How Robots Rule the Stock Market (SPX, DJIA)

Robots apparently rule the stock market. Quantitative funds managed via computerized systematic trading strategies, often referred to as investing robots or bots, are the fastest growing category of funds according to analysis by Credit Suisse Group AG (CSreported by Bloomberg. As a result, quantitative and passive investment funds now control about 60% of all equity assets, double their share in just a decade, and only 10% of trading volume now comes from human discretionary investors, per data from JPMorgan Chase & Co. (JPM) cited by Bloomberg.

On a related front, the subset of quantitative trading called high frequency trading (or HFT) drove 52% of May's stock market volume, according to research firm TABB Group LLC cited by CNBC. During its peak period in 2009, HFT accounted for 61% of volume, CNBC adds. Meanwhile, the difference in gross exposure to U.S. equities between human and computerized investors is the largest on record, with the robots much more heavily invested, according to the Credit Suisse study as cited by Bloomberg.

Source: Bloomberg.

Blame the Bots

Investors with long memories remember how computerized program trading, as it then was called, first entered the public consciousness when it was blamed for exacerbating the stock market crash of 1987. More recently, Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, finds that the selloff in big technology stocks on June 9 and June 12 was driven by changing computerized trading strategies, according to CNBC.

Computerized Mediocrity?

The growing application of artificial intelligence and computerized analysis to investment decision making is not producing significantly different, let alone better, investment results, according to an April 28 research note issued by asset management firm AllianceBernstein Holding LP (AB). The problem, as seen by Bernstein and reported by CNBC, is that the analysis of increasingly large sets of data is resulting in increasingly similar investment strategies.

Worse yet, so-called quant funds that make investment decisions based on sophisticated statistical models are lagging way behind more traditional funds run by human investment managers, the Wall Street Journal indicates. For the year-to-date through May, quant funds were up only 1.44%, compared to 8.7% for the S&P 500 Index (SPX) and 5.7% for the Vanguard Balanced Index Fund (VBINX), which is 60% in stocks and 40% in bonds, according to Hedge Fund Research Inc., or HFR, as cited by the Journal. The Dow Jones Industrial Average (DJIA) was up 6.3% through May, per Yahoo! Finance data.

Investors sunk $4.6 billion of net new money into quant funds during the first quarter, while they withdrew over $10 billion from other funds, per HFR and the Journal.

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