Computer-driven trading, which involves the use of quantitative strategies or automated trading systems, is on the rise and fueling big changes in equity market price swings, according to JPMorgan. 

In a note sent to clients on Tuesday, and later reported on by CNBC, the brokerage firm has said passive and quantitative investing account for over 60 percent of trading volume in stocks, more than twice the share from a decade ago. In contrast, fundamental discretionary traders, humans that make investment decisions by carefully analyzing the business fundamentals of individual stocks, are reportedly now responsible for trading just 10 percent of stock volume in equity markets.

"While fundamental narratives explaining the price action abound, the majority of equity investors today don't buy or sell stocks based on stock specific fundamentals," said Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, in the note. (See also: Basics of Algorithmic Trading: Concepts and Examples.)

Tech Sell-off Blamed on Machines

This rapid industry-wide shift toward making machine-driven trades, whether through quantitative strategies or the use of computer algorithms, is occasionally leading to baffling, large scale sell-offs and stake-building in industries and individual stocks that are hard to predict. One example is the recent big drop in technology stocks. (See also: What triggers a broad sector sell-off?)

Last Friday, $140 billion was wiped off market valuations across Wall Street’s best performing sector. JPMorgan believes that this out of the blue sell-off was triggered by automated trading machines, which perhaps sensed that the growing popularity of Nasdaq stocks led to overstretched valuations.

“Upward pressure on Low Vol and Growth, and downward pressure on Value and High Vol peaked in the first days of June (monthly rebalances), and then quickly snapped back, pulling down FANG stocks,” — Facebook (FB), (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL)," the report said.

While technology stocks have since regained some of their losses, Kolanovic warned that a rise in automated or quantitative investing will continue to alter the stock market’s behavior in the future. "Big data strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come,” he said.

Kolanovic added that quantitative investing tends to spark less volatility than traditional traders, whose decisions are often motivated by fear, greed and panic. A rise in more rational trading should lead to steadier markets, making it difficult for value investors to identify potentially oversold stocks.

A rise in machine-driven trade volume has been well documented. According to data from market structure research firm Tabb Group, high-frequency trading, a subset of quantitative trading, accounted for 52 percent of May's average daily trading volume of about 6.73 billion shares. Meanwhile, a separate U.S. government study, recently reported on by the Financial Times, claimed that automated systems now account for half the trading volume in many commodity futures.



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