According to a recent report in the Wall Street Journal, “Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.” Think “Synths” from telly series Humans leading trading decisions rather than, well, the human fund managers at Kames Capital.
The article goes on to blame the recent market weakness on computerised trading algorithms (algos). Just as a reminder, Google summarises an algorithm as “a process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer”. What we find interesting is that while the algos are blamed when it comes to bear markets, they are never blamed when it comes to bull markets. Shouldn’t they be responsible for both?
That eminently non-programmable human, Donald Trump, has come out and blamed the recent market weakness on a “glitch”. We remain a little more sanguine, and view market pricing as trying to tell us something. The Federal Reserve puts a dozen people in a room to deliver a rate decision, but the market rallied to the text of its statement and not to the bearish and mechanical process of a rate rise.
Whilst it is undoubtedly true that the vast majority of trading is now done by computers, this tells you nothing about human choices behind them. Algos execute trades based on a multitude of factors, with flow clearly being a key component.
If you want to blame recent market weakness on outflows that’s fine, but don’t blame the algos per se. There will always be some humans in the process.