“Worth” reading: RAGE AGAINST THE MACHINE
- The second widespread US equity “Flash Crash” on August 24, 2015 was a wakeup call for investors.
- The decline of “market making” activity has reduced daily trading volume on major stock exchanges and increased the
risk of liquidity shortages in times of panic.
- Dramatic changes in the mix of market participants has fundamentally changed the way US equity markets behave.
- While high-frequency traders account for the lion’s share of trading volume today, they are not market makers and have
very little skin in the game.
- In addition to contributing to the fall in trading volume and a rise in herding behavior, the ongoing migration from active
investing to passive vehicles like exchange traded funds leaves some investors particularly vulnerable.
- So, you ask, what does this mean for my portfolio?
These insights argue for rethinking the investment process in five ways:
1. Know your risk tolerance and expect more severe volatility.
2. Don’t allow yourself to get forced out of positions when selling frenzies occur.
3. Have a plan to capitalize on wild price swings, knowing that the regulators may or may not cancel those trades.
4. Watch for macro or policy breaking points that HFTs cannot anticipate.
5. Slow down and take a longer term view. There is opportunity in chaos!