Death of the human investor: Just 10% of trading is regular stock picking, JPMorgan estimates
Death of the human investor: Just 10% of trading is
regular stock picking, JPMorgan estimates
"Fundamental discretionary traders" account for
only about 10 percent of trading volume in stocks today, JPMorgan estimates.
"The majority of equity investors today don't buy or
sell stocks based on stock specific fundamentals," said JPMorgan's Marko
Kolanovic.
JPMorgan believes the recent sell-off in technology
stocks may have been related to quantitative and computer trading and not
traditional fundamental investors.
By Evelyn Cheng 13 Apr 2017 | 11:53 PM ET | 02:04
Quantitative investing based on computer formulas and
trading by machines directly are leaving the traditional stock picker in the
dust and now dominating the equity markets, according to a new report from
JPMorgan.
"While fundamental narratives explaining the price
action abound, the majority of equity investors today don't buy or sell stocks
based on stock specific fundamentals," Marko Kolanovic, global head of
quantitative and derivatives research at JPMorgan, said in a Tuesday note to
clients.
Kolanovic estimates "fundamental discretionary
traders" account for only about 10 percent of trading volume in stocks.
Passive and quantitative investing accounts for about 60 percent, more than
double the share a decade ago, he said.
In fact, Kolanovic's analysis attributes the sudden drop
in big technology stocks between Friday and Monday to changing strategies by
the quants, or the traders using computer algorithms.
In the weeks heading into May 17, Kolanovic said funds
bought bonds and bond proxies, sending low volatility stocks and large growth
stocks higher. Value, high beta and smaller stocks began falling in a rotation
labeled "an unwind of the 'Trump reflation' trade," Kolanovic said.
"Upward pressure on Low Vol and Growth, and downward
pressure on Value and High Vol peaked in the first days of June (monthly
rebalances), and then quickly snapped back, pulling down FANG stocks" —
Facebook, Amazon.com, Netflix and Google parent Alphabet, the report said.
Along with Apple, the big tech-related names fell more
than 3 percent each last Friday and dropped again Monday, sending the Nasdaq
composite lower in its worst two-day decline since December.
However, "the contribution coming from quant
rebalances to this snapback is now likely over," Kolanovic said, noting
that S&P derivatives have supported market gains at the beginning of this
week.
"$1.3T of S&P 500 options expire on Friday, and
this will change dealers' positioning," he said. "This can result in
a modest increase of market volatility starting on Friday and into next
week."
Tech recovered Tuesday, helping U.S. stocks close higher
with the Dow Jones industrial average at a record.
Derivatives, quant fund flows, central bank policy and
political developments have contributed to low market volatility, Kolanovic
said. Moreover, he said, "big data strategies are increasingly challenging
traditional fundamental investing and will be a catalyst for changes in the
years to come."
Figures from market structure research firm Tabb Group
point to similar gains in machine-driven trade volume, while the overall number
of shares traded has declined.
A subset of quantitative trading known as high-frequency
trading accounted for 52 percent of May's average daily trading volume of about
6.73 billion shares, Tabb said. During the peak levels of high-frequency
trading in 2009, about 61 percent of 9.8 billion of average daily shares traded
were executed by high-frequency traders.
To be sure, not everyone on Wall Street is giving ground
to the machines so easily.
AllianceBernstein analysts made the case in an April 28
note that artificial intelligence is unable to generate significantly different
results — by the mere fact that analyzing more and more data results in
increasingly similar strategies.
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