When Supporters ask me questions I always do my best to answer. However, I recently received a series of questions that I thought might be things that a wider audience would be interested in, so I’ve decided to publish my answers.
Ultimately, these details are not what matters most, but I do think it is helpful to demystify some of the jargon beginner investors might hear.
My answers are in blue.
Stock Rotations Question
- Are fundies the main forces behind stock rotations? Most recent being the bank shares getting pushed up while safety stocks like CSL that stood stoic during the pandemic suddenly experiencing drops.
Yes, active investors are the main force behind capital “rotating” out of some sectors into others. In theory, this happens because new information has changed the relative attractiveness of different investments. In practice, there is a sociological and quantitative momentum to these things as successful ideas spread and reflexivity takes hold.
- If so, what can a small time retail investor like myself do, to not get caught in ripple of their changing tides?
There is nothing you can do to avoid the impact of tides other than to stay ahead of them. Unfortunately, this would undermine the most profitable part of the investing journey, which is simply staying in good investments for long periods of time. Personally, I can only find a limited number of investments that I am sufficiently confident in to simply hold for the long term. They are the majority of my portfolio, but I want to expand that set, and the tides can be still be informative in terms of timing accumulation or profit taking.
Machine Trading Question
- I hear sometimes traders say they feel trades are being driven by the machines. While I know there are bots supercharged with algos, what does this exactly mean? How do these traders “know” trades are indeed driven by machines?
There are many ways traders know an algorithm is active. For example, sometimes you see hundreds of small transactions for unmarketable parcels of shares with scrambled order sizes. Most humans will either use an even amount of shares, or dollars. So you would see lots of parcels of 1,000 or 2,500 shares, or a purchase worth $1,000 or $2,500 (with the corresponding number of shares at the trade price). In comparison, bots/algos are typically executing a large order over a time or volume period, perhaps over vwap, or a percentage of volume over a time period, or something similar, and therefore orders appear fragmented and irregular in size.
- The closest example I know is:
i. Where oil futures were negatively priced. I heard someone saying a real life trader would never do that and it was probably the bots. How would the real life trader know?
Oil futures for a particular delivery spot were negative because of the expense of storing it. I don’t think it had to do with bots.
ii. There was some massive unexplained drop in the NYSE many years ago, causing the circuit breaker to halt trade that day. I don’t think it was ever explained but the bots were blamed.
I think that you need to differentiate between automated quant funds, where an entire pool of capital is controlled by algorithms, and an algorithmic trade. Automated quant funds have a huge part in momentum for the overall market, and are probably involved in a ‘flash crash’ scenario.
Closing Auction Question
Speaking of CSL, I was buying on the way down, But this really puzzled me: I put in a limit order to buy shares for $281.22 but in the end they were executed at $276.22.
Does this often happen? This suggests that CommSec is smart enough to always give me the best price? It feels like there was a massive dump just before the close and my purchase price got automatically swept to a lower price because there weren’t enough bids. I am not complaining though.
Your price (below your limit order) was a result of the closing price auction. You can read the ASX documentation for that here. Basically what happens is that from just after 4pm market participants can bid for shares or offer into the closing auction, and all the shares will go through at the one average weighted price. Because there was a big dump of sellers into the close that day, you and I both received a closing auction price that was below the price we bid. This does happen all the time, but it is unusual for there to be such a large dump into the close generating such a gap between the last traded price at 4pm, and the closing auction price, for such a large company as CSL.
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