Speculation Index

See: Speculation.

Hmm...something smells funny. Our invest-y spidey senses sense speculation afoot in the markets. Better check the speculation index.

The speculation index is a way to measure speculative trading in U.S. equity markets. Specifically, the index compares the trading volume on the American Stock Exchange to the trading volume on the NYSE. The former is smaller and riskier, while the latter is large. This means that more trading happening on the American Stock Exchange (relative to the “normal” trading on the New York Stock Exchange) signals speculative trading.

When people trade speculatively, it means they think there are risk-gains tradeoffs. Maybe they no longer want to hold an investment because the perceived risk went way up. Or maybe they're the buyers of that investment, because the perceived gains from the increase in risk is too good to pass up. All this flurry of trade can be seen in the trading volume, which is what the speculation index measures.

The speculation index has been harder to calculate since high frequency trading became possible. In the old days, everything happened in slo-mo, since trades were done manually. Now, trades happen lightning fast, so it’s hard to distinguish a normal long-term order from a short-term speculative trade.

And we thought technology made everything easier. Tradeoffs, right?