Chart of the Day: The Magic Hour

I wish I was referring to this trying to time in our nation's history, but instead I'm talking about what NYT's Vikas Bajaj calls "the scariest hour on Wall Street" - 3 p.m. to 4 p.m.

Ever since Lehman's collapse in mid-September, volatility in stocks has surged. For the year prior to Lehman, the S&P 500 moved an average of 0.8 percent per day (up or down). Since Lehman, the average daily move has surged to 3.1 percent, almost 4 times greater.

And not surprisingly, given the dramatic late-day drops we've seen recently, much of that volatility has come in the last hour of trading. The first half-hour of trading from 9:30 a.m. to 10 a.m., perhaps surprisingly, has also seen a 4X jump in bumpiness, although the overall level of price changes here has remained smaller than during the rest of the day.

The following chart shows the average hourly, as well as overnight, change (up or down, but you can assume that it's mostly down) in the S&P 500 before and after mid-September:
(Source: Reuters)

There also seems to be a lunch-hour effect, as best as I can tell: When you only look at one-hour periods, 12 to 1 PM has the least volatility both before and after Lehman.

And this chart shows the evolution of 3 to 4 PM volatility over the past year:

So why is so much upheaval concentrated in the last hour? It probably has a lot to do with the biggest bar in the first chart. Overnight volatility is even higher than last-hour volatility, so traders are probably trying to get out of positions to reduce their overnight risk exposure. Who said globalization was on the way out? 

Late-day volatility is actually not common, historically speaking. It used to be the case that turbulence was higher at the beginning of trade and would decrease as the day wore on. But those days may be gone for some time.