Editorial: Not human error

How stock markets rallied to a record high – initially, that is – after coronavirus became global news could be due to the influence of computer-led investing strategies.

Tom Becket, a chief investment officer, believes markets behaved as though they misjudged the effect coronavirus would have on the Chinese economy and, by extension, the rest of the world.

Was it a case of fundamental investors getting it wrong? Becket suspects the root cause was less human than that.

Computer-based trading strategies – which are ever-more prevalent in an era of factor investing, quant and passive portfolios – are having a “growing and historically different influence on markets”, says the CIO. This is chiefly seen in problems with stock pricing. Machines are chasing the same stocks to fulfil the requirements of their algos. Large-caps in particular are attractive to algos. Small-caps less so, we are told.

If, at time of writing, the correction is now in effect, it is likely to be very painful. Becket says the turning point would have been when algos started to underperform.

Nick Fitzpatrick, Group Editor, Funds Europe

© 2020 funds europe

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