Clinton Baker No Comments

Robots, Black Boxes & Algorithms…is the market wrong?

I for one have been long questioning the use of robots black boxes and algo’s in the financial markets. Is this still a fair market? These robots or algo’s can earn billions of dollars a year through buying and selling within milliseconds in array of financial instruments. For a quick analogy as to how much impact this type of environment effects even the most seasoned investors is staggering, there are many managers and just to name one you might know more publicly is carl Icahn. Carl and many other managers have underperformed the market the last 2 years running by around 10-20 percentage points per year. These are successful managers who have different styles and processes and have long been successful. As someone begs to differ, how is it possible that all these active managers have got stupid all at the same time? Is it that the markets wrong?

As others have stated and argued we are in one of the longest running bull markets in history with roughly over 3300 days without a 20% correction in the S&P500, plus the lowest interest rates ever seen. Many have not seen these trading conditions / environment before, period! There are many problems with these conditions created by robo advisers, but in this article I only want to address a few. The first being, that we no longer have price discovery in a free market and haven’t for sometime. It is crucial that fair value is determined by buyers and sellers and not machines with no intrinsic perception of real value. These robots and algo’s do not have any perception of price discovery or value. Most are programmed to buy or sell at certain prices or conditions regardless of value.

For example, the SNB is buying U.S. equities and has thus accumulated thousands of positions most of which are long U.S. equities. These securities are being bought on the basis that these are major holdings in ETF’s and have a certain market capregardless of their value. Not only are central banks buying stocks unheard of but doing so at an unprecedented level. When the SNB started buying (continuously) through 2015-2016 their positions where roughly $34 billion dollars a year into U.S. equities, they’ve kept buying and the amount roughly doubles from YoY through 2016-17.

What the SNB have done is let an algo lose and it just keeps buying! Apparently its even buying Iraqi equities because its programmed to do so through Cusip  but the programmers didn’t know that if the Cusip number is proceeded by a letter its not a U.S security but is traded in the U.S., thus the SNB has been buying Iraqi securities regardless of their real value or risk factor. The Swiss national bank used to be strongest banking system in the world until the effects of the financial crisis took its toll. The Swiss currency used to be backed by substantial gold holdings, now it seems the SNB or CHF is backed by the likes of FAANG holdings and such.

The Bank Of Japan have also been buying their stock market which is notoriously badly constructed, pumping billions into the Nikkei and such ETf’s. Again, this is unheard of and quite scary. Consider the fact that these central banks can basically print as much money as is needed.

My point to all this is, are we having the longest running bull market because the robots & algo’s are just buying this market without any perception of value? If one where to look at the weighting’s of the indexes and the amount of money that has flowed into ETF’s and equities in general it could produce a dangerous and unforeseen reaction if a correction starts to show through. The algo’s robots and black boxes could cause a serious liquidity problem and the market could sell off very aggressively. What would the central banks balance sheets look like after that and what levels could the markets sell off to?

One thing we can most likely be sure of is that the banks institutions and billionaires who profit from these super computers trading for them will put up one hell of a fight. Do you think there is something fundamentally wrong with this market if even the most successful seasoned not profit from these times? What would the market be like if you we all had robot advisers or algo’s to trade for us? Surely that model can not work? Let us know your thoughts.

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Clinton Baker No Comments

Trading Snapchat IPO, Dollar Turns and Everyday Trump-Days


What’s your risk appetite like in today’s markets?

Trading the financial markets requires a certain amount risk appetite that you as an individually have to be comfortable with. Forex markets are very volatile. The stock markets are raging ($FTSE & $SPX) for no apparent reason, to a point where not many understand valuations. Commodities and bonds are threatening to scary things. The US dollar constantly tests the goal posts.

Path To Trading Profit

Understanding these mechanisms and navigating through them is not easy but there is always a path to profit. Managing your risk well and not over trading in markets like this is crucial and a lesson worth remembering. Building positions and then not being afraid to close them if the information changes has to be a hand you consider playing in these type of markets.

Trading T-Days

What with Mr Trump being in power, many are feeling uncomfortable and uncertain but you can still make money in these markets. I don’t think its all doom and gloom, innovation still exists and venture capital projects are array. Gold seems to be holding the lower bounds, the upside in mathematics could be crazy and is a portfolio must. Snapchat IPO is due this month (March 2017) – will you be buying or selling? Is it worth $3bln? Isn’t that what Facebook Inc. $FB value it at? Give us your thoughts on any other risks that affect you in today’s markets….