Fears about inflation and growth are valid explanations for recent declines in equities. They do not, however, explain the sharp drops repeatedly seen at the end of the trading day in European markets. Derivatives activity might.

A prolonged period of calm has encouraged hedge funds to bet that equity volatility would remain low. Selling volatility to banks through products such as “variance swaps” has become popular. Variance swaps are bespoke derivatives constructed to give exposure to volatility, without the need to hedge on a daily basis. The banks, however, hedge by selling traditional options: they then trade equities against their option portfolios to maintain zero net price exposure.