The single most frequently asked question to a stock market professional is “where do you think the markets are headed?”. A seemingly more pertinent question asked by clients is “shouldn’t we wait for xyz event (election, rate hike, missile launch, etc) for a better entry point?” Our own experience as market participants have made us believe that it is increasingly impossible to predict market movements, especially in the short run given the rise and rise of algos, HFTs, ETFs, etc. This piece in the FT gives some facts and nuggets to drive home the point.
“Philippe Jabre was the quintessential swashbuckling trader, slicing his way through markets first at GLG Partners and then an eponymous hedge fund he founded in 2007 — at the time one of the industry’s biggest-ever launches. But in December he fell on his sword, closing Jabre Capital after racking up huge losses. The fault, he said, was machines.”
“…the volatility in financial markets in December, when US equities suffered their biggest monthly decline since the financial crisis, despite little fundamental economic news”.
“Even hedge fund veterans admit the game has changed. “These ‘algos’ have taken all the rhythm out of the market, and have become extremely confusing to me,” Stanley Druckenmiller, a famed investor and hedge fund manager, recently told an industry TV station.”
“JPMorgan estimates that only about 10 per cent of US equity trading is now done by traditional investors. Other markets remain more human, yet are slowly but surely being transformed.”
But not everybody has a problem with the machines “But markets have always been tempestuous, and machines make a convenient, faceless bogeyman for fund managers who stumble. Meanwhile, quants point out that they are still only small players compared with the vastness of global markets. “It’s insane,” says Clifford Asness, the founder of AQR Capital Management. “People are missing the forest for the trees. That we trade electronically doesn’t change things, we just deliver the same thing more efficiently . . . It’s just used by pundits and fund managers as an excuse.”
However, strong views are forming in Wall Street that SEC should have more control over the algo trades – “Leon Cooperman, the founder of Omega Advisors, has argued that the US Securities and Exchange Commission should investigate and tame the new “wild, wild west environment in the stock market” caused by these volatility-sensitive strategies.
“I think your next guest ought to be somebody from the SEC to explain why they have sat back calmly, quietly, without saying anything and allowing these algorithmic, trend-following models to wreak havoc with what has, up to now, been the best capital market in the world,” he told CNBC in December.”
“We just have to accept that financial markets are nearly fully automated,” he says, “and try to make sure that things don’t get so technologically complex and inter-connected that it’s dangerous to the financial system.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
