Markets face risk of robot war collapse

LIQUIDITY risk and the rise of high frequency “robotic” trading could trigger a meltdown to match the worst in history and force more funds to suspend trading.

Tomorrow marks the 90th anniversary of Black Monday, 1929, when the Dow Jones fell 12.82 per cent, a record only beaten by the 22 per cent drop on Black Monday 1987.

Brian Dennehy, managing director of Fundexpert, said liquidity risk could worsen the next correction as sellers struggle to find buyers: “Any rush for the exits will make Black Monday look like a tea party.”

The problem was brought into focus by Neil Woodford, who suspended his flagship fund after struggling to sell unquoted stocks to meet investor redemptions.

James Burns, portfolio manager at Smith & Williamson, is avoiding UK smaller companies over liquidity fears, while open-ended property funds have suspended trading in the past.

Dennehy said corporate bonds are most vulnerable: “Prices fell up to 50 per cent during the financial crisis due to a lack of buyers. Today the volume of bonds is much higher and the quality much lower.”

Two thirds of stock market activity is now high-frequency trading. He added: “Robots don’t bluff, hesitate or have long lunches. They sell rapidly. In the next downturn, it will be machine against machine.”

Ian Sayers, chief executive of the Association of Investment Companies, said new Financial Conduct Authority rules fail to guarantee investors can get their money, regardless of market conditions.