This commentary originally appeared on Real Money Pro on Sept. 30 at 8:45 a.m. EDT.
Last night I was thinking about the stock market and trying to search for adjectives or a phrase that best described the wild price action that has taken place not only yesterday but over the past several months.
In yesterday's morning session the
was up by as much as 240 points, by mid-afternoon the DJIA as down by 140 points, and in the last 30 minutes or so the DJIA rallied back by 280 points, to end the day up by 145 points.
The expression I selected to best describe the volatile and unpredictable nature of what we now call the U.S. equity market is the poker term "so sick."
So sick is a phrase with much versatility at the poker table, and I have often
about the similarities between the markets and poker.
"Sick call," "you are sick," "sick game," are just some of the ways this term is used. It can mean a horrible stroke of bad luck, truly amazing and almost unbelievable and/or an amazing stroke of genius beyond comprehension.
- Example No. 1: "I can't believe that I got in with pocket aces, hit a set and went all-in only to have Howard Lederer hit a sick runner-runner straight on me. The whole thing is just sick."
- Example No. 2: "I can't believe I am sitting next to Tom "Durrr" Dwan and Phil Ivey at my table, it's sick!"
- Example No. 3: "The villain moved all-in at the river, and Doyle Brunson tanked before calling with only an ace-high hand. The villain turned over complete rags, and "Texas Dolly" makes yet another sick read."
The proximate cause of our so-sick and volatile market is not the eurozone crisis nor the ambiguity of our domestic growth trajectory; moves such as yesterday are made and exaggerated by intraday reweighting of leveraged ETFs and by the disproportionate impact price-momentum-based, high-frequency trading strategies. (Again, just ask your friendly institutional trader; there was little in the way of natural order during the wild moves in the afternoon session on Thursday.)
on the disproportionate role of ETFs and algorithmic trading, strategies that have taken up (and filled the trading void) where retail investors and hedge funds have de-risked and virtually abandoned the equity market.
These high-frequency, momentum-based trading strategies and leveraged ETFs are raising volatility dramatically, and, in turn, the confidence in the marketplace is eroding quickly.
More important, this instability is (to paraphrase George Soros) causing a reflexive and negative impact on the real economy. As such, high-frequency-trading strategies and uber-leveraged ETFs are the new weapons of mass destruction, and perhaps, instead of calling on the
, we should be reporting this to the Pentagon, CIA and FBI.
While the SEC sits idly by day after day, this wild price action (such as yesterday) slowly erodes investors' confidence in the marketplace.
I am convinced that, in the fullness of time, the SEC will recognize the damage that has taken place in our markets.
I am equally convinced that, by the time they do, it will be too late.
Kill the quants before they kill us.
Doug Kass writes daily for
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Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.