more informed support for investment decisions, like managing ETFs.

A notable example of this happened in 2015, when fixed-income ETFs facilitated liquidity high yield bond prices began to fall. ETFs give both retail and institutional investors a way to even out market volatility and spread out its impact among a varied range of securities.


Inadvertently, the increased popularity of investment following ESG principles is contributing both to data improvement and to ETFs. Therefore, indirectly, ESG investment activity also protects against volatility in the financial markets.

The need to quantify and evaluate ESG-worthiness is fueling a well-documented demand for data standards that is being addressed globally, in Europe, and in the US. Getting consistent ESG data will have to be addressed, but having more investment and securities data as a result of these efforts would add to the wider variety and greater amount of market data now available—which helps manage risk, of course.

Where funds go hand in hand with generating more sophisticated data, or fund mandates spur data management advances, risk managers are bound to benefit. Data technology advances go a long way toward tempering market volatility, but it’s fundamental investment decisions that take technology the last mile toward a strong defense against volatility.

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