Have the quants had an accident?, wonders the FT’s John Authers in his latest Short View column. Or have many people, operating in separate markets, independently decided to take profits at the same time? Or has a dose of risk aversion suddenly grasped almost everyone in the world markets?The answer to all three is probably ‘Yes’. And whatever the most important driver, there is a palpable sense of deepening gloom over the world’s economic prospects and the chances for financials to muddle through the credit crisis.Monday saw sharp reversals for gold and oil, both on a historic tear since mid-August, when the Federal Reserve unleashed hopes for a liquidity-fuelled boom by cutting the discount rate at which it lends to banks. Both markets had seen unusually high speculative activity.Unrelated emerging markets suffered sharp falls. The Shanghai Composite is now down 14.6 per cent from its peak last month and looks more than ever like the Nasdaq Composite when the technology bubble burst in 2000. Brazil’s Bovespa fell 3 per cent in early trading. The yen, characteristically pummelled when traders are feeling confident, staged its strongest rally in years.
As for the role of quantitative funds, bizarre moves in US equities are redolent of the week in August when the largest names in the sector dropped by a third. Perverse effects can be caused when several quant funds, which tend to use similar models, pile in and out of the same stock at once.
Last week’s sudden fall in tech stocks, which had strongly outperformed the market, certainly had that look about it.
Intraday trading patterns also had a crazy look. No news, or sudden change of Mr Market’s heart, lay behind the 1.8 per cent fall of the S&P 500 in the last 38 minutes of trading on Friday, according to Bloomberg data. More likely, the move was dictated by shifts in the trading books of quant funds.
John Authers expands on the reasons for sharp reversals in some markets in the FT’s online video series, click here to tune in