11 Apr IS THE ILLUSION OF LIQUIDITY ABOUT TO BE SHATTERED?
Some believe the “illusion” of liquidity could be shattered in the intermediate future as more on Wall Street are adopting the view that technology based trading will be the bane of the markets, a view that I have expressed many times.
Bloomberg writes “algorithmic trading strategies and other quantitative traders have caused exacerbated moves on both the up and downside in equity market as AUM continues to flow out of actively managed equity funds and there are less participants to bring markets back to equilibrium.”
Bloomberg referenced a previously discussed JP Morgan report stating equity liquidity in December was one third of previous selloffs, blaming this lack of liquidity from the large shift away from human to electronic market makers that disappear in times of volatility. Bloomberg went as far as writing “algorithmic traders are a destabilizing force with many believing that such will provide nonexistent liquidity.”
The newswire wrote the scale of this shift in market structure is highlighted by a previously discussed JP Morgan study stating “exchange traded funds and algos dominate all but 10% of US stock trading.”
Bloomberg concludes “the illusion of liquidity dampens volatility but when that illusion is broken, volatility will be higher than it otherwise would have been which then could usher in changes to ensure that such does not occur again.”
Earnings season commences tomorrow. Some are concerned that the market could be facing a rude reawakening as both revenues and profits disappoint on companies that have a lot of dependence on overseas sales. A major culprit is the strong dollar and weakening consumer demand from abroad. Bloomberg writes “firms with highest share of overseas revenues are about to report two straight quarters of losses, the first such occurrence in over 10 years.”
The issue at hand, according to Goldman, a basket of companies with highest share of international revenue has surged 23% this year, almost 15% more than companies with the highest domestic exposure. Goldman states the current environment is a “conundrum,” an environment “in which shares in companies with high amount of overseas sales must come down.”
The pivotal question at hand is whether or not profit disappointments be the catalyst for a selloff that confirms the illiquidity thesis? In this case I hope my views or the emerging view on Wall Street are wrong.
Many times I have opined “it is not one does but rather why one does it,” a mantra that has all but been lost on Wall Street where style is completely dominating substance. Most will agree macroeconomic, geopolitical and security research is virtually nonexistent on Wall Street, where 90% of investing decisions are made by a computer program that emphasizes capitalization.
Is this about to change? Only history can answer that question.
Last night the foreign markets were mixed. London was up 0.13%, Paris up 0.78% and Frankfurt up 0.37%. China was down 1.60%, Japan up 0.11% and Hang Sang down 0.93%.
The Dow should open flat. The 10-year is off 4/32 to yield 2.49%.