Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

its amazing to watch the media try to deflect attention from the true, far more worrisome underlying issue: the Fed has spent twenty years fighting the problems of artificially low interest rates with more and longer durations of low interest rates.

the current meltdown is the result of the economy binging on debt and becoming too reliant on asset valuations. if the Fed raises rates it will crash asset prices...if it fails to raise rates then hyperinflation results

either way the everything bubble will be a crisis for the dollar itself

in late 2019 the Fed will do one final massive round of quantitative easing which will ultimately destroy the dollar

or you can believe this is about Trump or machine trading...if the economy could be saved by powering down some trading boxes, it would have happened in October

I suspect it's the same, but operates thousands of times faster.

As the article points out, passive funds, which have become a dominant force in the stock market, own the same stocks as everyone else in the same proportion.

When passive funds as a group have net outflows, all their holdings must be reduced in roughly the same proportion. But passive funds as a group cannot reduce their holdings by selling stocks to each other! It's impossible to take water out of a boat by scooping water from one spot and pouring it back into the same boat in some other spot!

Therefore, to reduce holdings, passive funds (or their broker-dealers) necessarily must find other -- i.e., non-passive -- buyers willing to take those stocks at some market-clearing price. Alas, everyone else, in the aggregate, also owns the same stocks in the same proportion.

Potentially, this can produce temporary imbalances between passive net sellers and non-passive net buyers that get corrected via declines in price. Passive net sellers, being price agnostic, do not care; they're on automatic.

Many (if not most) quantitative hedge funds are dollar neutral, which means they have one dollar short for every dollar long. There are typically additional constraints about having equal long/short exposure on each industry and investing style (momentum, value, etc).

So contrary to the article, most of these funds don’t take broad bets for or against the market. What they are really doing is correcting the relative valuations of each individual company by shifting bits of capital away from overpriced companies and towards underpriced ones. That doesn’t have the effect of raising or lowering broad market indices.

Now there are of course other investors who take broad directional bets on the market but those are probably more likely to be discretionary bets rather than systematic.

Non paywalled, and cleaner version: https://outline.com/9s3xTZ