This week saw some really unusual moves, 10Y repo, intraday volatility, stock rotations, A harbinger of more volatility to come?
The cash vs. ETF arbitrageThe creation & redemption process allows a trader (an authorized participant) to obtain or get rid of ETFs easily and at virtually no cost. From the composition, they can calculate the value of the ETF at any time with great accuracy. The...
GameStop’s rally and its short squeeze are more than just market exuberance. Thanks to low-cost trading, employees working from home, and a Fed-induced market rally, retail traders are pushing the market to new highs and enjoying the excitement of the rally. Worse, social media allow them to focus on a few instruments, with wild rallies.
It is only a matter of time before this party is over, for this stock or the market. We should start thinking of the aftermath.
More about Robinhood… Massachusetts’ Enforcement Division filed a complaint about
– its aggressive growth tactics,
– the firm’s outages and disruptions, which were well known and ignored while pushing growth,
– its gamification,
– and insufficient supervision for option trading.
Here is an excellent, albeit a bit lengthy, analysis of the history, regulatory and general situation of Robinhood & its Day Trading business by Bill Singer of Broke and Brokers (http://www.rrbdlaw.com/).
Robinhood has just been fined $65m for overcharging its customers, despite trades being free of charge – the company sells its order flow, and the net result is that traders are overcharged $35m/y.
The firm also mislead its clients in its advertising.
But in the back of these already serious issues, is the question of ”gamification’ of trading, where inexperienced individuals actively day-trade on margin. They end-up facing professional investors, who are much better informed and equipped than them. A previous note (https://lnkd.in/gCjKwtM) showed that most if not all end-up losing money.
This five-year-old article below still remains a good analysis of what ‘gamification’ entails. It is probably fine for school teaching and corporate training, but feeding a “high-octane gambling need” is probably not ideal for financial markets.
Robinhood’s documented bubbles, coupled with many new accounts and likely overpriced markets, could turn pretty ugly pretty fast.
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Most day traders on Robinhood lose money. Actually, maybe 0.5% of day-traders earned more than the initial salary of a bank teller.
A large body of academic studies going back 20 years consistently shows day traders and other very active traders have difficulty making money over anything more than short periods of time.
Quant hedge funds have had a bad year. One of their core factor, value, a staple of investment for many years, has strongly underperformed.
Quants rely on backtests to see what has performed / is performing well. In a changing universe, models naturally have short lifetimes as a result. In this covid world, the past really doesn’t reflect the future anymore, and many models do not work at all. Some quants have self-doubt on the validity of their approach (see the previous post on Inigo Fraser Jenkins).
It’s probably way too early to call for the demise of quant investing, but COVID surely brings a regime shift.
No benefit in being alarmist, and there are far too many people talking about COVID than needed. But the markets remain ‘truth midwives”, and today’s market fall is explained by these points:
– The resurgence covid resurgence is much larger this Fall than it was in Spring.
– Europe (not just France), needs to re-instore solid prophylactic measures. There are now curfews in large French cities.
– While Europe is in a second wave, whose roots probably come from frustration and the abnormal strength of this virus, the US is still in its first wave. The recent US resurgence is only the virus reaching states, which it had not yet infected. There’s probably worse to come in the US.