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PRICES AND SPENDING

The cost of crisis: why stock fees rise 

when markets slip

By Jason Wrobel

Tossed around by the pulls and tugs of financial markets, stock market bid–ask spreads, the fees received by 

securities dealers who handle trades, are sensitive to peoples’ expectations of the future and are influenced by 

world events. Over the past decade, three prominent economic crises occurred—the 2008 financial crisis, the 2010 

European sovereign debt crisis, and the 2011 U.S. debt-ceiling crisis. During the financial turmoil surrounding each 

event, bid–ask spreads and stock market volatility often moved similarly. This Beyond the Numbers article 

examines the relationship between the Bureau of Labor Statistics Producer Price Index (PPI) for dealer

transactions-equity securities and two major stock market volatility indicators. An analysis of these three measures 

February 2017 | Vol. 6 / No. 3
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shows a positive correlation. This means that when the market volatility indexes increase, the PPI for dealer 

transactions-equity securities also tends to increase.1 

What is a bid–ask spread?

Securities dealer fees, also known as bid–ask spreads, or “spreads” for short, along with broker fees, are the two 

major fees that investors pay when buying and selling stocks. Broker fees are typically a fixed fee per trade paid to 

an intermediary to sell or buy stock in a company. In contrast, spreads are dependent on a number of different 

market and economic factors, and their cost is variable. Securities dealers, also known as market makers, collect 

the bid–ask spread. The spread is the difference between the bid price, or the price the market maker is willing to 

pay to purchase a stock, and the ask price, the price the market maker will sell the same stock at the same time. 

Although the spread between the bid price and the ask price is usually small, it adds up to a large amount of 

money in aggregate.

How a spread is determined

A market maker assures that securities investors can purchase or sell a particular stock when they want. By 

guaranteeing this flexibility, market makers assume risk and collect the bid–ask spread for doing so. When markets 

are volatile, a stock price may change frequently, increasing the chance a dealer may lose money. A dealer may 

lose money on a buy (bid) side transaction, for example, if the market price of a stock falls below the price at which 

a dealer offered to buy. A dealer may lose money on a sell (ask) side transaction if the market price of a stock rises 

above the price at which the dealer offered to sell. To account for the risk of pricing on the wrong side of the 

market, securities dealers closely follow market volatility and typically receive larger spreads when prices are 

volatile.

Comparing spreads and volatility

One method of observing how severe economic events influence the size of spreads is by examining how the two 

factors relate to each other at a market level. Comparing the PPI for dealer transactions-equity securities, which 

measures the average change in securities dealer fees by tracking spreads for stocks traded on U.S. markets, to 

measures of market volatility shows a relationship. The two measures of market volatility used in this comparison 

are the average monthly changes in the CBOE NASDAQ-100 Volatility Index (a measure of volatility for the 

NASDAQ exchange) and the CBOE Volatility Index (a measure of volatility for the S&P 500 index). To differentiate 

it from the NASDAQ measure of volatility, this article refers to the latter measure as the S&P volatility index.2 Chart 

1 shows the trends in the PPI for dealer transactions-equity securities, along with the two volatility indexes, 

covering the span of years that includes all three financial crises.
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Other sources of change

Market forces, such as the volume of shares traded or the total value of a stock exchange or index, affect these 

measures of volatility and price. However, other forces also can influence their breadth. The main difference 

between the PPI and the volatility indexes is the makeup of the indexes themselves. The PPI for dealer 

transactions-equity securities broadly covers the changes in spreads relating to stocks traded on major American 

exchanges. However, the NASDAQ-100 Volatility Index only includes the top-100 listed companies on the 

NASDAQ exchange. The S&P 500 Volatility Index covers companies listed on both exchanges but weights them 

differently than either the NASDAQ or PPI. Because of these differences, the PPI and the market volatility indexes 

may not always move similarly. 

The financial crisis of 2008

In early 2007, uncertainty spread within the banking sector. The mortgage default rate was on the rise, resulting in 

some subprime mortgage lenders filing for bankruptcy.3 Among these lenders was New Century Financial, a wellknown company whose bankruptcy was one of the first signs of market turbulence in April 2007.4 Following the 

collapse of New Century, many large banks suffered record losses as market liquidity dried up. A growing crisis 

seemed around the corner. In the fall of 2007, a British bank, Northern Rock, requested emergency funding from 
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the Bank of England, and in March 2008, liquidity problems forced Bear Sterns to merge with J.P. Morgan Chase.5

During this period, the distressed mortgage market disrupted the banking system, leading to one of the most 

volatile periods for U.S. financial markets since the Great Depression.

As this financial crisis took shape, spreads and market volatility deviated from historical norms. From April 2007 to 

August 2008, a period of unstable prices and rising volatility resulted in the PPI for dealer transactions-equity 

securities increasing 37.6 percent, while the NASDAQ-100 Volatility Index climbed 43.7 percent, and the S&P 

Volatility Index rose 60.1 percent over the period.6 This trend signaled a shift in direction for stock markets. In 

response to uncertainty regarding the health of banks and bank stocks, both spreads and volatility increased—a 

trend that would continue over the next year as the financial sector distress extended to the wider economy. (See 

chart 2.)

Of particular interest, in September and October 2008 both financial market spreads and volatility spiked in 

reaction to effects of the subprime mortgage crisis, which included the U.S. government takeover of Fannie Mae 

and Freddie Mac and the collapse of Lehman Brothers in September 2008.7 From August to October, the PPI for

dealer transactions-equity securities, the NASDAQ 100 Volatility Index, and the S&P Volatility Index increased 26.9 

percent, 166.3 percent, and 195.6 percent, respectively, reaching their highest levels in 5 years.8

As the financial crisis ended in 2009, both spreads and volatility declined in a similar fashion. Between June 2009 

and April 2010, the PPI for dealer transactions-equity securities, the NASDAQ 100 Volatility Index, and the S&P 

Volatility Index decreased 21.6 percent, 40.4 percent, and 40.2 percent, respectively.9 
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European sovereign debt crisis

After a 2-year decline in volatility and spreads, another critical situation developed. The European sovereign debt 

crisis took shape in 2009 and 2010 following the collapse of Iceland’s banking system in late 2008. Spillover from 

the Great Recession in the United States also was viewed as a contributing factor.10 During this time, many 

lenders grew concerned about the ability of several European national banks to repay their debts. To compensate 

for their higher risk of default, lenders demanded higher interest rates from European countries with high debt and 

deficit levels.11 Working with less money, financially distressed European countries resorted to cutting deficits and 

raising taxes in an effort to raise revenue. This in turn led to social unrest and diminished investor confidence in 

the ability of countries to repay debt.12 

As this debt crisis unfolded, European turmoil spilled over to U.S. markets and caused spreads for U.S. stocks to 

spike again. In May 2010, the PPI for dealer transactions-equity securities increased 24.4 percent, the third-largest 

advance since the inception of the index in 2006. This coincided with the NASDAQ-100 Volatility Index jumping 

85.8 percent and the S&P Volatility Index rising 83.3 percent, the second-largest monthly increases on record for 

both indexes. (See chart 3.)

These results further demonstrate the link between world financial markets and the volatility of U.S. equities. As 

European governments struggled to reduce record levels of debt, the corresponding increase in the PPI 

demonstrated that U.S. investors were paying higher prices to enter or exit financial markets. Volatility, stemming 

from uncertainty about European banks during this crisis, affected expectations of U.S. companies. Consequently, 

spreads for stocks on U.S. exchanges expanded.
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U.S. debt-ceiling dispute

In 2011, another market-influencing event unfolded. In the middle of the year, the legislative and executive 

branches of the U.S. government were unable to agree on terms to raise the debt ceiling—a legislative limit on the 

amount of national debt that the U.S. Treasury can issue.13 This situation was without precedent; investors grew 

concerned about the U.S. government’s ability to repay its creditors after August 2, 2011, the date the U.S. 

Treasury estimated it would run out of money.14 Although an agreement was eventually signed on July 31, the 

political brinksmanship ensnared financial markets, leading to the first-ever credit downgrade for the United 

States.15

This chain of events initiated the most volatile week for financial markets since the financial crisis of 2008. In July 

and August 2011, market volatility and spreads increased abruptly. In July 2011, the PPI for dealer transactionsequity securities rose 34.6 percent.16 In August 2011, the NASDAQ-100 Volatility Index increased 66.1 percent 

and the S&P Volatility Index increased 82.2 percent—their largest advances in over a year and the third largest 

gains since their inception.17 (See chart 4.)

During this dispute, as the deadline drew nearer and no agreement was in sight, market volatility increased and 

investors paid more to trade on U.S. markets as spreads expanded. Even though the source of the disagreement 

was political rather than financial, the consequence for investors was the same—uncertainty about the economy 

made it more expensive to trade on U.S. exchanges.

Conclusion

Uncertainty about the direction of the financial markets affects the value of stocks and the costs to trade them. 

During economic crises, securities dealers inflate spreads to account for higher risk, driving up the cost of trading 

when share prices are usually falling. Although market volatility tends to affect spreads less than other variables 
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•

•

•

when markets are calm, it often has a greater effect on them when markets are volatile. An understanding of this 

dynamic can help investors better anticipate how spreads will change in the future and can perhaps help them 

avoid paying more when trading securities.

This Beyond the Numbers article was prepared by Jason Wrobel. For additional information, you may contact Brett R. 

Matsumoto, research economist in the Office of Prices and Living Conditions, U.S. Bureau of Labor Statistics. Email: 

matsumoto.brett@bls.gov. Telephone: (202) 691-6575.

Information in this article will be made available upon request to individuals with sensory impairments. Voice phone: (202) 

691-5200. Federal Relay Service: 1-800-877-8339. This article is in the public domain and may be reproduced without 

permission

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NOTES

1 The correlation coefficient between the PPI and the NASDAQ Volatility Index is 0.53; the correlation coefficient between the PPI and 

the S&P Volatility Index is 0.46.

2 This article compares the PPI tracking changes in prices for dealer transaction activities for equity securities with the NASDAQ 

volatility index because the NASDAQ exchange is the second largest exchange in the United States by market capitalization. The 

S&P 500 volatility index is the best indicator for gauging volatility on the New York Stock Exchange (NYSE), the biggest exchange in 

the United States by market capitalization. This analysis excludes other U.S. exchanges because they make up a much smaller 

portion of the market and do not have volatility indexes. See http://www.cboe.com/micro/vix/faq.aspx and http://www.cboe.com/micro/

vxn/ for more information.

3 “The Origins of the Financial Crisis: Crash course,” The Economist, September 7, 2013, http://www.economist.com/news/

schoolsbrief/21584534effects-financial-crisis-are-still-being-felt-five-years-article.

4 Michael Corkery, James R. Hagerty, Ruth Simon, and Gregory Zuckerman, “At a Mortgage Lender, Rapid Rise, Faster Fall,” The 

Wall Street Journal, March 12, 2007, http://www.wsj.com/articles/SB117366027973133733.

5 “The Origins of the Financial Crisis: Crash course,” The Economist, September 7, 2013, http://www.economist.com/news/

schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article.

6 To obtain the PPI data for investment banking and securities dealing, dealer transactions, equity securities link to https://

data.bls.gov/timeseries/pcu523110523110201. Data for the NASDAQ VXN Volatility Index is available by linking to Yahoo Finance at 
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8

http://finance.yahoo.com/quote/%5EVXN/history. Data for the S&P VIX Volatility Index is available by linking to http://

finance.yahoo.com/quote/%5EVIX/historyS&P. 

7 79th Annual Report, (Bank for International Settlements, June 29, 2009), pp. 23–24, http://www.bis.org/publ/arpdf/ar2009e2.pdf.

8 See NASDAQ VXN Volatility Index at Yahoo Finance, http://finance.yahoo.com/quote/%5EVXN/history, and S&P VIX Volatility Index 

at Yahoo Finance, http://finance.yahoo.com/quote/%5EVIX/history.

9 Ibid.

10 Alexander Elchler, “The European Debt Crisis: A Beginner’s Guide,” Huffington Post, December 21, 2011,

http://www.huffingtonpost.com/2011/12/21/european-debt-crisis_n_1147173.html.

11 “Why did the Crisis Spread?” European Economy Explained (European Commission, September 4, 2014), http://ec.europa.eu/

economy_finance/explained/the_financial_and_economic_crisis/why_did_the_crisis_spread/index_en.htm.

12 79th Annual Report, (Bank for International Settlements, June 29, 2009), pp. 23–24, http://www.bis.org/publ/arpdf/ar2009e2.pdf. 

Also, see “European Day of Action: Anti-Austerity Protests Spark Violence,” Spiegel Online, November 14, 2012. http://

www.spiegel.de/international/europe/anti-austerity-protests-spark-violence-in-european-countries-a-867316.html.

13 Debt Limit: Analysis of 2011–2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs, GAO-12-701 (United States 

Government Accountability Office, July 2012), p. 2, http://www.gao.gov/assets/600/592832.pdf.

14 Neil Irwin, “Markets plummet on global economic fears,” The Washington Post, August 5, 2011, https://www.washingtonpost.com/

business/economy/markets-plummet-on-global-economic-fears/2011/08/04/gIQALFdBvI_story.html?utm_term=.e2a52e3a952b.

15 Dan Arnall, Michael S. James, Susanna Kim, Steven Portnoy, and Jake Tapper, “Standard & Poor's Downgrades US Credit Rating 

From AAA to AA+,” ABC News, August 5, 2011, http://abcnews.go.com/Business/standard-poors-downgrades-us-credit-rating-aaa-aa/

story?id=14220820.

16 “Producer Price Index: Investment banking and securities dealing, Dealer transactions, equity securities” (U.S. Bureau of Labor 

Statistics, May 2016), https://data.bls.gov/timeseries/pcu523110523110201.

17 Data for the NASDAQ VXN Volatility Index is available by linking to Yahoo Finance at http://finance.yahoo.com/quote/%5EVXN/

history, and data for the S&P VIX Volatility Index is available by linking to http://finance.yahoo.com/quote/%5EVIX/historyS&P.

SUGGESTED 

CITATION

Jason Wrobel, “The cost of crisis: why stock fees rise when markets slip,” Beyond the Numbers: Prices and Spending, vol. 6, no. 3 

(U.S. Bureau of Labor Statistics, February 2017), https://www.bls.gov/opub/btn/volume-6/cost-of-crisis.htm