Are machines taking over the stock market?

There have been a bunch of articles out in the last week about the rise of the machines driving fund managers out of business. The headline is way more exciting that the details though.

The detail is that computers are making fund managers more efficient.

From the NYT

Score one for the machines.

The largest fund company in the world, BlackRock, has faced a thorny challenge since it acquired the exchange-traded-fund business from Barclays in 2009…

…Now, after years of deliberations, Laurence D. Fink, a founder and chief executive of BlackRock, has cast his lot with the machines.

On Tuesday, BlackRock laid out an ambitious plan to consolidate a large number of actively managed mutual funds with peers that rely more on algorithms and models to pick stocks.

And this morning from the AFR:

It seems BlackRock’s local stockpicking team isn’t immune to the great man vs machine debate playing out inside the $US5.1 trillion money manager.

BlackRock globally is relocating the research behind its “scientific active equities” quant funds to San Francisco, as it looks to reshape traditional methods of equity investing and keep up with client demands.

The real story is a little lower:

“Traditional methods of equity investing are being reshaped by massive advances in technology and data sciences. At the same time, client preferences are shifting, focusing not just on outcomes but on how both performance and fees impact value,” said BlackRock’s global head of active equities Mark Wiseman.

It follows changes announced last year to combine its quantitative and fundamental investment teams into what it calls a “cohesive active equity investment platform”.

The story is the same in hedge-fund land where managed futures (which use quant models to allocate between asset classes) attracted all the new money in 2016:
Hedge fund flows to quantitative strategies

What is really happening is the same the world over in countless industries. More powerful systems mean that fewer employees can do more.

In construction, better equipment means fewer labourers. On farms better tractors mean fewer farm hands. In factories better robots mean fewer process workers. In logistics GPS tracking and computerisation mean fewer drivers, few storemen.

Blackrock is going down a very similar path to the one that I am using for the MB fund: A quantitative system to screen stocks, coupled with fundamental analysts to go through the stocks to make sure that the quantitative systems are not throwing out value-traps.

You need a lot fewer analysts (we have ten) to verify quantitative information and then dig deeper into the fundamentals for the interesting stocks than you need to create an analyst team to cover 2,000 stocks worldwide.


Damien Klassen is Chief Investment Officer at the MB Fund launching in April 2017. Register your interest now (if you haven’t already):

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.


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    • ErmingtonPlumbingMEMBER

      Lets make it 10 years!,….if you want to avoid a heavy transaction tax.

      Young people can’t touch their super for 50 years.

      Whats the the text book stated pourpose of a Stock exchange?
      Its to provide capital to businesses engaged in the real economy? Or is it just a rigged Casino for Plutocrats to gamble away the life savings of the plebs.

  1. Akin to above, I recall son FIRE boffins spending billions to get a cable between London and New York, just so trading could occur milliseconds faster.

    Yeah, yeah …. “competitive advantage”.

    It made me think, other than the dubious cry of price discovery, what real economic purpose does share trading actually fulfil?

    I mean that rather than real investment. When you acquire an asset to add value, its based on current yield, and you make your money at the price you buy it. Also, its not really contingent on purchasing milliseconds sooner, or fractions of a cent cheaper.

    The traders, the parasites, who rely on front running, to capture fractions of a cent, they’re the only ones who need this.

    What if trading on an exchange, was intentionally delayed?

    Would it matter to real business, to real economic activity?

    I’d rather algorithms be used to program UAV lighter than air aircraft for cargo, than capture fractions of a cent.

    Have this discussion. As the post alkudes, the algorithms, once programmed, are being transacted by machines. That’s even less human economic activity to capture fractions of a cents for a non-worker.

    As well as the unearned gain, it seems rather petty.

    • Forget about algorithms, program trading etc etc. You can beat the House regardless if you have the will to do so.

    • Hhave you read about IEX in US? Also that strategy is called latency arbitrage where GETCO started its operations trading between chicago derivs and NY cash markets. I agree with all of your points though this debate is as muddy in mainstream media from vested interests(exchanges specifically) as the housing affordability. Heard someone saying that market makers(HFTs) add liquidity to market while buying from one and selling to other in a split second, same way investors provide supply to keep rents lower!

  2. Sure the casino is rigged; effective governance of same being off the agenda for our self-inflicted political masters. Nevertheless, the Internet has made possible for plebs such as myself to educate themselves sufficiently well so as to enable them to participate in this gigantic ponzi scam on near equal terms to so-called sophisticated investors. In fact, it is possible to far out-do the so-called sophisticated investor if your knowledge base is broad enough. A lot of hard work is required but in my opinion it is well worth the effort; it’s great to be able to beat the FIRE smartypants at their own game.

    • pft – the game is so one sided that it should be called a casino not “investing”.
      -standardize a minimum parcel to buy.
      -standardize brokerage costs
      -continuous disclosure…im sure that happens all the time
      -insider trading – again im sure sophs play by the book…cough.
      -more controls (or transparency) around short positions…or why even allow it?