Kill the Quants Before They Kill Us
This commentary originally appeared on Real Money Pro on Aug. 24 at 9:30 a.m. EDT.
Here we go again.
Those quantitative, high-frequency traders that utilize computer programs to focus on price-momentum-based trading "strategies" and the uber leveraged ETFs have retaken control of the wheel.
Neither strategies nor vehicles have any redeeming social and/or economic value. Indeed, one can argue that their influence on the market's volatility is contributing to the negative feedback loop that is threatening our domestic economy's growth trajectory.They were back in force on Tuesday afternoon, when the DJIA advanced sharply from being up by about 150 points at midafternoon to closing with a gain of over 300 points by day's-end. Computers don't sleep, don't get tired, don't care about politics or fundamentals and don't vacation in late August in the Hamptons or on the Jersey Shore -- they just wreak havoc on our marketplace by amplifying moves on the downside and on the upside (as they did in the last hour of trading yesterday). Over the last two hours of trading yesterday, I polled numerous sell-side institutional desks and a number of sizeable high-net-worth brokers, and none of them had any meaningful individual buy orders during the late afternoon that could account for the sharp market advance. By contrast, my contacts in the high-frequency-trading community were on trading overload after 2:00 p.m. EDT, as the quants dominated the market's trading activity (almost all on the "buy side"). Two days ago, in "The Selling Storm Might Be Clearing," although I recognized the important fundamental catalysts of the recent market swoon, the growing ambiguity of worldwide economic growth, the negative feedback loop engendered by the gridlock and rancor associated with the political circus in Washington, D.C., and the fragility of the European banking industry, I also underscored that several non-economic, temporary and artificial influences have conspired to exaggerate high-frequency trading's dominance and impact in accelerating market moves and volatility. Ever since the investment shock of 2008-2009, some of those non-economic factors, including a general de-risking in the hedge fund industry, growing hedge fund redemptions and a record level of domestic equity mutual fund liquidations, have served to reduce the role of the more stable classes of intermediate- to longer- term investors. This has created a vacuum of the more stable and two-sided retail and institutional trading flows and activity and has produced heightened volatility and a risk-on/risk-off atmosphere (which changes daily) owing to the increased presence and disproportionate role of high-frequency, momentum-based trading strategies. Some have estimated that high-frequency trading now accounts for about three-quarters of all trading!
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV