Market volatility ahead of the US election: Operational resilience is just as important as your trading strategy
By Guy Warren, CEO, ITRS Group
Market volatility has been the order of the day in 2020, as firms across the globe react instantly to the latest developments, whether that be Covid-19, the global economic downturn or geopolitical tensions. This volatility shows no signs of letting up, with the uncertainty around this year’s presidential election stoking yet another wave of uncertainty.
What is causing this volatility? The markets always experience turmoil in an election year, as investors hedge their bets on the outcome of the election, but this year the volatility is much greater. A key driver of this is of course Covid-19 and the resulting global economic downturn. With investors adverse to high levels of risk in the current climate they are constantly readjusting their portfolio to minimise their exposure. A key example of this is the recent dump of tech stocks over the past month, with investors worried about over-valuation and potential legislation breaking up big tech.
On top of this foundation of economic uncertainty, the specifics of this years election enhances volatility due to the close nature of the race, alongside the significantly different platforms of both sides. Investors have also been unsettled by rhetoric around mail voting and a potential delayed vote count due to high levels of mailed in ballots.
In the face of this volatility, firms must prioritise operational resilience, which is their ability to prevent, adapt, respond to and recover from disruptions. In this case, it is preparing their trading and IT infrastructure to be able to withstand high levels of volume, in order to ensure their systems don’t overload and face an outage.
It’s remarkable the number of companies out there that still don’t know how many trades they are able to process in a day. This big blind spot means their systems are unprepared for increased volatility. The consequences of experiencing an outage are huge, with clients at risk of losing millions, with the resulting reputational damage being severe.
What can be done to maximise operational resilience and minimise the chance of an outage? Firms must get visibility of their IT estate. This will allow them to identify their headroom (how many trades their system can handle in a day) as well as the specific pinch points and bottlenecks of their system.
At a more advanced level, using the right software tool firms are able to model and stress test worst case scenarios, which then enables firms to put plans in place to deal with them. For example, if a firm has just experienced a 4x day, they can model a 6x or 8x day, enabling them to prepare their systems for this eventuality.
As we get closer to the election, the financial sector is putting more time into their investment strategies, but alongside this they must also invest time and money into ensuring their systems can cope with high levels of volatility. The sooner you get a full view of your systems, the sooner you’ll be able to be ready for the unknown.