A volatile calm - the paradox of 2016 financial markets
(Story corrects to clarify nature of transactions in ninth paragraph below crosshead)
By Jamie McGeever and Vikram Subhedar
LONDON (Reuters) - Traditional measures of volatility at historic lows and Wall Street stocks at new record highs went hand-in-hand in 2016 with traders fretting about bouts of wild stock-price swings and currency flash-crashes.
The past year has been nothing if not paradoxical for financial markets - a landscape that will probably persist in 2017.
The proliferation of automated trading and passive investing, extreme levels of speculative positioning in an increasingly regulated broking world suggest investors should brace for periodic turbulence even if markets are mostly calm.
While the measures of future or implied price volatility look remarkably subdued, they are disguising a minefield in individual securities and currencies, and - during particular periods - micro market storms that may become magnified as U.S. interest rates rise and other central banks step back from years of anesthetizing money-printing.
An analysis of intraday volatility across major equity, bond and currency markets shows that episodes of sudden, extreme market volatility has become more commonplace in the last two years, even though implied volatility has been contained.