What happened last week? The Dow Jones Industrial average gained and lost a total of 2,134 points for a net change on the week of down 175 points, or down 1.5%, which is not exactly the end of the world. The S&P 500, the broader index we really care about, lost 1.6% on the week, 8.7% so far in the month of August, 10.5% on the quarter, is down 14.0% from the April 29th 4 year high and is down 24.7% from the all-time high set October 9th, 2007. The volatility is NOT rational. The equivalent would be selling your home on Monday, buying it back Tuesday, selling it Wednesday, buying it back Thursday and adding on a bedroom Friday.
Who wins from the volatility? "High frequency trading" firms that can effectively manipulate the markets by placing thousands of one sided trades (all bids, or all offers) on individual stocks, or even more effectively on thinly traded ETF's, to force the market one way or the other. There are no uptick rules and no margin requirements preventing these firms from setting up an initial position (long or short), manipulating the market in the right direction, and closing out the trades with a profit a few minutes (or moments) later. Who loses? Pension plans, endowments, mutual funds, individual investors and corporations (who will find it ever harder to raise equity capital.)