Yesterday, the stock market tanked early on news.
The news is we’re at war with Iran. On Mar 2, we were at war with Iran too and stocks closed flat to up, oil was down.
Then yesterday, shazam! Stocks nosedived. Early anyway.
Had the Dow Jones Industrials closed where it traded intraday, down about 1,200 points, it would have ranked in the top ten largest slides on a points basis.
But since stocks dropped just 2.5% and then recovered two-thirds of that by the close, nobody thought much.
But it might’ve broken the delicate link between stocks, ETFs and options.
I’ll explain.
First, this: In October 1983, my high school girlfriend’s brother, a Marine, returned from Mideast deployment for a visit 24 hours before the barracks he’d been stationed at blew up in Beirut.
Iran did that and many other dastardly things across the span of my life to present, without recompense. I think Iran is properly being held to account for the great destruction that regime has wrought on humanity.
Back to stocks. At a poker table, everybody plays and bets until one person is left. It’s unclear for a substantial period how it will go. I mean, somebody may jump out to a chip lead, sure.
There are the same bets in the stock market. Bets long, short, on volatility.
We know who’s winning the bets in the stock market. Follow the money. Blackrock et al, have crushed stock-pickers for assets gathered. This one firm added $700 billion of assets in 2025.
Add new assets at Vanguard, State Street, Fidelity, Geode, JP Morgan, Goldman Sachs, UBS, Morgan Stanley, and it’s trillions. Invesco has surpassed $2 trillion, thanks to $80 billion gathered in 2025 for its ETFs (principally QQQ).
Add up trading returns for Citadel, Jane Street, Susquehanna, Two Sigma, Hudson River Trading, Optiver, Jump Trading, DRW, Quantlab, IMC, Virtu, GTS and a handful more, and you’ve got…$100 billion? More?
Enough that the heads of those firms own South Beach, Aspen, etc.
I’m not knocking any of it. But we should understand that most of the assets under management are following quantitative models, and most of the firms setting prices are following quantitative models.
So is it news moving stocks? Or math?
“But Tim,” you say. “Stock-pickers are beating the benchmark at a nearly 50% rate in the last year. Dispersion is at 20-year highs.”
Yes.
And it should concern you against the backdrop of how the stock market works and what the money is doing. Stock-pickers are having a heyday because stocks are not conforming to benchmarks.
I’ve been writing about it for months. The S&P 500 INDEX behaves one way, while the stocks comprising it act another.
It gives an advantage to stock-pickers. But they aren’t garnering inflows, because the cost of stock-picking is high.
And here’s the trouble: When stocks scatter like a covey of quail, the trouble for the firms setting all the prices – Citadel et al – is how then do you electronically, automatically, calculate the right bids and offers for ETFs, and options, and index futures and the shrinking and scattering stocks underpinning them? Simultaneously? In microseconds?
It tells us how much machines have pervaded trade executions.
When machines drive volume in stocks, the market ceases to be a barometer for fundamentals or risk. And humans get caught up in the game devised by machines and they make mistakes.
What could you construe from headlines this week? Caution. Yet the market by closing above its midpoint unremittingly says people are buying the market. Well, machines are, and people are fooled.
Maybe that works out. Maybe there’s no risk.
I’ve long said there are only two threats to this market priced by machines, run by models, dependent on an arbitrage mechanism that keeps things generally moving higher: A change to flows. Or a break in the arbitrage mechanism.
Has there been a change in flows? To quote Jeff Bridges in The Big Lebowski when asked if he’d always been a loser: Well, yeah.
Flows have scattered stocks.
How about the arbitrage trade that always, always, keeps stocks, ETFs, and options pegged to both (and by extension, index futures comprised of them all) within 2% of each other?
I don’t know. It might have broken. I told EDGE users yesterday before the open:
Maybe the market today does what it did yesterday. Entirely possible. It’s the mechanics. But one of these days, it’ll break. And it will depend on whether the market falls more than its full volatility. And that’s right now, 3%.
We weren’t down 3%. But broad measures slid 2.5% and didn’t get half that back.
Public companies, you need a plan for navigating this market. Same for you, traders. We have the data.
