“Program Trading Gone Wild,” the Sequel?
What’s behind gyrating stocks the last three weeks or so? (I know, it seems much longer).
Here are two theories:
One. Age-old human emotion — fickle, fear-and-greed driven human psychology — is the culprit.
In particular, less experienced “retail” investors who chased high-flying tech stocks, and are now freaking out.
Or, late-to-the-party investors who used borrowed money (called, “buying on margin”) to pay for stocks — and now have to put up more cash, or see their positions liquidated.
Two. The volatility is due to a complete lack of human involvement, i.e., trading ‘bots and algorithms are behind the wild market moves.
Having seen variations of this movie many, many times before, I’m guessing that theory #2 is closer to the truth.
That’s because more and more of the supposedly unsophisticated shareholders are now invested in passive, buy-and-hold index funds, which damps down panic buying and selling.
Revisiting Black Monday (1987)
Meanwhile, there’s the spectre of “program trading gone wild,” which first manifested on Black Monday, in October 1987.
If you don’t remember (I was just starting law school then), that’s when uncontrolled program trading helped sink global markets almost 23%.
In one day.
In the last 30+ years, ask yourself this:
–Have computers become faster or slower?
–More or less powerful?
–More or less interactive, ubiquitous, and interwoven into people’s everyday lives?
I’m sticking with theory #2 . . .
See also, “How Will Rocky Stock Market Affect Housing?”
P.S.: memo to whomever is working on self-driving cars: make sure you study the stock market before you take humans completely out of the equation.