Tuesday, December 1st, 2015

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Shifting Focus Leading to Market Instability

Trading has become less about fundamentals and more about analyzing trends.The stock market has seen substantial volatility in the past few weeks, as traders responded to the uncertainty around the U.S. debt crisis. The Atlantic's Daniel Indiviglio suggests that much of the volatility and uncertainty in the market can be laid at the feet of traders, but not the ones most usually point to.

In general, high-frequency traders take much of the blame for the shifting nature of the financial sector, as this type of trading tends to exaggerate swings in either direction. Indiviglio, however, believes the actual cause is a related but much broader trend: the shift toward technical analysis of stock data.

As computers' capabilities have developed, a growing number of traders have turned toward quantitative analysis of trends independent of the actual strength of the companies represented by stocks. This causes a sort of herd mentality based on reaching certain quantitative thresholds, and the fast pace set by high-frequency traders make it possible for the market to swing quickly based entirely on numerical causes, rather than any economic news.

This last point is illustrated by the fact that high-frequency trading tripled during the recent market downturn, according to Bloomberg.

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