“… and we three were there alone in the middle of a great white plain with snowy hills and mountains staring at us; and it was very still; but there were whispers.” – Black Elk
Money Quote: “…fundamental discretionary traders” account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago…”
Just 10% of trading is regular stock picking, JPMorgan estimates
- “Fundamental discretionary traders” account for only about 10 percent of trading volume in stocks today, JPMorgan estimates.
- “The majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals,” said JPMorgan’s Marko Kolanovic.
- JPMorgan believes the recent sell-off in technology stocks may have been related to quantitative and computer trading and not traditional fundamental investors.
Tuesday, 13 Jun 2017 | 4:49 PM ETCNBC.com
Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets, according to a new report from JPMorgan.
“While fundamental narratives explaining the price action abound, the majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals,” Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, said in a Tuesday note to clients.
Kolanovic estimates “fundamental discretionary traders” account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago, he said.
In fact, Kolanovic’s analysis attributes the sudden drop in big technology stocks between Friday and Monday to changing strategies by the quants, or the traders using computer algorithms.
In the weeks heading into May 17, Kolanovic said funds bought bonds and bond proxies, sending low volatility stocks and large growth stocks higher. Value, high beta and smaller stocks began falling in a rotation labeled “an unwind of the ‘Trump reflation’ trade,” Kolanovic said.
“Upward pressure on Low Vol and Growth, and downward pressure on Value and High Vol peaked in the first days of June (monthly rebalances), and then quickly snapped back, pulling down FANG stocks” — Facebook, Amazon.com, Netflix and Google parent Alphabet, the report said.
Along with Apple, the big tech-related names fell more than 3 percent each last Friday and dropped again Monday, sending the Nasdaq composite lower in its worst two-day decline since December.
However, “the contribution coming from quant rebalances to this snapback is now likely over,” Kolanovic said, noting that S&P derivatives have supported market gains at the beginning of this week.
“$1.3T of S&P 500 options expire on Friday, and this will change dealers’ positioning,” he said. “This can result in a modest increase of market volatility starting on Friday and into next week.”
Tech recovered Tuesday, helping U.S. stocks close higher with the Dow Jones industrial average at a record.
Derivatives, quant fund flows, central bank policy and political developments have contributed to low market volatility, Kolanovic said. Moreover, he said, “big data strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come.”
Figures from market structure research firm Tabb Group point to similar gains in machine-driven trade volume, while the overall number of shares traded has declined.
A subset of quantitative trading known as high-frequency trading accounted for 52 percent of May’s average daily trading volume of about 6.73 billion shares, Tabb said. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.
To be sure, not everyone on Wall Street is giving ground to the machines so easily.
AllianceBernstein analysts made the case in an April 28 note that artificial intelligence is unable to generate significantly different results — by the mere fact that analyzing more and more data results in increasingly similar strategies.
… For the greatest tragedy of them all Is never to feel the burning light. – Oscar Wilde
Money Quote: – Autonomous flight up to 10,000 feet / Top speed of 150km/h (93.2 mph) / 10 min autonomy
The new Zapata Invention: Flyboard® Air
THE FLYBOARD® AIR
Zapata Racing has achieved the dream of mankind and offers you the first video of Franky Zapata flying on the innovation Flyboard® Air.
The Independent Propulsion Unit represents 4 years of hard work for a result exceeding all records
Money Quote: “It is both unknowable and all-knowing. It answers all questions, if only we know how to interpret those answers.”
Short for the Wolverhampton Instrument for Teaching Computing from Harwell, the WITCH was also known as The Harwell Dekatron Computer. It was slow (a multiplication took 5-10 seconds), but this was justified by its ability to run long periods of time unattended. It could therefore be left on its own with a large amount of input data. At one point it was left running over the Christmas and New Year holiday and was still working when the staff came back 10 days later. – Courtesy of Pingdom via Wired
Italics are the poster’s personal opinion and the poster thinks the article’s author has underestimated his audience (at least the poster hopes so).
Money Quote? – “While several high-profile money managers of active funds have raised concerns about ETFs, equity ETFs account for about 7 percent of the U.S. stock market’s value, according to data compiled by Bloomberg.”
ETFs Are ‘Weapons of Mass Destruction,’ FPA Capital Managers Sayby
The rise of passive investing distorts stock prices, they say
They question how ETFs will hold up in major market selloff
Exchange-traded funds are “weapons of mass destruction” that have distorted stock prices and created the potential for a market selloff, according to the managers of the FPA Capital Fund.
“When the world decides that there is no need for fundamental research and investors can just blindly purchase index funds and ETFs without any regard to valuation, we say the time to be fearful is now,” Arik Ahitov and Dennis Bryan, who run the $789 million fund, said in an April 6 letter to investors in the actively managed fund.
The flood of money into passive products is making stock prices move in lockstep and creating markets increasingly divorced from underlying fundamentals, the managers said. As the market moves ever higher, there’s the potential for a sharp decline. The U.S. ETF market has about $2.7 trillion in assets, the majority in products that track indexes. ETFs have attracted more than $160 billion in new flows so far this year, Bloomberg data show.
“This new market structure hasn’t been tested,” Bryan said in a telephone interview, noting that the stock market has never gone through a major downturn when passive investors were as important as they are now. “We could get an onslaught of selling.”
For more than two decades under former manager Robert Rodriguez, Los Angeles-based FPA Capital was among the top-performing stock funds in the U.S. From 1986 to 2010, it returned 14.5 percent a year compared to 8.5 percent for the Russell 2000 Index, according to a data compiled by Bloomberg.
The fund has struggled in recent years, in part, because the managers, finding too few attractive stocks to buy, have parked 35 percent of their money in cash. FPA Capital trailed 99 percent of peers over the past five years and the Russell 2000, with a 4 percent annual return, according to data compiled by Bloomberg. The fund is a concentrated stock fund. Its biggest equity holding as of March 31 was Western Digital Corp., which makes computer-storage devices.
While several high-profile money managers of active funds have raised concerns about ETFs, equity ETFs account for about 7 percent of the U.S. stock market’s value, according to data compiled by Bloomberg…
Found this chart by using the google – thanks Credit Suisse and the FT
So, what happens when those equity ETFs that account for 7% of the US Stock Market’s VALUE, but 30% of its trading volume (dollar value) all start selling? (insert your favorite falling knife reference here).
…In a February letter to investors, Seth Klarman, who runs the $30 billion Baupost Group, said that as more investors opt for passive investing over active management “the more inefficient the market is likely to become.”
In the same letter, Klarman cited Nikolaos Panigirtzoglou, a global market strategist at JPMorgan Chase in London, who, according to Klarman, has warned that the inflows into ETFS will “make markets more brittle” and “susceptible to more severe crashes.”
But Jim Rowley, senior investment strategist at Vanguard Group, disagrees with the naysayers. Vanguard, which has roughly $3 trillion in assets in passive products, including almost $700 billion in ETFs, has examined more than 20 years of market history, he said. The conclusion: markets are as volatile as ever and the dispersion in the performance of individual stocks is as great as it was before indexing became popular.
“We didn’t find any relationship between indexing and market dynamics,” he said.
Hmmm… He seems impartial. How about a relationship between indexing and an individual stock’s price performance versus its peers?
Ahitov isn’t totally pessimistic. Should stocks sell off indiscriminately, there will be bargains for smart value investors. “Dennis and I will buy the good stocks that are cheap,” he said.
Money Quote: “There are an estimated 13 trillion liters of water floating in the atmosphere at any one time, equivalent to 10% of all of the freshwater in our planet’s lakes and rivers.”
Money Quote: “Northeastern boasts several pioneers in the field, including Thomas Webster, the Art Zafiropoulo Chair in Engineering and the chair of Northeastern’s chemical engineering department, and Srinivas Sridhar, Arts and Sciences Distinguished Professor of Physics and director of Northeastern’s Electronic Materials Research Institute… Recently the two received a $496,000 grant from the National Science Foundation to launch the academy – a scalable, interactive network that will use Web-based videoconferencing to live broadcast graduate courses and research protocols in real-time from a classroom at Northeastern to students enrolled at four partner institutions: the University of Puerto Rico Mayaguez, Tuskegee University, Morgan State University, and Florida International University.”
Living up to the Man’s Best Friend Legacy over at NU