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Story Tellers

by The Wrinkle | May 7, 2010

Given the “red haze” surrounding the market at the moment, I thought we would push the 10,000 hour story out a week and chat about recent events instead.

Most if not every spiritual advisor you ever come across will talk about the importance of living in the moment, regardless of your spiritual appetite, faith, or belief. There is a rather resounding logic in this at a core level, you can’t eat yesterday’s meal, and you can’t spend next week’s pay check now.

Where am I heading you ask, simply that regardless of how you cut it, right now at this exact moment, yesterday is a story and tomorrow is a story. Let’s stay with yesterday for a moment; most people understand that history (or his story) is normally based on the view of the strongest or most interested commentator at the time, and how successfully their version of events or story survives through time.

Everyone loves a good story, and as a group we place a lot of faith in a small group of good story tellers (we might call them leaders, and we might also say they have natural charisma) be they in politics’, business, show business, or simply have access to the world stage via a hungry media eager for “news bites”.

Most of us enjoy taking our stories of yesterday, and projecting them into our stories of tomorrow (lets call them dreams), things go in cycles, cause and effect etc. This is no different in business; everyone is trying to pick trends, business cycles, the next big thing, takeover etc. The best story tellers get a following, and a group moves with them and if they are big enough they can move markets. Some individuals in their own right can have a huge influence on markets; George Soros is an obvious example.

So the first point is that markets can be moved by a few key individuals. Now in recent times there has been another phenomena I want to couple with this concept, and that is automated trading. Wall St. has been taking the best and brightest mathematicians out of universities for decades now. Their role is to give the big trading houses the jump on the market through automated trades done at speeds that are simply faster than a human trader. Often these are done via early small sample trades to mathematically gauge the depth of buy or sell support, then the trades are increased depending on the likely trend.

Some estimates place this trading volume to be in excess of 70% (by value) of all the trades currently made in the US market. By implication that means only 30% or less of the trades are made by people seeking to take a position, the rest are simply amplifying the trend. If there are reasonably equal numbers around a buy/sell perception this effect is largely cancelled out. However when there is a weak market in one direction the price movement of the stock will definitely be amplified.

Given most investors in the 30% pool following trends are less sophisticated or are looking for longer term growth as value investors, there will as a general rule be less shorters in this group. Hence price drops will be more severe than price rises, as this group is more likely to take gains on upwards price movements, than have shorts in place they can realise if a stock price falls.

So while it may be a little cynical, there is therefore a lot of truth in the following scenario. A few story tellers can drive the 30% of position takers trading in the market on a given day; this in turn can be amplified by up to 2.3x (70/30) by automated trading. Normally price drops will be larger than price gains, as the 30% group is less likely to be active shorters of stocks.

While I’ve used stocks in this example obviously the same thing is happening in other markets as well. So who cares? Well I can tell you who doesn’t care, the stock markets get increased fees on volume, and the traders get more brokerage fees on a larger volume of trades, no one in the finance industry wants to reduce the churn level. Will the regulators ever wake up, or do we need a computer generated “crash” for that to happen. Given the power of the finance lobby, I think I know where my money would be placed.

Technology is a great tool, but when a computer program makes unilateral trading decisions faster than a human can keep up, I do think we have gone a step too far.

I’ll just finish off with a couple of quick housekeeping notes; the Lions bet was closed out during the week at 1.33 as predicted. GGP obviously isn’t immune to the events of the recent days, however this is one of the reasons I said it was a 12 month to 2 year hold as I see it as a value investment. During the week it also acquired another private company via a script purchase. Their CEO is a good “story teller” and I still think they will do very well.

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