I should have looked at what was staring me in the face. Look at the behaviour of the FTSE 100 over the last 26 years, in the graph below.
Up until the late 90’s the growth of the index was fairly stable, with a bit of noise here and there, but actually following quite a linear path, even with the late 80’s crash in there. After 1996 the index took on a different characteristic, more mountanous with high peaks, deep ravines and techtonic sized valleys. The Dow Jones looks fairly similar in character.
Now looked up some history on algorithmic trading. As I said in the last blog, I didn’t think instability was necessarily a function of the algorithms themselves but more of the speed that they were being undertaken. In the late 90’s high frequency trading was said to have begun, and roughly coincides with the FTSE behaviour described, from then on. Communication speeds and therefore transaction times have continued to increase too, increasing the capacity and attractiveness of this type of trading.
Major business decisions are often based on the actual or percieved market strength of that business or sector. I can see now that businesses need to be much more wary about the scale and pattern of market value in their policy making, than say 20 years ago, as it is less likely to reflect the company’s ability to create “intrinsic value”, on which it trades, and more likely to be a function of market instability.
As a personal investor (a human one) I might also be more wary than to put my money into a system driven by microsecond decision-making. OK. Robert Harris’ book should be out now, let’s see if he concurs.