05/07/10 Jacobus, Pennsylvania – Yesterday’s roller-coaster market, made it even more apparent that ‘quant,’ or computerized, high-frequency trading exacerbates swings in the market.
Rather than supply cash to the market during panics, and supply stock inventory to the market during melt-ups, it appears that these funds do the opposite. Quant trading relies on the same garbage-in-garbage-out models that created such wonders as ‘AAA’-rated CDOs.
The physics and mathematics Ph.D.s that create and modify these models should do something more productive, like apply this math where it’s actually appropriate and predictive: in engineering problems, rather than markets that are heavily influenced by emotion.
This is also what happens when a market with no investment merit at current valuations runs out of speculative fuel.
When governments and central banks manufacture the illusion of an economic recovery driven by deficit spending and money printing, the faith in the sustainability of that recovery is – not surprisingly – weak.
Now, after two market crashes in the space of a decade, the list of greater fools is shorter. Mom and pop investors have largely chosen to sit out this cyclical bull market, making it very narrow and jittery, rather than broad and sustainable.
After yesterday’s drama, I think we can forget about the widely anticipated surge in mutual fund inflows.
Dan Amoss
for The Daily Reckoning
Dan Amoss
Dan Amoss, CFA, is a student of the Austrian school of economics, a discipline that he uses to identify imbalances in specific sectors of the market. He tracks aggressive accounting and other red flags that the market typically misses. Amoss is a Maryland native, a graduate of Loyola University Maryland, and earned his CFA charter in 2005. In spring 2008, he recommended Lehman Brothers puts, advising readers to hold the position as the stock fell from $45 to $12. Amoss is managing editor of the Strategic Short Report.
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like the article-thought it would start as “Lessons from the edge” like a man on the lip of a cliff windmilling his arms to stay upright. r
This is what happens when they replace Market Makers and Specialists with
Computers.
These quant programs are all about “making a profit”, not “making a market”
I don’t know that I follow the “narrow and jittery” comment by the author about the bull phase since March 2009.
As usual, small caps (think broad, not narrow) lead the upswing side of the “V” bottom in March 2009 and were hot in the recent surge from early February (until the more recent plunge). And volatility had declined to complacent levels until the recent upset.