“Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast,” as the Wall Street Journal is reporting.
“That market has grown up during the long bull run, and hasn’t until now been seriously tested by a prolonged downturn.
“Since peaking in late September, the S&P 500 index of U.S. stocks has fallen 19.8%. The S&P is down 15% in December alone. It isn’t just stocks. Crude oil stood above $75 a barrel in October. By Christmas Eve it was below $43. Monday was the worst Christmas Eve for the Dow Jones Industrial Average in its history.
“’Electronic traders are wreaking havoc in the markets,’ says Leon Cooperman, the billionaire stock picker who founded hedge fund Omega Advisors.
“Behind the models employed by quants are algorithms, or investment recipes, that automatically buy and sell based on pre-set inputs. Lately, they’re dumping stocks, traders and investors say.
“’The speed and magnitude of the move probably are being exacerbated by the machines and model-driven trading,’ says Neal Berger, who runs Eagle’s View Asset Management, which invests in hedge funds and other vehicles. ‘Human beings tend not to react this fast and violently.’
“Among the traders today are computers that buy and sell on models, and passive funds that seek only to hold the same securities as everyone else does. Meanwhile, bankers and brokers—once a ready source of buying and selling—have retreated. Today, when the computers start buying, everyone buys; when they sell, everyone sells.”
The rest of the article is here.