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Market Innovations Make This Time Different?

#1
Just saw a squib about an interview with the new Goldman CEO on CNBC.com.  He pointed out that some post-08-Credit Crisis market innovations and strong product trends --- untested through a full market cycle --- MIGHT result (or actually may have already resulted!) in unexpected market behavior....in particular volatility under stress.  These innovations and product popularity trends include some obvious stuff -- some of which we generally wouldn't think of as potentially dangerous:
 
1. High frequency trading / algo trading / program trading (obviously these have been flagged as potentially dangerous)
2. The rapid growth and daily trading volume predominance of index funds and Index ETFs.
 
Although I can't cite the source, I recall reading/hearing several times recently that trading in ETFs, program executions for "passive" index funds, and HFT/Algos total on average 70% of all trading volumes.  If correct, it's pretty clear that (say) equity index products like SPY, QQQ, DIA, etc. aren't really so diversified any longer --- at least not the way we used to think of diversification.  I mean, arguably, ETF and passive fund index trading likely drives individual equity issue prices more often than vice-versa...right?  And the Goldy CEO fails to mention the algo trading now permitted in large liquid financial futures markets -- like Treasury 10s and 30s and Eurodollar deposit/LIBOR!  And how about feedback loops between algos (say) driving rates higher AND "hopping aboard"/accelerating related consequent equity plunges?
 
So....what do you think?  If the sea-change that starts to reverse the glorious since-09 equity rally hasn't already started, we are surely closer to it than at any time in the past decade.  Is there a real danger that once the everything's-groovy-stay-the-course-keep-buying-talking-heads sooner or later run out of gas, the resulting market action looks more like a train wreck than an orderly decline?   Might it make sense to ALWAYS hold some way-way-out-of-the-money "lottery ticket" puts?   Thoughts about any part of this?
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#2
What  do I think?  I think you must be pretty bored to play back Captain Obvious.  And I must be pretty bored to play along.
 
CNBC (and various guests) have been touting the potential dangers/evils of HFT and the dreaded "algos" since May 6, 2010.  At least twice a week, and up to 5-6 times a day on good days.  "Flash crash" is always good to grab at least a little attention.  And many of the guests at least claim to have been ringing (wringing??) the bell before that.
 
And other market theorists have been talking about the relative importance of asset allocation vs market timing vs sector rotation vs individual stocks since time immemorial.  Many smaller investors have always wanted both to follow the crowd and also to diversify.  Pooling their assets allows more diversification and also makes them part of the crowd.  Mutual funds (conceptual predecessors to ETFs) have been around since the 1770s. ( https://www.ific.ca/en/articles/who-we-are-history-of-mutual-funds/ ) Adam Smith's The Wealth of Nations has some thoughts that could be interpreted in that light.  ETFs are just the newest way to play that game.
 
As to "the everything's-groovy-stay-the-course-keep-buying-talking-heads", I don't see that.  There always seem to be some perma bears and some raging bulls and some cautiously optimistic and some optimistically cautious. 
 
I do have to agree we are closer to the next crash than we were 10 years ago.  But we are also closer to the next rally and to 2020 and to 2050.  Time flows monotonically. 
 
Will the "new toys" enable some nasty side effects?  Corollary #138 (of 8342 and counting) to Murphy's Law says that every new thing designed for an intended result will have at least 3 unforeseen, unintended side effects, and at least half will be detrimental.
 
Tom Clancy's 1994 Debt of Honor had a Japanese bad guy crash the US stock market using some carefully designed major sell orders that triggered computer assisted correlation patterns that fed on themselves in a vicious cycle.  In that particular fictional scenario, the hero fixed that problem by simply erasing one day's history --- "it never happened"  The point being, if the stuff really hits the fan, will your puts matter? In the real world, Obama administration rewrote/ignored bankruptcy law with GM, promoting pensioners and workers ahead of bond holders --  not to say the result was right or wrong, merely that the rules were drastically changed.  If you plan based on the rules, ----  so what?
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#3
This Time is Different
The Only Thing That Doesn't Change Is Change Itself
Everything Old Is New Again
Those who Forget the Past are Condemned to Repeat It
 
The big concepts are based on deeply ingrained human characteristics --- Fear opposing Greed, Rugged Individualism opposing Herd Instinct, Looking Forward vs Looking Back.  These never change, at least on any human time scale. And the drive the future. But the details do change.  The future is never clear nor fixed.  And (see Hendrix and Hunt, see Alzheimer, see Winfried Martini et al, see Trump tweets) neither is the past!!!
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#4
Not the type of response I expected, but VERY thoughtful...
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#5
OK, it's the middle of a rainy day morning and I can't work outside and I'm still bored.  But in a different way, so here's a different twist on unexpected.

Are you BUYING or SELLING those "way-way-out-of-the-money "lottery ticket" puts?"

If the HFTs and ETFs amplify and accelerate and concentrate market moods and moves, do you want to try to beat the speed burners at their own game, or bet instead they will overshoot bigtime?

For most individual investors the flash crash was a non-event.  Most of the individual investors hurt by the flash crash were stop-loss holders (similar to OTM puts, at least in effect)  Most who made money "bought the dip" or had sold puts at 45 on PG.  I don't play that game either way, but both are playable

And one more, this of the "expected" variety.  Then I quit !
My working career included a stint of risk management.  Mostly theorizing potential "gotchas"  but covering all of risk management.
Boiled down, you create an "expected cost" which is more or less the integral of the product of cost-if-happens times the probability-of-happening.  If the expected cost is "large" you may try to reduce it with a "risk mitigation strategy"  which reduces either the probability or the cost (or both).  Then you calculate a new "what-if" expected cost.  If the delta significantly exceeds the cost of mitigation, you implement the mitigation program.  Else you don't.

I see the market as (always) having fairly significant risks --- and fairly significant opportunities.  I don't see HFT or ETF as significantly changing either.  The delta expected gain (loss) not great enough to justify distinct mitigation costs,  Except   --  I no longer ever use market orders, always limit orders.  Too easy for HFT to front run, and I believe that has happened to me on occasion.
As a very general statement, I don't hedge my bets.  If there's enough risk to warrant hedging, there's too much for me to be there at all.
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