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Market Volatility and Functionality

In the fall of 2011, volatility in the market looked set to reach new highs according to the VIX index but, as Robert Karofsky pointed out, increased volatility does not mean that the market is not functioning effectively. As the Global Head of Equity Trading for AllianceBernstein, Robert Karofsky noted that the market experienced no delays or other disruptions, which speaks to its continuing functionality. Volatility, however, does push traders toward exchange-traded funds (ETFs). In the past, these funds have generally accounted for about 30 to 35 percent of daily volume. During the period of increased volatility, however, ETFs represented about 40 to 50 percent of the trades. Robert Karofsky explained that traders want to place bets on the entire market in these situations, rather than taking chances on individual stocks. Ultimately, volatility does not have a direct correlation to liquidity. Even when traders are unhappy with certain prices, it does not necessarily mean that they will struggle to fill orders.