Coronavirus Outbreak – How Smart Program Trading has Saved the Stock Market during Pandemic

Today, trading and investing are almost mutually exclusive. Trading has taken over the day-to-day market, leading to the extreme volatility (wild swings, sky-high volumes, etc.) that we have been seeing since the closing stages of the last recession.

When it comes to the lion’s share of today’s trading, it’s largely controlled by the “smart” program trading, driven by sophisticated algorithms (Math/AI models). Generally, 30 to 50 major financial services companies (hedge fund, brokerage, private equity, etc.) heavily depend on smart program trading. These models decide the daily swings of the market.

In its infancy, program trading was essentially just high-speed trading. Today, with the integration of AI, etc., it is much smarter and more predictive. Of course, the tremendous volatility it adds to the market may make small investors extremely confused, often forcing them back to good ole’ Mutual Funds as their preferred investment vehicle.

When the models are in tandem, the market generally stays up all day long; when they are in conflict, some wild swings come into play. Obviously, the news and events of great economic or political consequence (e.g., the announcement of lockdowns, stimulus payments to consumers and businesses, May employment report indicating the reversal of job trend, etc.) heavily influence those models. Of course, while the other professional day traders play along with the trend, they hardly influence the direction of the market anymore, contrary to the conventional wisdom or belief.

What the media won’t tell you is that today's smart program trading also helps create meaningful floors to the market. Without the smart program trading in place, a once-in-a-century pandemic would have pushed the Dow average down to 5,000 – instead, it bottomed out at 18,000 in March.

When the averages temporarily hit top or bottom (due to overbought or oversold condition), smart program trading offer better signals, thus allowing savvy traders renewed entry and exit opportunities periodically (of course, they do not necessarily exit the market; they simply overweight on the short side when the exit signals start to flash). 

The stock market, therefore, is not necessarily the leading indicator of the economy anymore (that could very well be an old economic theory, but we have to wait a little longer to recognize if trading has dethroned investing).

-Sid Som

homequant@gmail.com