“People are getting screwed because they can’t imagine a microsecond.”
Well, how about $1 trillion? Can we imagine that?
If you want context for the quote, read Michael Lewis’s book, Flash Boys (No. 1 now in NY Times nonfiction). Equally relevant and lost in the shadows of microseconds is the magnitude of the monolithic.
There’s a company you’d know that in the past 20 trading days has had intraday volatility of 108%. That is, summing daily spreads between high and low prices – somebody paid both – equals 8% more than a share costs. The entire value of the company in effect turned over the past month, plus an 8% commission. (Do you know your intraday volatility?)
Divided by 20, that 5.4% daily. Compare to overnight borrowing rates near 0.15% for banks, and 30-year mortgages at 4.4%. Yet beneath its skin, behavioral changes for this stock are miniscule. The average recent daily fluctuation in bottom-up investment – the money you talk to – is less than 2.3%.
There was one monolithic change. On March 24, demand from indexes/ETFs dropped 15%. Just once. Since that day, gradual price-erosion tallies eerily to a 15% decline. A one-day shift in asset-allocation cost 15% of market cap over the following month.
Yesterday we ran a dozen models for public companies reporting results today, weighing demographics and sentiment to project price-reactions. Outcomes are an amalgam of purposes. Without data, it’s impossible to know that price-moves reflect rational thought. If share of market did not change for investors, they didn’t set price, didn’t alter their views.
The Fed in 2013 bought $1 trillion worth of US Treasurys and mortgage-backed securities, pinning interest rates on ten-year US bonds near 1.7% until word leaked in May that it might stop. Between May-Dec 2013, Treasury yields rose 75% and average 30-year mortgage rates jumped 30%. (more…)