Loading ...The stock market is currently prone to sharp fluctuations, driven by a mix of low liquidity and algorithmic trading bots reacting to headlines. This dynamic amplified a fake tweet about President Donald Trump’s tariff plans, sparking a $2.7 trillion market surge on Monday, and is now powering another rise in U.S. stocks today. As traders struggle to adapt, market makers are pulling back, raising trading costs and intensifying volatility in equity markets.
“Liquidity is terrible, so anyone with just a decent-sized order is going to move the market,” Brent Kochuba, founder of the options data provider Spot Gamma wrote in a research note to clients on Monday.
When traders talk about liquidity, they mean the ease at which investors can buy and sell financial instruments. That dried up at times on Monday amid a frenzied eight-percentage-point round trip in the S&P 500. In the options market, bid-ask spreads briefly jumped three-fold. Liquidity remained sparse during the European trading day on Tuesday.
The conditions amplified the 180-degree turn in sentiment on Monday, aided by momentum-driven trading algorithms primed to react to sudden changes in market direction, according to Benn Eifert, managing partner and co-chief investment officer at the hedge fund QVR Advisors. “Big trades just push the market really fast,” he said.
Eifert says the way market makers and hedge funds are programmed to trade on news contributed to the market reaction to the tariff headline. Automated trading systems can pick up shifts in market sentiment in milliseconds, exacerbating price swings. “You have a daisy chain of buying reactions in response to a headline,” Eifert said. “Algorithms are tuned to react extremely quickly to any kind of headline reversing tariffs.”
Comment: I think we all knew this long ago.