Tuesday, October 14, 2014

High speed trading programs set off yesterday's sell-off

Something as dramatic as yesterday's U.S. equity market sell-off in the last half hour of trading had to be related to high frequency trading.  It makes sense and apparently that was the in fact the case.  When it became clear at some point after 3pm that the S&P 500 index would close below its 200 day trading average for the first time since November 2012, automated programs began selling stock across the board.  To the extent that there was any sector bias is unclear, and the impact of individual stock selection was almost certainly minimal, but as always it was there on the margin.

What this type of move means for investors, big and small, is not trivial.  When this type of automated group think move hits, one can only get out of the way.  Referring back to a September 2 post here, how does individual stock selection and research fit into this pattern of macro trading moves.  It certainly negates, in most cases, the benefit of paying any appreciable amount to have assets managed.  It's either do it yourself or use index funds, or both.  As the California state pension board pointed out two weeks ago, using hedge funds broadly as a means to beat the market is a fool's errand.  Some funds will of course excel, but for the most part those fund's ultra high fees eat up any market beating returns.

We'll see any impact of individual stock analysis today and in the coming weeks as corporate earnings reports roll in.  Rarely should such reports be analyzed more scrupulously as we sit on the cusp of a potential major market correction.


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