I wrote a few times in the blog I believe circa 2008 that due to the quants, we will one day have Oct 19, 1987 repeat... but instead it will happen in 15 minutes. I think today was a preview of that. When you have a market dominated by a handful of players, who control 70% of the volume ... and all basically mimic each other. Well that sings Black Swan event. About a year ago I wrote this:
I will repeat what I said last year - this might keep working for a year, 2 years, 5 - even 10. But eventually this will turn on itself and cause a another Black Swan. Just as humans are apt to do, although I expect the speed of this Black Swan event caused by HAL9000s to be extraordinary. I could see October 19, 1987 literally happening within a 10 minute time frame especially if we continue down this path and even more money goes into these strategies. But until that day, certainly incredible wealth will be created by a small subset of firms while the rest of the investing class just looks like a 1910 Model T trying to buy stocks on... fundamentals (chortle). As we now know everything in financial America is about exploiting narrow windows, even if it breeds massive instability down the road - and then have the taxpayer clean up the mess. So we're on track here.
Long time readers will know I've been using HAL9000 for years to reference the quants... the algos...the machines. No one in position of power will question the owners of HAL9000 until something very bad happens. Because said owners are among the greatest lobbyists and want thing to keep going as they are. We are in a locust society...
I want to bring over a piece from Joe Saluzzi from Jun 2009 on the blog; [Joe Saluzzi Comments on HAL9000] Joe being one of the only mainstream guys allowed on financial TV to talk about it. In a truthful manner.
A few quotes:
- Over 60% of equity volume comes from the high frequency traders (HFT). Basically, HFT’s are computers that execute trades with extremely low latency.
- Our equity market is being controlled by machines that are nothing more than two bit, SOES bandits. They cloak themselves under the mantra of liquidity providers but they are really just locusts and are feeding off the equity market until it doesn’t suit them anymore.
- what damage would they have done? We will be left with a shell of a market that is used to being led around by computers. Real people and real capital are a scarce resource in today’s market.
But don't worry - you'll be assured today's festivities were all just part of the normal market and just a fat finger or a computer error. Remember these are a benign class of computer who are only here to provide liquidity and skim a little bit off the top for themselves. Just ask them.
Just remember that Russian guy who dared steal Goldman's algo code and had the full force of the FBI borne on him within days. Who knew some computer code could be so important to national security. Investigate Madoff even when handed to the SEC on a silver platter? Give us a decade or two. Goldman quant code on the other hand? Bring every government agency to bear - we must fix this in 3 days or less. Justice *will* be served.
All part of your natural free market.