Marko Kolanovic holds a Ph.D. in theoretical physics and has long been involved in the discussion of the computerized trading and its effects on the markets. Even in the current bullish markets, the effects of these technologies are evident as proven by the flash crashes of 2015. Because the algorithms are designed so as to get rid of the assets if they drop below a certain threshold, if several large funds use such algorithms, the market will experience a severe crush if the assets were to drop in prices for some reason. “They are very rapid, sharp declines in asset values with sharp increases in market volatility. If you have these liquidity-driven sharp sell-offs that come at the end of the cycle, or maybe even causes the end of the cycle, then I think you can have a much more significant asset price correction and even more significant increase in market volatility,” – said Kolanovic.
According to the estimates of Marko Kolanovic, around $2 trillion has moved from actively managed funds to passively managed funds, which means that there is no human factor involved in the decision-making process, so the chance of someone stepping in to purchase the assets that have suddenly dropped in value are lower. On the contrary, all of these funds will start selling off their investments too which leads to even further price drops. It is estimated that about 90% of total daily trading activity is initiated by such algorithms. “Basically, right now, you have large groups of investors who are purely mechanical. They sell on certain signals and not necessarily on fundamental developments, such as increases in the VIX, or a change in the bond-equity correlation, or simple price action. Meaning if the market goes down 2%, then they need to sell,” – said Kolanovic.