What I Learned This Week

The risks grow that the passive and algorithmic transformation of equity markets could lead to a crisis.

For years in these pages, we have dissected the meteoric rise of passive investing and algorithmic trading. The influence of “rules-based” strategies has only grown more extreme this year. According to estimates released by J.P. Morgan in late June, passive strategies now control 60% of U.S. equity assets while quant funds control 20%—a staggering 80% combined. Passive titans Blackrock and Vanguard now oversee $12 trillion, up from less than $8 trillion just five years ago. And based on a recent report by Thomson Reuters, algorithmic trading systems are now responsible for 75% of global trading volume. This development has never been tested by a recession. And evidence continues to mount su…

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