We frequently blog about the structural strains put on the market by algorithmic and high frequency trading. We’ve also blogged (more than a few times) about the distortions in price discovery caused by central bank intervention, zero interest rate policy, etc. (most recently pointing out that 80% of the annual equity premium since 1994 was attributable to trading in the 24 hours before a Fed announcement).
This morning, however, saw a convergence of the two we seldom get to “enjoy.”
First, today’s episode of “Algos Gone Wild” was set at the NYSE, where 148 symbols began trading wildly and with ludicrous volumes at the open. While there seems to be some linkage to Knight Capital, the specifics are not yet clear. What we do know is that these stocks started swinging inexplicably by magnitudes of 10% or more.
A quote from a director of floor trading: “Stocks are moving all over the place, they are weird, and they are trading like millions of shares 100 shares at a time.”
An example, provided by CNBC, would be Molycorp. This stock traded 5.7 million shares in the first 45 minutes of trading. Typically, Molycorp trades about 2.65 million shares per day.
If there is an upside to this story, the NYSE quickly halting the affected stocks may very well have averted another flash crash. Small consolation in the scheme of things.
While the algo drama was unfolding, Louis Bacon put out a letter regarding his multi-billion dollar Moore Global Investments fund. Bacon is voluntarily returning $2 billion to his investors, for the following reasons:
- “The markets have been riskier and less liquid.”
- “Markets are increasingly distorted by central banks’ attempts to squeeze drops of growth from an over-indebted private sector across much of the developed world.”
- The US markets are hindered by “a caustic political environment and an anti-business administration.”
- “The [Eurozone] banking authorities have been a special case in ineptitude, [waiting to raise bank capital] until it is largely infeasible.”
- “Disaster Economics, where assets are valued based on their ability to withstand a lurking disaster as opposed to what they may yield or earn, is now the prism through which investors are pricing markets.”
Pretty strong words from the 238th richest American and uber-successful hedge fund manager since 1987.
To get some sense of how prevalent the Louis Bacon-type behavior has become in the hedge fund industry, Google “hedge funds calling it quits.” Bring a cup of coffee, because you’ll be spending a lot of time reading your computer screen.
These are indeed weird times. Navigating them requires extreme care in both capital allocation decisions and sizing of positions.
To paraphrase the 1972 song by Stealers Wheel: “Fed to the left of me, algos to the right. Here I am stuck in the middle.”