SocGen: "This Is What Happens When The Algos All Head For The Exit At The Same Time"

After Goldman, JPM and even Dennis Gartman all opined on Friday's "tech wreck", in which the Nasdaq tumbled 2% as the Dow Jones hit new all time highs (the only previous time it has done that was in 1999 just as the tech bubble was ramping up), and when the Philly semiconductor index fell 4.2%, SocGen's Andrew Lapthorne could not resist, and in a note released on Monday morning, explains that what happened on Friday was merely an episode of "systematic momentum selling", or said otherwise, a teaser of what happens when the algos all "head for the door all at the same time."

His advice: "when it’s time to head for the door, you better move fast."

Here's Lapthorne:

The sell-offs themselves are not particularly unusual, but the uniformity of the prices moves all on the same day indicates a market driven by price chasing momentum, with investors heading for the door all at the same time.


Indeed, those S&P 500 stocks which sold-off on Friday were almost all from the strongest performing decile over the previous 12 months (the r-squared on the S&P 500 line in the chart below is 85%). Within Nasdaq the relationship is even stronger at 95%.



Such a uniform sell-off strikes us as systematic, especially as the relationship weakens once you look at the broader and less liquid Nasdaq composite. For price chasing investors, Friday’s plunge serves as a warning; when it’s time to head for the door, you better move fast.

To all the human traders out there who hope to outrun algos who use laser beam to send their sell tickets to the NYSE at the speed of light, good luck.


jmack BlindMonkey Mon, 06/12/2017 - 12:40 Permalink

Human trader here,  trading  Peter Steidlmayer's  framework to determine value and selling the top, buying the bottoms, taking trending trades when it breaks out of balanced value areas...   made $1k friday (shoulda been well over 3k, but who knew right?), and made 1.3k this morning already....       I dont fight algo's, i ride them.

In reply to by BlindMonkey

small axe Mon, 06/12/2017 - 10:27 Permalink

Difficult to know whether to make $7K a month part-time or go 3X overleveraged long and wait for SPX 3000. Or maybe make like an algo ... but what about Gartman? So confusing.

Peak Finance Mon, 06/12/2017 - 10:38 Permalink

YAWN it's already over. The drop stopped, market will slowly gind upwards the rest of the Day, Fed will say somehting slightly dovish and we will all foget this before 330 Ramp Capital takes over.   

Herdee Mon, 06/12/2017 - 11:21 Permalink

The downside players are up against the trading desks of The Fed and Treasury. You have Central Banks openly admitting to buying up stocks and there's no transparency from the government on how the Exchange Stabilization Fund is being used. Like I said before, can the Market overpower unlimited margin from Central Bank printing and government scams? The Bond Market holds the keys.

Mustafa Kemal Mon, 06/12/2017 - 13:24 Permalink

Somewhat OT, but I have a question for my ZH investor friends.  Most of the time BTC price is a wiggly up and down function.What does it say to you when the price locks in perfectly flat for substantial periods of time and the jumps instantaneously to a  new point and then stays flat there for a while?I also see this in other currencies. Any help would be appreciated, Thanks

jmack Mustafa Kemal Mon, 06/12/2017 - 14:54 Permalink

If the spread is wide enough during the flat time, it could be a hft style algorhytm, working the spread for nickles and dimes, then when it is turned off, you see the directional move.          But most likely it is just slow markets and then as it hits some higher time frame moving average, you see buyers/sellers come in that create the directional move, rinse and repeat.   it is known as ramp and camp.   when a product is trending,  it outruns value, but is still not far enough away to entice the opposite side to come in, so it just has to consolidate the move until the moving averages catch up, then the greed takes over and it moves in the direction of trend again.

In reply to by Mustafa Kemal

VisionQuest Tue, 06/13/2017 - 08:22 Permalink

Whoever was in charge of the Security Exchange Commission when derivitive financial instruments and electronic trading were allowed into the market is, was, and always will be a criminal and a traitor. The only thing on earth that creates genuine value in human affairs is actual hands-on-build-it-and-sell-it work. The wonks of Wall Street and their algo robots are useless eaters, like the GimmeDat class, only worse.