The day the droid army struck
Last week marked my 44th year at the JSE.
I joined the market after qualifying as an accountant, though I commenced work on the trading floor as a lowly clerk, running orders and reading out prices to clients over the phone.
Over those four decades I have witnessed infinite change, notably the deregulation of the broking industry, forced upon the clubby JSE committee in the early 1990s by a group of institutions that threatened to launch a competitor exchange, and, shortly thereafter, the political transformation in South Africa that opened its borders to international business flows. Yet by far the most dramatic conversion was the move, 20 years ago, from trading in a hall, where transactions were recorded manually on a chalkboard, to the introduction of a highly sophisticated electronic system that automatically matched buyers and sellers located remotely around the country.
Since then the progress to computerised trading, advancements in technology and the growth and reach of the internet have radically transformed the performance and behaviour of financial markets.
Real-time access to price and volume information has unlocked the marketplace to speedy, quick-turnover, highly leveraged proprietary trading executed by computers, programmed to move in and out of positions in fractions of a second, and generate series of infinitesimal profits with each transaction. These mechanical machinations move impassively through markets like a formidable droid army, disruptively shifting prices, and, at the same time, flattening any resistance in its path. Horizons are very short term, nor does operating these algorithmic tools require large amounts of capital. Positions are often squared overnight, leaving the operator's book clear to begin afresh the next day.
How else can one explain the extraordinary volatility experienced on the JSE last Thursday?
I lived through Black Monday in 1987, the collapse of long-term capital management in 1998, the bursting of the internet bubble in 2000 and the Great Financial Crisis in 2008 where fears that the events would undermine the global economy triggered a stampede out of equity markets, causing indices to lurch down. On Thursday, though, disappointing services data in the US that weakened the dollar, in the belief the Federal Reserve would scale back tightening its monetary policy, could barely compare with those seismic occurrences. Still, somehow it set off an algorithmic explosion that pushed the gold share index up 10%, the platinum index up 15%, Anglo American up 17%, Exxaro up 19% and a whole sequence of other securities up by over 10% each.
While the moves on Thursday gave us plenty to cheer about, it was clear that these gains were not human-inspired. Mostly people are very measured when trading, and think wisely before increasing a buying price or reducing a selling price, unless, perhaps they are bidding for a rare collectable or being forced out of an asset. Angloplats - up 20% on Thursday - hardly fits that category.
A company's valuation is determined by its ability to grow earnings progressively and pay shareholders satisfactory dividends. But to reach that point you have to endure the rigours of modern markets. It's easy to write about it; explaining the "Assault of the Droids " to clients whose money you manage, though, is something else.