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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

#61

Post by vasilipupkin »

xapata wrote: post #60
vasilipupkin wrote: post #59

Earlier quoted context omitted.

We had plenty of algorithmic trading and years of very low volatility at the same time. If algorithmic trading increased risk of extreme events, it would have shown up during let’s say 2012-2017 years of low volatility. No, algorithmic trading actually reduces risk of extreme events such as fat fingers or extreme bets by humans. What drives volatility is macroeconomic environment.

You don't remember any of the "flash" crashes? Turbulence has increased, regardless of the general trend.

Flash crash of 2010 was extensively investigated and no evidence that algorithmic trading was at fault was found. After that, we had some of the lowest turubulence years on record, while algorithmic trading was going on, so your theory is not supported by evidence.

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

#63

Post by JumpCrisscross »

hendzen wrote: post #33
JumpCrisscross wrote: post #31

Earlier quoted context omitted.

Stock borrow is expensive. More problematically, dollar neutral doesn’t necessarily mean beta neutral (which is the same thing as delta neutral with respect to a broad-market index).

Sure, I alluded to the concept of beta neutral when I mentioned 'additional constraints' - dollar neutral was a simpler concept I used for a non-finance audience. I've never heard anybody use the term delta neutral outside of derivatives trading. For the vast majority of symbols, stock borrow is cheap at institutional size.

> For the vast majority of symbols, stock borrow is cheap at institutional size

Stock borrow costs vary from symbol to symbol. The ones you want tend to be the ones you pay for. Moreover, cheap doesn't mean free. Shorting half of one's portfolio is rancidity expensive compared to buying some puts. Even that is pretty expensive for total hedging purposes.

At the end of the day, most long-short funds are not market neutral. The ones that are operate on minuscule time horizons, and are better categorized as shadow market makers than funds. (Both in their operation and fundraising mechanics, the short-term traders tending to be more likely to deploy permanent--versus limited--capital.)

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

#64

Post by pixl97 »

joe_the_user wrote: post #54
lordnacho wrote: post #30

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 the…

Pretty much every conversation I have with anyone in the investment business talks about one thing: QE and zero rates. Well, the Fed seems to ending that. Certainly it's signaling an end to this. How would this change the conversion?

If the market of the past few days says anything

"OMG SELL"

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

#65

Post by pixl97 »

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…

> 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!

But you can balance a boat and keep it from tipping over that way.

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

#66

Post by gnopgnip »

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…

There is an underlying presumption here that US stock market and investors live in the US, or are otherwise correlated with US demographics. Historically this is not true. International investors make up a sizeable part of the investors, and within the US investors the very wealthy are a disproportionate part of the market.

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

#67

Post by xapata »

vasilipupkin wrote: post #61
xapata wrote: post #60

Earlier quoted context omitted.

You don't remember any of the "flash" crashes? Turbulence has increased, regardless of the general trend.

Flash crash of 2010 was extensively investigated and no evidence that algorithmic trading was at fault was found. After that, we had some of the lowest turubulence years on record, while algorithmic trading was going on, so your theory is not supported by evidence.

There have been others. Plus there's some enjoyable literature if you're curious. Mark Buchanan has a nice blog and some links. The gist of it is that in the low latency space the ratio of players to possible strategies is too high.

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

#68

Post by module0000 »

ctlby wrote: post #41
jm__87 wrote: post #22

Earlier quoted context omitted.

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…

> more buyers than sellers lead to rising prices and more sellers than buyers lead to falling prices That's not how any of this works. Every share bought is a share sold by some counterparty. Buyers and sellers are always in equilibrium.

The person you're replying to is telling you the truth - imbalanced delta for buyers or sellers means rising or falling prices. There is no magical equilibrium, and if there was, there would be no profit.

To explain it a step further... at this moment in time, every private and institutional investors stopped selling APPL...I can still buy a share, likely thousands of them... from the market participants that are always there: market makers. When you make a "bad call"(like selling into a rally), a market maker is likely on the other end of your trade, and they will profit from your "bad call". Now the inverse also applies, often times a market maker is taking the other end of your trade that is a good(profitable) trade for you. The market maker isn't losing though, they are just playing the odds. They are convicted that for every losing trade they take out of obligation(as a market maker), they are going to take 2 or more winning trades. They also operate with trade costs much lower than you or I(ie retail investors) have access to.

That was more reply than I originally intended to write...but you have to understand this(or fail at profitable trading). There is no equilibrium, and there are parties(market makers) ensuring that there never will be. That is their job, to create a state of constant liquidity, even if buyers and/or sellers individually are unwilling to play.

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

#69

Post by ironSkillet »

ctlby wrote: post #41
jm__87 wrote: post #22

Earlier quoted context omitted.

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…

> more buyers than sellers lead to rising prices and more sellers than buyers lead to falling prices That's not how any of this works. Every share bought is a share sold by some counterparty. Buyers and sellers are always in equilibrium.

The "market" is more complex than a single stream of matching buy and sell orders at specific price levels. For any given asset, there is an "order book" containing the quantities market participants are willing to buy/sell at various price levels. Lots of people coming in to buy at "the market price" eats away at the selling side of the order book, raising the market price level.

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

#70

Post by vasilipupkin »

xapata wrote: post #67
vasilipupkin wrote: post #61

Earlier quoted context omitted.

Flash crash of 2010 was extensively investigated and no evidence that algorithmic trading was at fault was found. After that, we had some of the lowest turubulence years on record, while algorithmic trading was going on, so your theory is not supported by evidence.

There have been others. Plus there's some enjoyable literature if you're curious. Mark Buchanan has a nice blog and some links. The gist of it is that in the low latency space the ratio of players to possible strategies is too high.

if yoi try to tie low latency or algorithmic strategies to volatility, you need to be able to explain multiple years of really low volatility despite all those strategies going on.
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