A.I. Controls the Stock Market
60% of all equity assets are now being traded by bots.
Fundamentals no longer matter; only endless central bank-supplied liquidity does.
Central bankers know how to manipulate these bots.
The exchanges of old, in which people could buy and sell ownership in a corporation, and in which fundamentals mattered – no longer exist.
It now belongs to robots.
The images of trading floors you see on TV, where the people in bright jackets appear frantically busy in making their trades, have no bearing on the actual trading action.
The real action happens across fiber-optic cables and in server rooms, where an arms race defined by processing speeds and algorithms is being waged.
Data compiled by Credit Suisse Group AG show systematic traders, known as quants are the dominating force in markets.
Credit Suisse Group AG defines quants as funds that invest in thousands of equities and trade dynamics, rather than making stock-specific bets. Since they use different signals and time horizons, their combined impact mostly goes unnoticed. According to JP Morgan Chase & Co. estimates about 60% of all equity assets are now being traded by bots, while only about 10% are being traded by actual humans.
Basically these bots are faking each other out in order to create buying opportunities. The exchanges have become neural junctions of quantitative machines that attempt to trick themselves and exploit each other’s weaknesses.
Similar to the tactics of politicians, the investors behind the machines attempt to sugar coat and dilute the truth.
“Diversity of market participant trading is a very important element of a healthy market. Quant funds certainly add to that diversity, and I feel that is very good,” said Jaffray Woodriff, co-founder and chief executive officer of Quantitative Investment Management, which oversees $3.5 billion. “Funds that are completely uncorrelated to everybody else and that also trade a lot of volume are very good for the liquidity of the investment ecosystem.”
In reality, these bots are creating fake stock pricing that has nothing to do with their actual value, and Woodriff knows this:
“It’s more of a style that identifies patterns in the market that is not related to any other factor.”
Brad Katsuyama, CEO at exchange IEX Group, fears that computer-driven trading is driving flash crashes that continue to weaken market durability.
In a recent interview with MarketWatch, he states that computers running complex software conducting trades at lightening speeds are a “dangerous” threat to the stability of the market, juicing volumes and sparking so-called flash crashes, where assets swing rapidly in value in a matter of seconds.
Katsuyama goes on to say, “I think the biggest risk in the market is that 50-, 60-plus percent of the volume is being executed by computer programs who have no idea what companies actually do. They’re just reacting to data. And I think it’s dangerous.”
A prime example is how Amazon dropped $40 on June 9 in four seconds, then bounced right back, creating a ripple effect that caused the Nasdaq overall to drop 1.8%:
This wasn’t due to any kind of global economic change, nor was it a reflection of Amazon’s intrinsic value, but rather an algorithm triggered a price switch and deceived other quants to follow suit.
Create a dip and then buy the dip, making billions in seconds.
This dip pattern has shown itself in the cryptocurrency markets as well.
Known as flash trading, these high frequency traders (HFT) along with central banks, as Michael Lewis, author of “Flash Boys: A Wall Street Revolt,” goes on to say in a 60 Minutes interview, have rigged the stock market.
“The insiders are able to move faster than you. They are able to see your order and play it against other orders in ways you don’t understand.”
Lewis goes on to explain that these elite traders can see what you have just ordered, order it first, then raise the price before your order is complete.
All within the blink of an eye, sometimes a nanosecond, yet just enough time to make serious money. A second on the clock is an eternity to a high frequency trader.
What will happen when these bots possibly decide to crash everything in order to buy it all back at bargain prices?
All of this is completely legal, and as scary as all this sounds …
Central Banks Know How to Manipulate These Bots
Central bankers know how to tease the right bots with the right price points in order to herd other bots in their desired direction.
Central banks have an incentive program on the CME (Chicago Mercantile Exchange) where these exact types of highly leveraged, electronically traded products that are best suited for market manipulation – are being traded.
Of course no reports exists, nor is there anything within their financial disclosures that indicate ownership of any of the accounts being traded on the CME, yet every single market decline of the past several years has been reversed – usually in the dead of night, and in the futures market – by mysterious injections of capital that then get the HFT’s to follow the trend.
A HFT developer goes on to explain in an interview how easy it can be for these algorithms to be manipulated.
Central banks can easily use the same programs to bend the markets in their favor.
The core function of the markets is rapidly deteriorating as bots manipulate pricing without understanding the collective needs and wisdom of millions of individuals and entities. This moves us ever so closer to the day of reckoning of historical proportions where bots will crash everything in order to sweep it all up at a fraction of the value.
The stock exchanges of today are rigged. Unless you have access to tremendous processing power and algorithmic software, your best bet is to get out now.