Wall Street Fights Stock Machines With Trend-Chasing on Steroids
(Bloomberg) — Wall Street is fighting the robot revolution by chasing the billions of dollars of stocks bought and sold on autopilot in the dying minutes of every trading day.
It’s where the action is. Some 23% of equities trading volume happens in the last half hour, compared with 18% in 2010, New York Stock Exchange data show.
“We’re getting much closer to what some hedge funds do, and getting into more high-frequency trading,” said Guillaume Arnaud, head of quantitative-investment strategies at SocGen.
Spurred by the boom in quant and passive investing, SocGen recently launched a total-return swap riding the intraday strategy while UBS offers bespoke trades via swaps, certificates or notes.
Traders on Wall Street have sought to profit from late-session swings for years. But these new products give institutional investors a fresh way to exploit the rise of the machines — a shift that’s spurring fears that the equity market is more vulnerable to flash crashes and liquidity blow-ups.
As index managers track closing prices, quantitative funds eye volatility targets and option market-makers balance exposures, a frenzy of rules-based rebalancing and hedging transactions takes place toward the close of a stock session.
Some 60% of assets in U.S. equities are housed in passive products, while quant strategies comprise another 20%, according to JPMorgan Chase & Co. All told, index and exchange-traded funds, quants and options-related strategies dominate all but 10% of U.S. stock trading, the bank calculates.
“What it may do is create a relatively predictable pattern of systematic buying or selling that could create some pressure in the market,” said Shane Edwards, global head of equity derivatives at UBS.
The thinking goes that leveraged ETFs, market-makers and quants amplify morning moves in the afternoon session, making it easier to divine the direction for a given day once the cash market kicks off.
In that sense, intraday volatility is likely to be lower than price swings on a close-to-close basis, according to Sandrine Ungari, SocGen’s head of cross-asset quantitative research, whose studies contributed to the product’s design.
SocGen’s strategy works like this: A long or short position on S&P 500 futures is initiated based on where prices are relative to the previous day’s close. If they’re higher, the strategy goes long and if they’re lower, it flips short. When there’s no clear trend, there’s no trade.
The products marry a clutch of Wall Street obsessions from the passive revolution to the high-frequency boom. Firms with big trading books are better positioned to run the high-turnover strategies. Neither bank would say how much money is following the strategies, though UBS said client interest is “strong.”
For Arnaud, the trend-following strategy is defensive since it fares better when markets are volatile. UBS’s Edwards sees it as “considerably less correlated than other traditional strategies” because it can sell into long-term rallies or buy into protracted downturns.
The boom in end-of-day trading is changing the game for Andre Honig at Transtrend BV, a traditional trend follower known in the industry as a commodity-trading adviser. The $5.4 billion hedge fund has adjusted its quant model so signals are less vulnerable to late-session spikes.
Stock moves toward the close can also offer opportunities to trade at better prices, according to the executive director at Transtrend in Rotterdam, the Netherlands.
“What we’ve done over the years is adapted the way we trade such that we are now able to act as a liquidity provider during these moments instead of a liquidity consumer,” Honig said.