The mighty algorithmic robots that have dominated global markets over the past decade — spitting out insane swings in asset prices in the process — will probably get even mightier during the next decade.
One end result: Successfully trading the stock market will become even tougher for most.
“The whole infrastructure of the market is changing,” said veteran trader and Sevens Report Research founder Tom Essaye on Yahoo Finance’s ‘The First Trade.’
Essaye said that “for all of us, especially traders, dealing with this extreme short-term volatility is something we all have to get more used to. And, we have to somehow assimilate that into our trading plans and figure out how we deal with that from a risk management standpoint.”
He added: “The market is getting more volatile in the short-term for no good reason and that could swing you out of trades, which we all know could hurt performance over the longer term.”
Without question, the past decade in the markets has re-written how one approaches putting money to work in stocks.
The rise of algorithmic trading programs has led traders away from past practices of running simple valuation-based scans for overvalued and undervalued stocks. Even trolling earnings call transcripts for clues on future earnings, or placing a call to management teams, have become as outdated (for some) as Apple’s first iPhone.
In the place of those seemingly primitive exercises are programs that scan real-time news feeds and trade stocks based on headlines. There’s very little human interaction required here, and in turn it causes scores of crowded trades amplified by the herd mentality of the algos.
As we have learned over the past ten years, those crowded trades could instantly unwind as the machines assess a single new headline.
And of course, there are algos that trigger trades based on tweets from Twitter — as seen in 2019 via the volatile swings in stock prices. President Donald Trump’s frequent attacks on the Federal Reserve, or whipsawing expectations of a U.S.-China trade deal, were some of the reasons behind big price swings.
In fact, JP Morgan Chase noted in a September study that the stock market declined slightly on days when Trump tweeted more than 35 times. On days when Trump tweeted fewer than 35 times, stocks often went up.
So in a lot of ways, investors have algos to thank for fueling the market’s volatile herd mentality. And more to Essaye’s point, those in the market that think navigating the algos over the next decade won’t become infinitely tougher are out to lunch.
Trading programs are only likely to get more sophisticated as computer processing power rises, and cloud capabilities strengthen. Meanwhile, the size of the global algorithmic trading market is expected to surge by a compound annual growth rate of 11.1% to $18.8 billion from 2019 to 2024, according to research firm Markets And Markets.
Buckle up, traders.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi
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