IS THERE THE BEGINNING OF DEMISE FOR ALGO TRADING?

Several times I have referenced at 2015 interview with Amazon’s Jeff Bezos where he commented that algorithms could be written to manipulate/influence stock prices but “this of course would be illegal.”

A WSJ headline read yesterday “High Frequency Trading Pioneer Runs into Slump.”  The article chronicled the rise and the fall of an “algo” trading firm that enjoyed nearly a 14-year winning streak in which it made a profit every trading day—more than 3,400 consecutive sessions—a streak that ended in 2017, partially the result of everyone mimicking its programs.  According to the WSJ, last year it made only $30 million.

It is a well-known Wall Street axiom that everyone will follow a successful strategy and it will work until it does not, the result of crowdedness.

The last six months I have read numerous stories about how algorithmic trading firms are firing workers because the lack of returns, behavior that is well rooted in Wall Street.

At this juncture the only two strategies that are working is passive indexing and momentum buying of the largest capitalized issues.  The concentration of wealth is incredible.

As noted several times the assets of passive/index equity funds are now greater than active funds.

Regarding momentum of the largest capitalized issues, which is perhaps a byproduct of indexing, the momentum is intense.  Tesla which sells about 100 cars in a year was up one time yesterday by about 48% since Friday and up more than 130% since January 1.  It is up about 430% form the June 2019 low

Two weeks ago, it passed VW who sells about 10.2 million cars, becoming the second most valuable car company in the world. Since that day, Tesla has exceeded this amount by almost $50 billion, an amount greater than the capitalization of GM, the company that sells about 10.1 million cars.  Is this reasonable?

Will Tesla catch Toyota, which sells about 10.4 million cars, as the most valuable car company? At the time of this writing it is $50 billion away.

Incidentally Tesla sold 367,500 cars in 2019.

I think it is noteworthy that as recent as October 15, 2019 there were fears that Tesla’s financial statements would contain a “going concern” clause.

And then there is Amazon whose one-day $95 billion rise is the greatest on record, eclipsing the $78 billion increase of Google in 2018.  As noted last week this one-day increase is greater than the total capitalization of over 450 S & P 500 companies.

As with algorithmic trading, passive indexing and the chasing of the largest capitalized companies will end but the question is when and what will be the ensuing carnage.

Commenting about yesterday’s market activity, equities rallied while Treasuries plunged on the belief the global economies will withstand any impact form the corona virus.

Last night the foreign markets were up.   London was up 0.54%, Paris up 0.81% and Frankfurt up 1.03%.  China was up 1.25%, Japan up 1.02% and Hang Sang up 0.42%.

The Dow should open moderately higher amid hopes for a breakthrough in fighting the coronavirus.  China added more liquidity.   Oil is about 2.5% on headlines that Saudi Arabia is considering an emergency production cut.  The 10-year is off 10/32 to yield 1.64%.

kent
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.