The unseen impact of a volatile market

Published on December 16, 2020 by Rajkumar Bodduna

The dramatic market crash of 2020 is still fresh in our minds.

The stock-market started to crash on 9 March 2020 with a large 2,014-point drop in the Dow Jones Index in a single day, followed by two more drops of 2,353 points on 12 March and 2,997 points on 16 March. This signalled the start of a bear market and ended the bull market. The Dow’s drop was the worst single-day drop in US history.

Traders forecast a global economic recession and reacted to the market crash amid global fears about the spread of the coronavirus and the drop in oil prices by selling stocks, resulting in stock markets reaching their lowest price levels and increasing market volatility.

The major reasons for the rally in the bear market:

  • Oil prices reaching their lowest of all time

Unlike during previous crashes, asset management companies (AMCs) and portfolio managers had time to strategise their portfolios this time around. The stock markets did not shut to control the emotional selling in the markets, and AMCs continued trading with their work-from-home setups.

The market crash led to more volatile share prices that resulted in fluctuations in portfolio concentration limits and market capitalisation rules. When guidelines are beached, analysts investigate the cause of the failure and notify the respective teams. Post-trade workflow is outlined below.

One of the challenges analysts face is in handling the spike in guideline violations and ascertaining the reason for failure such as market movement, trading or other factors.

There was a spike in email communications as well; however, post-trade teams ensured they notified the trading desk in a timely manner, to remain compliant, and helped initiate communication between the investor and the end client.

AMCs use multiple levels of alert systems to reduce the number of breaches in the following day’s post-trade batch; these include open orders, pre-trade fails and close-of-the-day alerts. Even a pre-trade system may sometimes fail to capture guideline breaches because of the timing of trades. When a trade is submitted, it may pass through a pre-trade system but eventually fail in the post-trade system due to market volatility, rating changes or corporate actions.

The following are the most frequent breaches we as investment compliance support professionals face when handling large numbers of breaches.

  • Market-cap limits: For equity investments, it is advised that portfolios be invested in within market-cap limits. The market cap of most securities have dropped sharply, breaching client guidelines.

AMCs cannot avoid compliance, and they need to make sure they are not penalised by regulatory bodies and they do not breach client contracts. However, a few amendments to investment management agreements (IMAs) could help portfolio managers handle market volatility during a crisis. (An IMA is an agreement between the investor and the AMC that outlines the investment plan and return objectives.)

  • Portfolio managers can make suggestions to their clients or clients could provide the portfolio managers with flexibility and re-review the guidelines wherever possible

How Acuity Knowledge Partners can help

We are experienced in the fields of pre- and post-trade monitoring, decoding IMAs and coding rules in applications.

To ensure business continuity in these challenging circumstances, we have adopted a work-from-home model to serve clients effectively.

Originally published at

About the Author

Raj is an Investment Guidelines Professional with 2+ years of experience in Coding, Monitoring, Reporting, and Testing in Compliance Systems. He is adept at logical coding and monitoring of investment guidelines in Sentinel. He holds an MBA in Finance and Marketing.

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.