The word of the week was “flood.”
Here in Colorado, Denver had a coup d’état by weather patterns from Portland, Oregon for a week but our streets never ran in torrents. Where the Rocky Mountain watershed empties to the flood plain from the Mesozoic Era, occupied by present-day Boulder, Loveland and Greeley and small towns like Evans and Lyons hugging the banks of normally docile tributaries, the week past reshaped history and landscape. It will take months to recover.
In the markets too there was and remains a flood that surfaces with rising intensity from its subterranean aquifers to toss debris into market machinery. It’s the spreading vastness of complex market data.
SIDEBAR: If you’re in St. Louis Friday, join us at the NIRI luncheon Sept 20 for a rollicking session on the equity market – how it works and why it fails at times.
Data is the fuel powering market activity. Globally, trading in multiple asset classes turns on computerized models that depend on uninterrupted streams of reliable data. This gargantuan global data cross-pollination affects trading in your shares. After all, there are two million global indexes, as the WSJ’s Jason Zweig noted in a poignant view last weekend on modern equities.
Take for instance global currency-trading. Since the financial crisis of 2008, averages have hung near $4 trillion of daily turnover involving monies used around the globe. The US dollar, the British pound, the Euro, the Japanese yen, the Swiss franc, dominate.
Since Japan launched a dramatic currency-depreciation plan to fuel growth and turbocharge its markets, the pairs-trade involving dollars and yen has skyrocketed, sending daily currency-trading to a whopping $5.8 trillion.
In the past, growth in currency trading often pointed to increased economic activity and foreign trade. But global data points measuring underlying economic currents don’t correlate to the searing pace of currency trading.
More trading means more data, and the movement of currencies factors into global macro equity-trading. Until the Japanese central bank counterpunched with the US Federal Reserve last fall, the single most reliable indicator of stock-direction since 2008 had been inverse correlation between the S&P 500 and the US dollar’s value versus global currencies.
In June, new rules affecting derivatives markets pushing swaps-clearing onto central platforms took effect. That fosters more data. Options and futures markets increasingly reflect the frenetic automation found in equity high-frequency trading. More data. Record amounts of bonds have been sold in the past five years. Data.
Creating of flood of data and moving assets at accelerating speeds globally with nimbler hedges to protect against consequent turbulence in financial markets has risks. We’re seeing these manifesting in markets almost daily now.
I’m no information technology architect so I’m not suggesting a collision between the unstoppable force of global data and the immovable object of massively parallel terabyte data systems.
But storm drains back up when the stream becomes a mighty torrent. It is a patent fact that we’re seeing these effects in the data my own firm studies with models. There are increasing hiccups, delays and uncertainties in the data. At the same time we’re seeing these developments hitting our systems, we’re observing them in the broader market.
The problem isn’t massive data. It’s connecting all this data together. This week, Ben Bernanke will comment on Fed policy – and markets globally have been on a monetary, not fundamental, tear in the past week. Volatility options and futures lapse about the time Mr. Bernanke steps to the mic today.
Thursday come expirations preferred by international money. The final wave of swaps-clearing mandates are hitting processors this week, too. Friday is quad-witching and rebalances in S&P indexes and Nasdaq indexes. And Monday the 23rd, the Dow Jones Industrial Average launches, rejiggered.
Those are some rapids to navigate.
