Maybe machines aren’t to blame for the recent market cataclysms.
That’s what AQR Capital Management founder Cliff Asness said in a recent blog post in which he criticized analysts, commentators and journalists who associate the recent equity market volatility with machine-based, quantitative trading mechanisms.
“People are still writing crapola like this about high-frequency trading,” wrote Asness. “In particular, whle seeking to hedge themselves, commentators make the same implicit mistake so many do: They casually assume that because today’s system isn’t perfect, and it isn’t, that yesterday’s was better.”
AQR applies quantitatively driven investment strategies in vehicles for institutions and advisors, but Asness clarified that while his firm engages in algorithmic, machine-guided trading, it is not just a high-frequency trader.
Since peaking on January 26, many U.S. equity indexes have lost more than 10 percent of their value, with selling thus far most pronounced on Monday, when the Dow Jones Industrial Average fell by several hundred points in a matter of minutes, and on Thursday, when the Dow ended up down more than 1,032 points or 4.15 percent.
In the aftermath, some market commentators have blamed algorithmic trading and complex exchange-traded notes associated with volatility for the steep pace of the declines, which implies that steep declines didn't happen before automation.
Markets of the past, dominated by human market-makers with little automated processes, were not necessarily better, said Asness.
“Yesterday’s system was much more expensive on average. Crashes still occurred, and human market-makers still didn’t throw their bodies and assets in front of those crashes to stop them by buying at higher-than-market prices,” he said.
In previous blogs since volatility spiked earlier this month, Asness has argued that risk parity, trend-following and volatility-targeting strategies can not be solely to blame for the markets’ wild ride, as not enough automated selling was caused within products and accounts running such strategies: ahead of the volatility, they did not contain sufficient assets to cause the rapid sell-off.
When market indexes post steep losses, people may end up blaming what they fear, said Asness.