Algoritms

Pfäffikon SZ, Switzerland – The fact that the world is changing at a rapid pace does not need any argument. Some technological developments are even faster than expected and already have a deeper impact on society. In the financial world, this picture is no different. Exceptional situations are the result.

VIX
Volatility (VIX) is hard to find in global markets. Some analysts suspect that this has to do with an increasingly computer-driven stock market. In the meantime, up to 90 percent of the stock market trading would be computer-controlled. Fundamental investing has become a quite unpopular. Interesting in this process is that computers predict an ever-lower volatility. Traders play in and use more leverage than normal as the movement –and thus the risk– is low. Additionally, passive investing is raised to an art form, and the picture is complete.

Pledging
The main question is what will happen during a next crash. Structural pledging combined with low-volatility could speed up a next financial crash. Many algorithmic models link risk to volatility. The behavior of a rising market is, therefore, not comparable to a downward market. Exposure to increased volatility should be accelerated run-down according to mathematicians. Also, it cannot be ruled out that the passive investor who has fallen asleep in the meantime, turns out to be not that passive.

In any case; systematic decision-making would affect the market at a next crash as such as never before. The 1987 crash is known for the problems surrounding the pledge that originated at that time; as a result, the market clearly went too far. How the algorithmically driven trader reacts in 2017 is a fascinating question.

It remains for me to wish you a good weekend.


Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.