Tuesday, February 06, 2018

My image of stock traders as small, fearful animals

Maybe it's unfair of me, but I always have this image of stock traders in my mind as small, skittish little animals which, as soon as they see a shadow or hear someone say "Boo!", scurry back to the safety of their holes, before fearfully creeping out again. Or maybe like little furry lemmings throwing themselves helter-skelter over financial cliffs for little or no reason.
Now, I know they're just doing their job, being cautious and all that. But there's just something about the way they scuttle about en masse, overreacting to every minor event and rumour, that keeps that image fresh.
The latest sky-is-falling event has led to at massive 1,175 point fall on the Dow Jones Industrial Average, with smaller but still substantial "corrections" on the S&P 500, the NASDAQ and the TSX. Asian exchanges have seen even larger percentage drops, and sone estimates put the accumulated global value of the correction at a ridiculous $4 trillion. This is the largest tumble since the dark days of 2008.
And the world-shaking event that precipitated this slashing of billions of dollars off the main stock exchanges? Well, nothing really. Just a vague feeling that maybe things to have been going too well for too long (two steady years of increasing markets leading to record or near-record high indexes, upbeat economic and employment reports, strong global economic activity), and that inflation may be rising, with another interest rate cut possibly in the air. Or maybe not.
It's really not much to go on. But as soon as few major players start to act on a hunch, however vague or misguided, everyone else follows suit, in a veritable orgy of FOMO. It all seems so unscientific somehow, so tribal. It's a most unflattering image I have of all these important and almost certainly very rich individuals, but I can't seem to shake it.

UPDATE
Some are now blaming the run on automated computer algorithms, which frankly makes the human traders look even sillier.
When stocks are as expensive as they are currently, very small shifts in expectations can lead to big market moves. And when hard-wired computer algorithms are involved  (e.g. at its simplest, automatically sell when a stock value reaches $x), the effect can be unnecessarily exacerbated. And when one computer sees another computer selling, it too can be triggered to sell., even if there is no good underlying reason, leading to the stock exchange equivalent of a multiple car pile-up. So, ultimately, all those billion dollar computerized stock trading systems can begin to look like nothing more than a headless chicken running around the farmyard.

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