Help me understand...

GregFromBoston

I am hoping for some insight from all you more sophisticated participants in these discussions.

I thought I understood that in this complex, fast-moving 21st century investment world, large market movements were driven by cleverly designed algorithms that move huge quantities of shares around in less than a blink of an eye, often out-of-sight in "dark pools". All of it much too deep for a yokel like me.

And then this last little while we have large market movements up and down correlating seemingly more than coincidentally with changes in nuance in a few sentences from Ben Bernanke -- which most of us don't think means much of anything at all.

So what the heck is happening? Do the quant guys quickly add new rules with amazingly high weightings after every Fed pronouncement -- which then causes their automated trading systems to very quickly behave just like a very panicky naive new investor?

Any insight?

I'm feeling a bit blank.

gfb

Charles

Good observation. I have same question. Yesterday, RSH down 7%, today up 7%...all on speculation. Even X is up and down 3%, day to day...US Steel! Is its assessed value changing that much in single day? I know...the market is a voting machine. But like gfb is asking, who is doing the voting these days?

Old_Joe

We could tell you but then we'd have to kill you.

Yours Truly,
Wall Street

scott

Reply to @Charles: It was thought that RSH was going down the tubes. The CEO came out and said no.

Thursday, July 11, 2:56 PM Shares of RadioShack (RSH -17.5%) fall further into the abyss with reports out that the company is looking to hire bankers to help find a way to shore up its balance sheet. More than a few retail watchers think the bankers are going to come back to the boardroom with a bankruptcy plan wrapped up with a bow. 1 Comment [Consumer]

Friday, July 12, 8:54 AM Shares of RadioShack (RSH) move up 7.6% premarket on top of a late-in-the-day rally yesterday which cut into a sharp drop related to reports the company hired bankers to solve its financial issues. Though a number of Wall Street firms are defending the stock today by saying a reorganization is more likely than a bankruptcy, traders are playing with dynamite with more wild swings in share price expected. 1 Comment [Consumer, On the Move]

scott

CNBC discussing server farms located near govt buildings so that news releases can be sent to traders a couple of milliseconds before everyone else. The building they are discussing is owned by Coresite (COR is the symbol, it's a REIT.) You have a consistent trend of companies putting servers as close as possible to exchanges (from Coresite's website about their Chicago location: "CoreSite's Chicago data center adjacent to the Chicago Board of Trade brings together a well-developed customer ecosystem with over 80 customers including tier 1 carriers, financial trading firms, CDNs, cloud computing providers, and systems integrators") to get that extra fraction of a second advantage.

However, interesting to see that at least one of the data center REITs (and I'm guessing the others - such as Digital Realty Trust - DLR; do too) is focusing on this theme. One may think that there may be eventual regulation of this, but on second thought, nah probably not.

You have computers that can read headlines and act accordingly. Large money is absolutely trying to gain that advantage over competition - the only question is what is the cost of an imperfect tool looking to gain an extra millisecond?I think you saw that when Knight Capital happened.

How one bad algorithm cost traders $440m
http://www.theregister.co.uk/2012/08/03/bad_algorithm_lost_440_million_dollars/

MikeM

I guess anyone can come up with possible reasons but I'll throw my 2 cents out there.

I think there has always been movement or volatility based on words the Fed might use or any other high profile administrator or bureaucrat for that matter. What might be different today is what you called the cleverly designed algorithms and extremely high speed data flow. What we used to see as smaller or slower moving market volatility is now magnified 1000 fold. In engineering terms, someone turned up the gain and decreased the reset.

hank

Thanks Greg. Think there's a message in your question - pertaining to how idiotic these market reactions sometimes appear. Suspect it has something to do with outsized leverage by some, so that very small changes in the perceived investment climate translate into very big dollars (maybe hedge funds?). How they manage to plug their new assessment into the algorithms so quickly, don't know. Don't overlook the fact that these traders aren't just playing "the market" per se. They're also playing other smaller investors whom they fully expect to react to the news - but in delayed fashion.

Reminds me of when I used to play around with online sports gaming years ago. The team odds (you could place bets continuously throughout a contest) would continually fluctuate during games. Using baseball as an example, every pitch or swing of the bat caused the odds to change. An "underdog" at game start might pay $3 for every $1 wagered. But, if you bet on the same team during the seventh inning when they were ahead by a couple runs, payout might have reversed to perhaps only $1 for every $3 wagered.

Bernanke's comments apparently changed "the odds" in some folks' minds. Really amusing when you consider his "lame duck" status.

GregFromBoston

Thanks, gents. I found your various perspectives -- all well-informed and sane by my lights -- to be quite helpful.

gfb

fundalarm

Reply to @Old_Joe:

fundalarm

March 22 Ben started the Tapergate -- communication of timing tapering bond purchases slightly before it had been widely expected. in many minds "tapering" equated with "tightening" and the volatility ensured. Since then, the Fed was careful to make a distinction between the two and market participants' expectations on bond purchases have moved forward. as a result, both interest rates and equity prices have recently stabilized. please note it has nothing to do with quant factor trading or other issues. this is an unexpected violent reaction of real interest rates which are very important for everything globally, from pension liabilities, to mortgage rates, to pricing emerging markets, to dollar strength, to gold weakness, etc. equity couldn't just watch the world go down and reacted to moves in other asset classes. if anything, it was a good lesson for many bond/ yield-holders and the Fed alike... stay the course. we'll live through this too.

VintageFreak

Conspiracy Theory 101.

Let's all "buy and hold". Let only Morgan Stanley, Goldman Sachs, JP Morgan, et. al. keep trading among themselves. Let's not be the "suckers" they sell too. Something tells me when they only keep eating each other's lunch, some of them will under. Which means they have fewer like themselves to cause havoc in the markets. Or they will not be able to do it anymore.

Conspiracy Theory 201

Let's all retail investors come together and decide to short said equity/commodity/whatever on a given day. Let's do it for security want to buy. Let's draw down the price then buy. We do this after 1st week of quarter after asset managers have pumped up their holdings to boost quarter end performance.

scott

Reply to @scott:
RSH
S&P warns of RadioShack default
RadioShack (RSH -12.6%) slumps after S&P downgrades the company's senior notes to CCC from CCC+The agency warns the retailer could default in less than a year unless the cash situation improves quite a bit.