5 ms·

>> As the article points out, passive funds, which have become a dominant force in the stock market, own the same stocks as everyone else in the same proportion

>> As the article points out, passive funds, which have become a dominant force in the stock market, own the same stocks as everyone else in the same proportion. THIS. This is how it works. They also have similar basis prices for their positions, and similar pain thresholds. It's not a big surprise that when Institution XYZ reaches its' pain threshold and stop loss orders are used, a few more dozen Institution ABC, DEF, and GHI hit theirs also! This looks like a "huge selloff" on a chart, but it's just the same event being experienced by multiple institutions near the same point in time. tldr: it looks like a herd because it is a herd.

ajross 8y ago
How is that any different from previous bear markets? I swear I remember reading the same analysis in 1987 after the crash. Human behavior (even human-programmed behavior) is pro-cyclic. Everyone wants the same stuff and makes the same decisions with the same input. I don't see anything notable about this market cycle as compared with previous ones at all, only the jargon is changing.
- module0000 8y ago
  It's not any different other than the speed it happens at. 20 years ago it would have taken minutes/hours for some of the drops we've seen to materialize. Now you can watch the NQ drop 100 points in less than 5 minutes, 20 years ago that would have taken hours, possibly all day. People had to wait on quote services via satellite, telephone calls to their floor traders, or actually be in the pits during the selloffs. Now it only takes us a couple seconds to connect our device of choice to our trading platforms. Market makers stop providing liquidity during these sell-offs much faster than they could 20 years ago.
  - JumpCrisscross 8y ago
    > 20 years ago it would have taken minutes/hours for some of the drops we've seen to materialize. Twenty years ago was 1998. Ten years before that, Black Monday was faster and more vicious than anything we've seen since. It remains "the largest one-day percentage decline in the DJIA" [1]. [1] https://en.wikipedia.org/wiki/Black_Monday_(1987) https://en.wikipedia.org/wiki/Black_Monday_(1987)
    - module0000 8y ago
      Black Monday is the edge case
- jm__87 8y ago
  Not really sure what your point is. Cycles always happen for the same technical reason - more buyers than sellers lead to rising prices and more sellers than buyers lead to falling prices. Understanding what leads to these imbalances in buying and selling is the more interesting and more difficult part and the details tend to be a bit different for every cycle. Most people find these details interesting and for some people, it is their job to understand these details. The abstract idea that herd behavior is what moves markets is not that useful unless you understand exactly which herds are moving which markets and how they make their buying and selling decisions.
  - ctlby 8y ago
    > more buyers than sellers lead to rising prices and more sellers than buyers lead to falling prices That's not how any of this works. Every share bought is a share sold by some counterparty. Buyers and sellers are always in equilibrium.
    - module0000 8y ago
      The person you're replying to is telling you the truth - imbalanced delta for buyers or sellers means rising or falling prices. There is no magical equilibrium, and if there was, there would be no profit. To explain it a step further... at this moment in time, every private and institutional investors stopped selling APPL...I can still buy a share, likely thousands of them... from the market participants that are always there: market makers. When you make a "bad call"(like selling into a rally), a market maker is likely on the other end of your trade, and they will profit from your "bad call". Now the inverse also applies, often times a market maker is taking the other end of your trade that is a good(profitable) trade for you. The market maker isn't losing though, they are just playing the odds. They are convicted that for every losing trade they take out of obligation(as a market maker), they are going to take 2 or more winning trades. They also operate with trade costs much lower than you or I(ie retail investors) have access to. That was more reply than I originally intended to write...but you have to understand this(or fail at profitable trading). There is no equilibrium, and there are parties(market makers) ensuring that there never will be. That is their job, to create a state of constant liquidity, even if buyers and/or sellers individually are unwilling to play.
JumpCrisscross 8y ago
> They also have...similar pain thresholds Passive funds have no pain thresholds which force them to sell. Investors in them may. But that’s a difference in how individual investors’ risk tolerances are abstracted to broad market pricing, not a change in those risk expressions themselves.
- module0000 8y ago
  I disagree, I'd argue that exactly 4 times a year, passive funds must sell, and must buy again. Contract expiration dates cause huge volumes of activity from so-called "passive" funds. The seconds, minutes, hours, and (occasionally) days that elapse between rolling out from current month to forward month contracts are all about the fund managers pain threshold. The exception to this rule is if your fund has governance specifying that rollovers have to happen ASAP(as in, as each <N> contracts are sold from the current month, <N> forward month contracts must be bought before repeating the process), which is not common. edit: Sometimes I'm blinded by the part of "market" I operate within, which is the commodity futures market. I could be(and likely am) completely wrong when you apply this to the securities market, which I am less familiar with.

ajross 8y ago

How is that any different from previous bear markets? I swear I remember reading the same analysis in 1987 after the crash. Human behavior (even human-programmed behavior) is pro-cyclic. Everyone wants the same stuff and makes the same decisions with the same input. I don't see anything notable about this market cycle as compared with previous ones at all, only the jargon is changing.

module0000 8y ago
It's not any different other than the speed it happens at. 20 years ago it would have taken minutes/hours for some of the drops we've seen to materialize. Now you can watch the NQ drop 100 points in less than 5 minutes, 20 years ago that would have taken hours, possibly all day. People had to wait on quote services via satellite, telephone calls to their floor traders, or actually be in the pits during the selloffs. Now it only takes us a couple seconds to connect our device of choice to our trading platforms. Market makers stop providing liquidity during these sell-offs much faster than they could 20 years ago.
- JumpCrisscross 8y ago
  > 20 years ago it would have taken minutes/hours for some of the drops we've seen to materialize. Twenty years ago was 1998. Ten years before that, Black Monday was faster and more vicious than anything we've seen since. It remains "the largest one-day percentage decline in the DJIA" [1]. [1] https://en.wikipedia.org/wiki/Black_Monday_(1987) https://en.wikipedia.org/wiki/Black_Monday_(1987)
  - module0000 8y ago
    Black Monday is the edge case
jm__87 8y ago
Not really sure what your point is. Cycles always happen for the same technical reason - more buyers than sellers lead to rising prices and more sellers than buyers lead to falling prices. Understanding what leads to these imbalances in buying and selling is the more interesting and more difficult part and the details tend to be a bit different for every cycle. Most people find these details interesting and for some people, it is their job to understand these details. The abstract idea that herd behavior is what moves markets is not that useful unless you understand exactly which herds are moving which markets and how they make their buying and selling decisions.
- ctlby 8y ago
  > more buyers than sellers lead to rising prices and more sellers than buyers lead to falling prices That's not how any of this works. Every share bought is a share sold by some counterparty. Buyers and sellers are always in equilibrium.
  - module0000 8y ago
    The person you're replying to is telling you the truth - imbalanced delta for buyers or sellers means rising or falling prices. There is no magical equilibrium, and if there was, there would be no profit. To explain it a step further... at this moment in time, every private and institutional investors stopped selling APPL...I can still buy a share, likely thousands of them... from the market participants that are always there: market makers. When you make a "bad call"(like selling into a rally), a market maker is likely on the other end of your trade, and they will profit from your "bad call". Now the inverse also applies, often times a market maker is taking the other end of your trade that is a good(profitable) trade for you. The market maker isn't losing though, they are just playing the odds. They are convicted that for every losing trade they take out of obligation(as a market maker), they are going to take 2 or more winning trades. They also operate with trade costs much lower than you or I(ie retail investors) have access to. That was more reply than I originally intended to write...but you have to understand this(or fail at profitable trading). There is no equilibrium, and there are parties(market makers) ensuring that there never will be. That is their job, to create a state of constant liquidity, even if buyers and/or sellers individually are unwilling to play.

JumpCrisscross 8y ago

> They also have...similar pain thresholds Passive funds have no pain thresholds which force them to sell. Investors in them may. But that’s a difference in how individual investors’ risk tolerances are abstracted to broad market pricing, not a change in those risk expressions themselves.

module0000 8y ago
I disagree, I'd argue that exactly 4 times a year, passive funds must sell, and must buy again. Contract expiration dates cause huge volumes of activity from so-called "passive" funds. The seconds, minutes, hours, and (occasionally) days that elapse between rolling out from current month to forward month contracts are all about the fund managers pain threshold. The exception to this rule is if your fund has governance specifying that rollovers have to happen ASAP(as in, as each <N> contracts are sold from the current month, <N> forward month contracts must be bought before repeating the process), which is not common. edit: Sometimes I'm blinded by the part of "market" I operate within, which is the commodity futures market. I could be(and likely am) completely wrong when you apply this to the securities market, which I am less familiar with.