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Volatility may appear irrational, but there are steps investor relations professionals can take

Corporate executives often wake up to unsettling stock price swings with no clear catalyst, news, filings or obvious events. In today’s markets, volatile price movements frequently extend well beyond the fundamentals. Algorithmic trading, macro-overlay strategies and often drive disconnects, making market reactions appear irrational.

These dynamics have intensified in recent years. The rise of passive investing, the influence of retail traders, , and the emergence of ‘meme stocks’ have all contributed to a market structure that is more fragmented, faster moving and harder to interpret.

For directors and executives, understanding these market forces should be a key priority to help elevate their company’s governance, finance and investor relations functions. Volatility can affect a company’s access to the capital markets, create an opening for shareholder activism and shape investor sentiment far more than earnings alone.

This article explains the forces driving stock price volatility, outlines best practices for communicating strategically, and provides actionable steps to help leadership teams understand what is going on with their stock price.

What’s really driving volatility – market microstructure in action

Algorithmic and high-frequency trading (HFT) are automated platforms that execute trades based on momentum, trend-following, sentiment and statistical arbitrage rules. While these algorithmic and HFT participants often improve liquidity when markets are calm, they become more cautious in pricing risk assets with wider bid-ask spreads when volatility explodes. In turn, this often amplifies price moves through rapid feedback loops.

A prime example is the March 2020, the Covid-19 pandemic induced sell-off showed how liquidity evaporated when HFT participants pulled back, exacerbating volatility just as investors sought to raise cash in a critical time of uncertainty.

Boards must understand that much of today’s intraday trading is detached from fundamentals, driven instead by speed and statistical relationships. This complicates the task of explaining short-term share price movements to investors.

Macro overlay trading strategies: Global news, interest rate shifts, inflation data and geopolitical shocks often drive exaggerated stock price movements. Quantitative macro and factor models sift through massive datasets and tilt portfolios toward regions, sectors and themes like growth, value or momentum. When multiple models converge, sharp buy or sell orders can trigger unusual stock price swings far detached from company fundamentals.

Boards and CFOs should connect macro-driven volatility to the company’s treasury management policy, including capital allocation strategy and timing of debt or equity issuance.

ETF flows and index events: ETF rebalancing, inflows and outflows add another powerful driver for individual stock price movements. The sheer size of passive funds means that rebalancing often creates concentrated buying or selling trading flows.

An example was Tesla’s addition to the S&P 500 in 2020. From the November 16 announcement date through year-end 2020, Tesla’s stock price rose approximately 73 percent, primarily fueled by index-tracking funds that had to acquire its shares.

Executives should anticipate these events and prepare investor messaging accordingly. For companies facing upcoming index changes, explaining to the board and shareholders that such moves are technical, not fundamental, can help manage expectations.

What should companies do?

Reaffirm your company’s long-term vision and the fundamentals supporting your value proposition. Ensure alignment across investor decks, MD&A disclosures, earnings calls and shareholder outreach. Consistently highlight strategic priorities, execution progress and financial resilience. Market noise is inevitable, and credibility rests on demonstrating consistency and discipline.

Volatility presents opportunities to engage shareholders proactively, strengthen relationships with existing holders and prospects. Use turbulent periods to connect with long-term holders and high-quality prospects to reinforce trust. Tailor outreach based on shareholder profiles, distinguishing fundamental investors from high-turnover traders who generally do not align with long-term ownership.

The only way to be sure of what is happening to your stock is to use a market surveillance firm to monitor trading in the stock.  Market surveillance tracks real time activity, monitors order books, trading volume shifts and unusual liquidity patterns. Market surveillance also provides settlement and ownership analysis to identify high-frequency trading patterns, separate long-term holders from algorithmic churn along with short interest analysis and fails-to-deliver as indicators of market pressure. Companies should monitor securities lending dynamics, including stock loan and borrow rates, particularly ahead of shareholder votes, activist campaigns or other key events.

More importantly, real time stock surveillance monitors and alerts you to critical trading in your stock that detects early signs of activist involvement, ownership shifts and hard-to-identify activist tag-along investors.

Companies need to be careful of providers who merely repackage stale 13f data and call it stock surveillance.  By the time an activist shows up in an SEC filing your company has lost any benefit of early detection.  Monitoring of buyers and sellers of your client’s stock in real time takes you beyond standard 13f filers, to include pension funds, sovereign wealth funds, non-filing hedge funds and foreign investors

Market surveillance tools and accurate ownership analytics can equip executives and their advisors with actionable intelligence and a competitive edge in managing volatility that goes beyond the basic reporting of share price performance and trading volumes.

Conclusion

Directors and executives must recognize that short-term stock price action often reflects flows not fundamentals. All companies should have the tools in place to be able to spot the differences.

Executives cannot control algorithms or macro flows, or even an activist but they can control how they respond. Stay consistent and disciplined in messaging, be transparent and communicate openly with stakeholders, and more than anything else, focus on the long-term drivers of fundamental performance to create shareholder value versus daily stock price fluctuations.

Volatility is inevitable in modern market structures. Executives who embrace market literacy, monitor ownership changes and communicate consistently can withstand the turbulence, ultimately leveraging it to build credibility, reinforce investor trust and lower their company’s cost of capital.