Machines, not Trump, to blame for markets

Just as U.S. President Donald Trump had nothing to do with the stock market’s rise, despite the almost 60 boastful tweets he has posted about it since being elected, he has nothing to do with the recent stock crash. Instead, praise the machines — and blame them, too.

Last year, Marko Kolanovic, global head of quantitative and derivative research at JPMorgan, estimated that stock pickers — those who trade on stock-specific fundamentals — account for just10 per cent of today’s stock market trading volumes.

Some 60 per cent of trading is “passive and quantitative investing.” Nearly half is high-frequency trading by algorithms; though its share is down from the 2009 peak, it’s responsible for pretty much all of the market’s volume gains this century.

Duke University’s Brian Weller has shown that algorithmic trading deters information acquisition, potentially distorting asset prices and weakening capital allocations. In a sense, thanks to the algorithmic shift, the stock market has become more like the one in bitcoin, also driven largely by algorithmic trading. It’s not that the assets in such markets don’t have a fundamental value — bitcoin does, too, insofar as it allows anonymous transactions.

It’s just that the fundamental value matters far less than speculative opportunities, which computers, with their superior ability to analyze statistics, can detect better than humans. Relying primarily on information that can lead to short-term gains means, essentially, feeding on what the rest of the market is doing to a greater degree than a human does.

Trump appears to hold an old-fashioned view of the stock market, linking its performance to investors’ expectations. That explains the White House’s reaction to the stockmarket drop: Trump’s press secretary, Sara Huckabee Sanders, said the “president’s focus is on our longterm economic fundamentals.”