Friday's Perfect Storm

Tomorrow (Friday) will once again bring a sort of “perfect storm” in the markets.  Think high volume and high volatility - especially at the end of the day.  For starters, stock index futures, stock index options, single stock options and single stock futures contracts all expire at the close, (aka “Quad Witch Expiration”).  Quad Witches occur four times a year, on the third Friday of the third month of each quarter.  They bring large volumes which leads to fast money (high frequency traders) getting involved, which leads to more volume, which leads to more fast money getting involved.…  You get the picture.  

This particular Friday we have the added bonus of a quarterly share update for the S&P 500, S&P MidCap 400 and the S&P SmallCap 600 indexes taking place at the close.  Every fund pegged to one of these indexes (and that’s a lot of funds) will have to adjust its portfolio.  Even stocks that are not in one of these indexes can experience increased volume as fund managers move money around to accommodate the changes.  And, as previously mentioned, volume begets volume. 

Lastly, I would expect that the continued uncertainty surrounding the state of affairs in Japan will have traders nervous about carrying big positions over the weekend.  That risk aversion should only add to the volume and volatility on the day.