Seems the wild ride in the share market last week has a simple explanation. Simple, but disturbing…
So last week was a bit odd wasn’t it?
At the beginning of the week it was all, ‘here we go’. I had friends calling me and telling me the next ‘crash’ was on.
And for a while there it looked like it was going that way. The previous week ended with so major falls in Asian markets, giving everyone plenty of time to build up a head of panic over the weekend.
Come Monday morning, markets opened and tanked immediately, wobbled and tanked again.
Come Wednesday everyone’s talking about the crash that was ‘coming’, as if another GFC was practically locked in.
But by the end of the day, nothing. Bargain hunters had snapped up some bargains, prices were supported, and it seemed like we were out of the woods.
Apart from everyone feeling a little sea sick from the wild ride the market had just given us, there was no damage done.
Still, it was a bit strange. And the pundits were talking about ‘unprecedented volatility’.
I think that’s a phrase you use when you have absolutely no idea what happened.
But I know what happened. I know who’s to blame for the wild ride we just had:
Robots.
Most insiders are pointing the blame at automated, high-frequency trading systems. Like robots. Just not very sexy robots.
These robots use their own capital and take advantage of small movements in price on a huge scale.
Say a price of a share moves 1c. That’s not very much, but if you’re trading in a thousands and thousands of units, suddenly that’s real money.
And with high-speed data connections, these robots aim to stay just a fraction ahead of the game, picking off opportunities from minor movements in price…
… to make big bucks.
And they’re major players now. The Securities and Exchange Commission in the US estimates that over half of the stocks traded every day on the US market are executed by robots.
But because there’s so many of these robots out there, and because they’re all working to similar strategies designed by the same people, and because no actual human has an oversight on what they’re doing, these robots can go a little rogue.
Not Terminator rogue, but rogue enough to do some serious damage to your nest egg.
And so that’s what caused last weeks shenanigans. Some bad news out of China was enough to set all the robots off, and we had some wild swings until a strong GDP print in the US was enough to settle the boat.
I don’t know if you lost money. I know a few folks who bought into the panic story, sold out, and certainly didn’t come out ahead at the end of the day.
But it was very profitable for some. Virtu Financial Inc., for example had one of its biggest and most profitable days on Monday.
“Our firm is made for this kind of market,” said Virtu CEO, Douglas Cifu.
And what does Virtu do – Virtu is one of the world’s largest high-frequency trading firms.
They build robots.
It seems that high-frequency trading pays off when there’s high volatility and large volumes.
Does this seem strange to anyone else?
So we have a system where robots are causing huge swings in volatility, and the companies that make the most money in those kind of conditions are the firms running the robots?
Anyone else see a conflict of interest here?
And if it would be funny if it were Wall St insiders ripping themselves off, but they’re not the ones picking up the bill. If the markets crash it’ll be the mums and dads who lose their nest eggs.
And now suddenly, it seems that in the stock market, the odds are stacked even more against you.
Not only do mum and dad have to find some good (and honest!) advice about what companies are performing well, but they then have to hope that their market doesn’t get over-run by robots.
It feels more and more like a casino. You might win. You might even win regularly. But the numbers are against you. Sooner or later the house gets their cut.
I mean seriously, how are people supposed to have any faith in a market like this?
There’s always risk with any asset class, but stocks and shares just seemed to get a whole lot riskier.
And last week Domain was running with the headline:
Spooked Stockmarket Investors Park Cash in Property”
“Shaken investors who endured a rollercoaster week on the Australian Securities Exchange will try to find their sea legs in the stability of property, economists predict, which could potentially push house prices up further.
“As a knee-jerk reaction, investors are seeing the volatility of the financial markets, and asking themselves, ‘where else can I go that’s not as volatile?'” St George Bank chief economist Hans Kunnen said.
“Property is an answer. They say, ‘I’m not having a bar of the sharemarket; I’ll stick with bricks and mortar.”
I think that’s stretching it a bit to say they’ll jump on a single week’s movements, but I think over the long run it has to be true.
I mean, as a property investor, I know I might be doing a deal with someone who knows a bit more about the market than I do.
But at least I know I’m not dealing with a robot – or a league of robots.
I know I’m in the game, and the game’s not rigged against me.
And so in the long run, I think it’s true. The stock market will become more and more volatile, and people will become more and more turned off.
And property will become more and more appealing.
There’s got to be limits to this idea, but the trend seems pretty solid to me.
Are you rushing into the market and buying the dips?
Does a share market volatility mean more upside coming for real estate?
Sowrabh Behl says
as a trader of 5 years I can tell you that the share market was rigged against you long before robots were around. Institutional traders and traders like myself exploit novice ‘mum and dad’ traders who follow what all the books say about buying a company with solid fundamentals, good profits etc. etc. While this applies to very long term trading, unfortunately this is not how markets work on a day to day basis. Markets are mostly supply and demand imbalances. ‘Robots’ (also known as algorithms) simply replicate what institutional traders did, but only faster. It’s still possible to make money from the market, but novices never will.
CS says
Does that mean that super is a waste of money
Sowrabh Behl says
I also mentioned “….this applies to very long term trading…” so no I don’t think Super is a waste of money.
Don says
I am 100% with you Jon, I was a trader with a lot of technical training & it just has not been working for me for some years now. Every thing I learnt was being out hought by something else that was smarter than me, I eventually realised that it was robots.
Paul Kenny says
One of my mentors used to call them “Shocks and Scares” I think he was right!!
Thanks for your posts Jon.Cheers Paul
Liz says
Won’t be long before Hollywood brings out a movie…..Robots ate my Shares!
KatM says
Share trading is a form of gambling. If only our Treasurer and Finance Minister would get their heads out of **** {insert whatever phrase you like} and impose higher taxes on financial market transactions to stop myopic market manipulation. This idea has been around for decades – even the Democrats seemed to warm to it! Better than raising the GST. At least increase consumption tax on sugary products to combat fat and disease.
Buying shares at a good price in a decent publicly-listed company that’s in a business you’re comfortable with still makes good long-term sense.
Andrew M says
As you say Jon the old Buy and Hold method has become outdated. If youre not using strategies like hedging to protect your investment and leveraged investments to multiply your gains you’re a mug. I get the feeling that the only reason mum and dad investors were taught the buy and hold method was so that there would actually be some longer term liquidity in the market, otherwise the market would go even more haywire and companies would no longer have assurance of longer term income from the stock market.