Be afraid, be very afraid

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People are worried about stock-market liquidity.

  • Denver investor preps options strategy for next flash crash
  • Watch out for when algos ‘switch off their machines’: 36 South

A small band of humans is taking up arms against the rise of the machines.

Fund managers who ride big sell-offs in stocks are relishing fresh Wall Street warnings that robots and the like are leaving the bull market more vulnerable to explosions in volatility and crashes in liquidity.

They’re ready to pounce when the herd — from quants to passive money — is forced to unwind in a downturn just as the relative firepower of fundamental managers to buy the dip gets depleted.

All told, today’s equity rally is storing up all the ingredients for a flash crash, according to Dominick Paoloni in Denver. The founder of IPS Strategic Capital started a fund three years ago to hedge price swings triggered by robotic programs going haywire — and sees the current market calm prone to disruption.

“Algorithmic trading strategies and other quantitative traders have caused exacerbated moves on both the up and downside in equity markets,” he said. “As AUM continues to flow out of actively-managed equity funds there are less participants available to bring markets back to equilibrium.”


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