11-21-2018, 04:05 PM
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?
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?