From the Wall Street Journal: It has looked that way in recent weeks, as macro issues such as the solvency of European countries and fears of a global economic slowdown have overshadowed fundamental differences between companies. The consequence is that stocks are moving in tandem, indicating a high degree of correlation.
One potential reason is the popularity of exchange-traded funds. ETFs account for more than 30% of volume in U.S. stock markets, compared with just 2% in 2000, Credit Suisse says. It's reasonable to expect ETF trading to drive correlation higher because many of the vehicles are tied to stock indexes.
Even so, ETFs were by no means the beginning of index-based trading. Mutual-fund managers have traded baskets of stocks tracking the S&P 500 for decades. Stock index futures began trading in 1982 and they remain far larger than ETFs. According to CME Group, the value of CME E-mini S&P 500 futures traded each day is more than four times the combined volume of SPDR S&P 500 ETF and iShares S&P 500 Index ETF.
Another trend that may have boosted correlation is the decline in structured products. The result has been that a range of market participants, from big banks to hedge funds, have adopted more macro-oriented strategies. And even if there's no evidence that high-frequency trading firms are a source of correlation in their own right, they are likely to reinforce it by following other participants and trading products like ETFs….
Read more about this at http://online.wsj.com/article/SB10001424053111904787404576532811006776504.html
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