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Is Robot Trading Really Going To End In Disaster?
Today, the stock market and other markets such as bonds and currencies can be described as "automatic automation." Here's what I mean.
There are two stages in the stock investment. The first came with the allocation of preferred among stocks, cash, bonds, etc.
This stage also includes deciding how much to put in the product index or funds traded on exchanges (ETF, which is a kind of mini-index) and how much management Off to use.
The second phase involves buying and selling the actual decision - when to come out, when to enter and when to go to the sidelines with safe-haven assets such as Treasury notes or gold.
What investors may not realize is the extent to which the decision is now left entirely to the computer.
I'm not talking about automated trading matching where my buyers and sellers and your computer according to our orders and execute trades. Such trading has been around since the 1990s.
I'm talking about computer portfolio allocation and decision making buy/sell in the first place, based on algorithms, without human involvement at all. It is now the norm.
Eighty percent of stock trading is now automated in good shape index funds (60%) or a quantitative model (20%).
This means that the "active investment", in which you choose the allocation and time, down 20% from the market. Although active investors even receive automated execution.
In all, the number of men "make a market" in the traditional sense down about 5% of total trade. This trend is the result of two errors intellectual.
The first is the idea that "you can not beat the market." This drives investors to the corresponding index fund market. The truth is you can beat the market with a good model, but it was not easy.
The second error is that the future will resemble the past on the horizon that is long so that the "traditional" allocation of, say, 60% stocks, 30% bonds and 10% cash (with shares less as you get older) will serve you well.
But Wall Street does not tell you that accidents of 50% or greater market share - as happened in 1929, 2000 and 2008 - before the date of your retirement will remove you.
But this is a larger threat that is rarely considered ...
In a bull market, the type of passive investment strengthens the upside as the indexer piling into hot stocks such as, for example, Google and Apple have.
But small sell-off could turn into panic as passive investors headed for the exits at the same regardless of the fundamentals of a particular stock.
index funds would storm out of stock. Passive investors will be looking for active investors to "improve" and buy.
The problem is there will not be any left active investors, or at least not enough to make a difference. There will be no remaining active investor for the risk capital to try to catch a falling knife.
Shares will instantly go down without a bid. The market crash would be like a runaway train without brakes.
Reappears to the complexity, and the market is an example of a complex system.
One formal property of complex systems is that the size of the worst events that can happen is an exponential function of the scale of the system.
This means that when the scale of this complex system is two-fold, double no systemic risk; can increase by a factor of 10 or more.
This kind of sudden, unexpected accidents that seem to appear out of nowhere is entirely consistent with the predictions of the theory of complexity. Improving market scale correlated with the market collapse exponentially larger.
Welcome to the world of investing automatically. It will end in disaster.
There are two stages in the stock investment. The first came with the allocation of preferred among stocks, cash, bonds, etc.
This stage also includes deciding how much to put in the product index or funds traded on exchanges (ETF, which is a kind of mini-index) and how much management Off to use.
The second phase involves buying and selling the actual decision - when to come out, when to enter and when to go to the sidelines with safe-haven assets such as Treasury notes or gold.
What investors may not realize is the extent to which the decision is now left entirely to the computer.
I'm not talking about automated trading matching where my buyers and sellers and your computer according to our orders and execute trades. Such trading has been around since the 1990s.
I'm talking about computer portfolio allocation and decision making buy/sell in the first place, based on algorithms, without human involvement at all. It is now the norm.
Eighty percent of stock trading is now automated in good shape index funds (60%) or a quantitative model (20%).
This means that the "active investment", in which you choose the allocation and time, down 20% from the market. Although active investors even receive automated execution.
In all, the number of men "make a market" in the traditional sense down about 5% of total trade. This trend is the result of two errors intellectual.
The first is the idea that "you can not beat the market." This drives investors to the corresponding index fund market. The truth is you can beat the market with a good model, but it was not easy.
The second error is that the future will resemble the past on the horizon that is long so that the "traditional" allocation of, say, 60% stocks, 30% bonds and 10% cash (with shares less as you get older) will serve you well.
But Wall Street does not tell you that accidents of 50% or greater market share - as happened in 1929, 2000 and 2008 - before the date of your retirement will remove you.
But this is a larger threat that is rarely considered ...
In a bull market, the type of passive investment strengthens the upside as the indexer piling into hot stocks such as, for example, Google and Apple have.
But small sell-off could turn into panic as passive investors headed for the exits at the same regardless of the fundamentals of a particular stock.
index funds would storm out of stock. Passive investors will be looking for active investors to "improve" and buy.
The problem is there will not be any left active investors, or at least not enough to make a difference. There will be no remaining active investor for the risk capital to try to catch a falling knife.
Shares will instantly go down without a bid. The market crash would be like a runaway train without brakes.
Reappears to the complexity, and the market is an example of a complex system.
One formal property of complex systems is that the size of the worst events that can happen is an exponential function of the scale of the system.
This means that when the scale of this complex system is two-fold, double no systemic risk; can increase by a factor of 10 or more.
This kind of sudden, unexpected accidents that seem to appear out of nowhere is entirely consistent with the predictions of the theory of complexity. Improving market scale correlated with the market collapse exponentially larger.
Welcome to the world of investing automatically. It will end in disaster.
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