Kass: Revenge of the Nerds
By exaggerating broader market moves as well as individual stock price moves, quant funds might be inflicting more damage than good in the efficient pricing of equities.
It's fine and dandy when stocks are rising and the "machines" distort the moves both in scope and in duration to the upside, but, as I witnessed vividly when portfolio insurance was a disruptive force in the stock market massacre of October 1987, those distortions can and will occur in either direction.
Computer-generated market programs almost always end up badly for the markets, but for now, they are adding to the fireworks and to the festivities.
As the wise man once said, "This too shall pass."
As Grandma Koufax once said, "There's no business like mo business."
I say, Kill the quants ... before they kill some of us!
-- Doug Kass, "Quants Causing Trouble" (May 4, 2010)
More importantly and with greater regularity, we have also experienced the disruptive influence of high-frequency trading, which has exaggerated and sometimes has even dominated intraday and daily price action.
As I wrote on Thursday, the risks are acutely apparent: