I have noted many times the automated trading strategies and algos of Wall Street pertaining to stocks. And how the Australian dollar has become little more than their plaything during periods of high risk and high correlation.
Now, we have evidence that it is robots that are increasingly driving forex, via Reuters:
Foreign exchange traders are increasingly turning to a new breed of algorithms that can execute transactions smoothly in volatile markets, according to a client report from JPMorgan’s trading desk seen by Reuters that covered recent market conditions.
The turmoil wrought by the coronavirus pandemic resulted in market volatility surging unexpectedly and bid-ask spreads on even some of the most actively traded currencies widening to levels last seen during the depths of the 2008 financial crisis.
Clients of JPMorgan looked to so-called adaptive algorithms to give them an edge, leading to the U.S. bank’s algos claiming a larger share of its electronic currency trading business, according to the report by the bank’s FX electronic trading desk.
The study chimes with Reuters findings that investment banks more broadly have seen a surge in clients trading with “algos” since early March, with the growth eclipsing the broader increase in FX trading volumes.
In stocks, there are two basic robot strategies at work. The first are momentum and arbitrage chasers. This is a bizarro world robots fighting one another (and people) to front run and or maximise returns of volume-weighted average prices (VWAP).
The second are the analytical strategies like CTAs and risk-parity which leverage fast into pre-described scenarios. Mostly it’s trend-following. Like the Terminator doing technical analysis.
Both exaggerate moves rather than create them, increasing the amplitude of volatility, which they then take advantage of.
If you combine it with the massive role of passive investing today, most of the market is controlled by these automatons, while an increasingly select growth of active fund managers set the direction.
But if they are housed under the same roof, such as in the case of Blackrock and others, then the risk of market manipulation starts to increase. Especially when some of these same firms are also helping monetary authorities buy and warehouse the same assets!
It’s almost as if US capital markets have become a giant automated quango of the benefit of the uber-rich.
You don’t say.
