WHY THE ALGOS NEED A HEART
same time, making the financial crisis worse in their quest for liquidity. The next crisis will add algorithms and programmatic trading into the mix, with vast sums of pooled investor money and less-than- ideal transparency. Increasingly, algorithms are a bigger part of the market, both in asset allocation programs and trading execution. For example, commodity trading advisors (CTAs), which are essentially algo-driven funds, have seen assets swell by 36% to $360 billion over the past 10 years. CTAs are to market swings what warmer waters are to hurricane formations. Stocks go up, the models say buy, stocks go down, the models say sell – in either case intensifying the move. Designed for small moves, without a human with a hand on the throttle or brake, these programs can intensify the havoc on days with big moves up or down. So, for now, we benefit as CTAs propel stocks up further than they would have otherwise... But as rising ocean temperatures are increasing the intensity of the hurricanes we’re seeing, we can expect more frequent and more intense volatility as the effects of CTAs and other momentum investors continue to (GSXX,EVPMWWc is one of Wall Street’s most connected analysts. He spent 20 years trading for some of the top investment banks in the country – including First Union Securities, Wachovia Securities, Stifel Nicolaus, and FBR Capital Markets – for
exercise outsized effects on the markets with little oversight or transparency. That worries me. It should worry you, too.
After all, before any of this force-multiplying technology came into being, one of the most damaging things ever done in the markets was caused by a single person in the 1990s. Nick Leeson, a Singapore-based trader, attempted to cover prior losses by making bigger and bigger unauthorized trades. It didn’t work. Instead, his losses ballooned enough to cause the insolvency of Barings Bank, the oldest U.K. merchant bank. Then consider that the second-largest one- day swing between the high and the low in the Dow Jones Index was the so-called “flash crash” on May 6, 2010. In less than 45 minutes, algorithmic trading caused the Dow Jones Industrial average to drop a total of 998.5 points at the lows before snapping back. Imagine what someone like Nick Leeson could do with an algorithm. clients like SAC, Viking Global, Discovery Capital, UBS O’Connor, T Rowe Price, and +MHIPMX]8SHE]EXc Stansberry NewsWire, he uses his expertise to reveal what’s happening behind-the-scenes on Wall XVIIXWS]SYGERTVSǻXSR2EMRXVIIX
American Consequences 69
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