Editorials

Algorithmic trading may cause flash crash

While some stock market analysts have been warning the S & P 500 has been overbought for some time, it has continued to reach new highs. The truth is the market can be just as irrational and divorced from fundamentals on the way up as it can be on the way down.

Today the majority of trading is done by machines.  Approximately 10 percent of trading is done by humans. 40 percent is done by index funds and exchange-trade ETF funds.  Almost  half of trading is done automatically by computers using algorithm programs which follow price and momentum.  With robots doing the trading fundamentals are largely irrelevant. Leveraged hedge fund using algorithmic trading tend to be herd bound on steroids. Algorithmic trading programs have a buy basis and can result in bubbles.

When a black swan event happens and markets drop quickly, algorithmic trading works in reverse and can cause flash crashes were selling begets selling and markets can quickly go from overbought to oversold.  Another problem is that with leverage buying, profits can be big, but losses can be enormous.  In addition when markets drop quickly, buyers with leverage can be forced to sell because of margin calls. 

It may be the Coronavirus epidemic may be the unexpected black swan event which triggers a market meltdown.  A stampede can turn into an avalanche if algorithmic computer programs feed off each other with sell orders.  Gold and silver have been a safe haven over the past week as stocks have tumbled.  However, at some point algorithmic trading could cause gold to spike too fast and reach overbought irrational exuberance. 

News has just come out the incubation period could be much longer than presumed earlier. Chinese authorities say a man in China's Hubei Province was infected with Coronavirus but did not show symptoms for 27 days.   This means the 14 day quarantines being used are not long enough.  People returning from trips to China in the U.S. have been released after fourteen days or self quarantine, and may be exposing people to the virus.  New communities of Coronavirus may develop in various countries around the world and geometrically increase the spread of the epidemic.

I am long Gold Resource Corporation (GORO).

© 2016 - 2020 Steve Johnston - All Rights Reserved.
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