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Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

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Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#21

Post by cs702 »

nostrademons wrote: post #19
cs702 wrote: post #6

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 scoopin…

A lot of the attention on the stock market is focused on the short term (i.e. panic sells or a flight to safety in reaction to quick emotional events), but I wonder what happens when this dynamic plays out in the long term. Right now, the pool of people putting money into the market has been steadily increasing as Millenials enter the workforce. Boomers are retiring, but not really in large numbers yet, so the overal…

In such a horrific scenario, I imagine the stocks of companies with low-duration free cash flows (i.e., generating profits in the near future and trading at reasonable multiples of those profits) would hold up the best, because they can pay greater dividends, buy back more shares, be more likely to go private at a premium, etc. As for the stocks of companies with high-duration cash flows (i.e., companies for which the majority of profits lies far in the future, trading at optimistic multiples of those distant profits)... I imagine they would suffer the worst declines.

However, I agree with JumpCrisscross (https://news.ycombinator.com/item?id=18763124) that such a horrific scenario is unlikely.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#22

Post by jm__87 »

ajross wrote: post #9
module0000 wrote: post #7

Earlier quoted context omitted.

>> 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. THIS. This is how it works. They also have similar basis prices for their positions, and similar pain thresholds. It's not a big surprise that when Institution XYZ reaches its' pain threshold and stop loss orders are used, a few more dozen Institution ABC, D…

How is that any different from previous bear markets? I swear I remember reading the same analysis in 1987 after the crash. Human behavior (even human-programmed behavior) is pro-cyclic. Everyone wants the same stuff and makes the same decisions with the same input. I don't see anything notable about this market cycle as compared with previous ones at all, only the jargon is changing.

Not really sure what your point is. Cycles always happen for the same technical reason - more buyers than sellers lead to rising prices and more sellers than buyers lead to falling prices. Understanding what leads to these imbalances in buying and selling is the more interesting and more difficult part and the details tend to be a bit different for every cycle. Most people find these details interesting and for some people, it is their job to understand these details. The abstract idea that herd behavior is what moves markets is not that useful unless you understand exactly which herds are moving which markets and how they make their buying and selling decisions.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#23

Post by bboreham »

ajross wrote: post #11
satya71 wrote: post #4

Earlier quoted context omitted.

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

This bear market took a week to develop. The crashes of 1929 and 1987 happened in a day. I don't think that point holds.

Which particular day in 1929 are you thinking of?

October 24 - 11% drop, followed by some recovery. October 28 - 13% drop October 29 - 12% drop

The lowest point in 1929 was reached on November 13. The bottom of the crash was on July 8, 1932.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#24

Post by gcb0 »

cs702 wrote: post #6

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 scoopin…

passive funds hold a disproportionate amount of sp500 like indexes. if that was the only explanation, those would have to fall always much more in price than all the rest.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#25

Post by JumpCrisscross »

nostrademons wrote: post #19
cs702 wrote: post #6

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 scoopin…

A lot of the attention on the stock market is focused on the short term (i.e. panic sells or a flight to safety in reaction to quick emotional events), but I wonder what happens when this dynamic plays out in the long term. Right now, the pool of people putting money into the market has been steadily increasing as Millenials enter the workforce. Boomers are retiring, but not really in large numbers yet, so the overal…

> a smaller working-age population supporting a larger dependent population (absent massive technological advancement in care) = lower standard of living for everyone

On average, assuming nothing else changes. In reality, we have the levers of immigration and workforce utilization (e.g. making it easier for ex-felons or non-violent drug convicts to re-enter the workforce) to juice labour inputs. And we have education and R&D to juice productivity. On top of that are random factors like natural resource utilization, falling energy and material intensities of GDP, et cetera.

> That would imply an S&P 500 of about 370 (down ~95%) and interest rates in the 10% range

One cannot so neatly connect demographics to interest rates, let alone the S&P 500. Demographics map to certain consumption sectors (e.g. durables) very well. They map to others (e.g. luxury or entertainment products) quite badly.

To illustrate one of the many confounding variables between demographics and stock prices, consider what a small shift in asset allocations in a single generation from real estate to equities would do to prices.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#26

Post by JumpCrisscross »

hendzen wrote: post #8

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…

> Many (if not most) quantitative hedge funds are dollar neutral

Delta neutral. And this is very difficult (and expensive) to attain in real life. Most funds are long biased because it's cheaper to be long than short.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#27

Post by hendzen »

JumpCrisscross wrote: post #26
hendzen wrote: post #8

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…

> Many (if not most) quantitative hedge funds are dollar neutral Delta neutral. And this is very difficult (and expensive) to attain in real life. Most funds are long biased because it's cheaper to be long than short.

No - dollar neutral. Delta neutral is an entirely separate concept. I'm talking about equities trading (or potentially total return swaps) not options or other derivatives.

Why do you think its so difficult and expensive to attain? What do you think institutional borrow costs are? And I'm not talking about Interactive Brokers... I'd wager that most funds are long biased because its more difficult to generate short alpha - not because of the costs of portfolio construction.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#28

Post by anongraddebt »

nostrademons wrote: post #19
cs702 wrote: post #6

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 scoopin…

A lot of the attention on the stock market is focused on the short term (i.e. panic sells or a flight to safety in reaction to quick emotional events), but I wonder what happens when this dynamic plays out in the long term. Right now, the pool of people putting money into the market has been steadily increasing as Millenials enter the workforce. Boomers are retiring, but not really in large numbers yet, so the overal…

"...a smaller working-age population supporting a larger dependent population..."

This describes Japan for the past decade or so, right?

Also, are you saying the standard of living would regress back to the 90's/80's/etc., or that growth in the standard of living would be curtailed significantly?

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#29

Post by ajross »

jm__87 wrote: post #22
ajross wrote: post #9

Earlier quoted context omitted.

How is that any different from previous bear markets? I swear I remember reading the same analysis in 1987 after the crash. Human behavior (even human-programmed behavior) is pro-cyclic. Everyone wants the same stuff and makes the same decisions with the same input. I don't see anything notable about this market cycle as compared with previous ones at all, only the jargon is changing.

Not really sure what your point is. Cycles always happen for the same technical reason - more buyers than sellers lead to rising prices and more sellers than buyers lead to falling prices. Understanding what leads to these imbalances in buying and selling is the more interesting and more difficult part and the details tend to be a bit different for every cycle. Most people find these details interesting and for some…

> Not really sure what your point is. Cycles always happen for the same technical reason

Pretty sure that was exactly my point. I'm sure someone finds the behavior "interesting", but if the same thing is happening for the same reason, I'm arguing those details that everyone finds "interesting" aren't "important".

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#30

Post by lordnacho »

Former fund manager here.

Yes, there is herdlike behaviour. But why?

Here's a little story about my investment career.

I once hired a guy for a fund I was partner in. He was a proper old school equity investor. He'd fly around the world to different countries and visit businesses. He'd think about each country's prospects, each industry, and each company. He'd meet withe the CEOs and look them in the eye, and ask them whether his company was gonna make money. I shit you not. He's come back to the office and share his thoughts on why one country was good, why this industry, why this business. It was a different story each time.

Another guy I worked more closely with on a fixed income desk. We'd think about different countries, their bonds, their IR rates, swaptions, etc. There's be some global stories inevitably, but a lot of local ones too and we'd chat about what to do in our trading book.

Then there was quantitative FX trading, another one of my projects. We'd look at things that affect currencies, patterns in the prices, anything you might imagine arrives as a live feed. And we built the infrastructure to trade the regularities that we found. Quite a lot of research and execution infrastructure. But at the end of the day, the computers are doing what? Looking at a variety of information and judging what will happen. Just like my two colleagues.

Fast forward to the last few years. Pretty much every conversation I have with anyone in the investment business talks about one thing: QE and zero rates. There's only one thing that matters for everything now. When interest rates are really low, what happens? Everything is worth buying. Buy houses, buy stocks. Buy them in the developed countries, buy them in EM. Sell options.

What used to be a conversation containing rates as an ingredient has become a conversation only containing rates.

People, and computers which learn what worked for people in the recent past, have gone from a rich market conversation about many things to one about just QE.

It will be interesting to see what happens in the near future. I can't think of a lot of bubbles that were deflated in a controlled manner. And I also expect more differentiation in equity debates. Company does this, industry does that.

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