Universal Insurance Holdings Inc (UVE)

[Veteran Stockhawk]

Why are stock prices so volatile?
Professional investors are the chief factors in the current selloff. Trading desks, hedge funds and private equity use a great deal of leverage - they borrow a lot and depend on aggressive margin trading to maximize their profits. As a result, they are extremely vulnerable to any constriction in the supply of credit.

If the market starts heading down, margin calls may force these pros to sell, even if they don't want to. And modern computerized trading can result in a cascade effect.

Margin calls make traders dump stocks, which drives share prices down so much that another round of margin calls is triggered. Portfolio managers may have to sell whatever they can move in volume. So paradoxically, better-quality, liquid stocks may actually be the ones that are dumped.

Other professional traders may try to profit from such market declines by selling short. They typically reduce their short exposure by purchasing stock in the last hour before the market closes. That can produce a whipsaw, like the one we saw on Thursday, where stocks plunge and then rally back powerfully at the end of the day.