“We will never have all the facts to make a perfect judgement, but with the aid of basic experience we must leap bravely into the future” – Russell R McIntyre
Click to listen to a ~1 minute clip of my views from the “N@ked Short Club”, Resonance Fm… The main points are highlighted below.
CONTEXT – A MARKET TREND
- 1w late May this year ~60% of trades on NYSE were down to high frequency and algorithmic traders
- Beginning of this month the ISE announced: opening up to algorithmic trading
- Result – will account for an increasing share of trading volumes on EM exchanges & beyond
ASSESSING THE DISTINCTION – Algo trading vs. judgement driven
- Humans are responsible for writing the code that identifies anomalies in stock prices
- Based on assumptions about what a hypothetical efficient market should look like
- Still at risk of errors – bugs in these systems – Flash Crash – May 6, 2010 when the markets crashed by 573bps in 5mins (a large order by broker via algo program was identified as the probable tipping point) but recovered fairly quickly- CFTC*/SEC says that early sell pressure was absorbed by algorithmic and high frequency traders – evidence of adding significant liquidity – beneficial (*Commodity futures trading commission)
AT RISK OF TRADING RESTRICTIONS? JUST THE REVERSE!
- The SEC is considering a requirement that high-frequency traders keep buying and selling shares during periods of stress, instead of abandoning the market.
BOTTOM LINE – Judgment driven strategies retain their use.
- NOT ENOUGH TO MAKE MARKET EFFICIENT – still opportunities / inefficiencies to exploit.
- TRENDS BREAKDOWN – when do – it’s opportunistic players w uncorrelated returns that save a portfolio.
- UNCERTAIN TIMES – the flexible players willing to adapt to their judgment calls benefit