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Waiting for Algo: Dip-seeking in the time of the great US stock market algorithm

Anton Tonev

Anton Tonev

Strategist

Anton Tonev

Anton Tonev

Strategist
Anton joined Trium Capital in February 2023 to be the third member of the Trium Larissa Global Macro Strategy’s Portfolio Management & Research team. Anton’s previous experience includes being Head of Thematic Research for HSBC where his roles included being Head of Global Macro for HSBC Multi-Asset Trading Desk in London. Prior to that Anton was a Portfolio Manager and Thematic Researcher for Moore Capital, which followed 7 years at Morgan Stanley, where he worked as a Trader alongside Peter Kisler for a period . Anton brings additional research and idea generation capabilities to the Larissa team panning Developed and Emerging Markets. Anton has a BSc in Economics and Finance from Wharton Business School.
Trium Larissa Global Macro
Trium Larissa Global Macro

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In recent decades, the US market has been transformed by increasingly powerful algorithms. What began with buybacks in the 1980s quickly evolved to encompass rate dynamics, government bailouts, and, AI-powered trading systems. This piece explores, with a satirical eye, the progression of these market interventions, culminating in an era where stock prices seem immune to decline.

Through the lens of a seasoned investor, it explores the implications of a market that appears to only move upward— suppressing volatility. As the dominance of algorithmic trading continues, the question arrives: Is there anything left that can derail the seemingly unstoppable rise of US stocks? But perhaps it isn’t different this time after all…

He wasn’t worried. He was bored. Ever since the latest tweak in the algorithm, a couple of years after the Covid pandemic, US stocks have been relentlessly going up. That was not the problem – he had put all his savings in the index and even automated all surplus income at the end of the month to be passively invested.

But without even the slightest dip in the market, all the joy and excitement of being a stock market investor had disappeared. More importantly, there was nothing to brag about or even talk about at cocktail parties: everybody was long stocks. Somehow, he was secretly hoping for a dip. But how? The algo was bulletproof, they said; Nvidia’s AI had perfected it. Still, he was thinking, if the Chinese can hack the US Treasury, why can’t they hack the NYSE?

By all accounts, he was a veteran investor, starting shortly after the Great Financial Crisis (GFC). He had heard stories about investing from his father about the times before that. Those were stories of great pride and joy. His father knew how to play the stock market game well.

Dip-learning machines

Despite numerous market declines, his old man knew that ever since they first introduced the ‘algo’ back in 1982, the only move to make in US stocks was ‘buy the dip’. He last loaded during GFC before passing away shortly after, but already before that, he had amassed a small fortune. All his son had to do was… buy the dip.

Easier said than done. For almost a decade after GFC, there were hardly any decent dips to talk about. Few knew at the time, but ever since the first prototype of the algo in 1982, they had been introducing newer versions of it every single time a larger dip happened. They just used those declines as a training ground to make the algos better.

The first one was rather primitive – it was called SEC 10B-18 – it simply allowed US companies to buy their shares back pretty much whenever they wanted. That first algo went through several iterations in the late 1980s and early 1990s – awarding US corporate managers shares and options on shares in their own companies as an incentive to buy more stocks.

In the mid-1990s, they tweaked the algo more by introducing an extra layer to it related to US interest rates. They called it “Greenspan’, named after the Fed Chair, who oversaw the process. The interest rate leg made the algo immensely powerful.

So powerful that when the real Greenspan tried to push the market lower in 1996, by declaring that investors had reached a state of ‘irrational exuberance’, just to test the algo, the market did not budge. What followed after that was probably the greatest 4 years of stock market rally we had ever seen. Nothing could stop the advance. Even when foreign stock markets were crashing, US stocks were racing higher and higher.

When Russia defaulted in 1998 and, between one thing and another, that caused the world’s largest and smartest hedge fund to go under, they introduced another version of the algo, called ‘bailout’. That hedge fund went belly up because of wrong-way bets in rates – notes, not stocks! He thought, why would anyone trade anything else but US stocks?

Keeping the faith

Sure, for entertainment purposes, he understood later on, being bored out of his mind seeing stocks go up all the time, but back then, if you wanted to make money, just stick to the equity market. Anyway, they had to tweak the algo since that large hedge fund’s collapse put the rates version of the algo in jeopardy.

Then, something really extraordinary happened two years later. US stocks collapsed, and for a swift moment, even his father got scared that the algo had stopped working. His son was too young to remember exactly, but he had vague recollections of the times back then. The people in the know, and there were just a few, thought that was because of the Y2K bug, but his father doubted it. Just before he passed away a few years later, he told his son he was that close to selling out.

The young investor thanked him for not doing that and for keeping faith in the algo. In hindsight, his father realised, rather ‘he was told’ that indeed the algo had stopped working for a few months but only because the system needed a major upgrade, not because of Y2K but because of what it was called back then ‘the Internet’ and what we now call AI.

The GFC collapse was a routine operation for his father. By then, the original algo had gone through several iterations – starting with buybacks, then rates, bailout, and finally, putting on a new digital platform – his father was fully hooked. So, there was nothing new under the sun when one of the oldest and most venerable US banks went under – the old man had seen it all already. He knew how the system worked. But then everything changed.

Upgrading the algo

Two things happened. The latest version of the algo was called ‘QE’. Few people knew exactly what ‘QE’ stood for, but that did not matter because, after GFC, the algo kind of became common knowledge. So, it is a new and improved version, and everybody is on board. And that is when the young investor came in. For the next decade or so, investing in US stocks became so easy that people started inventing other means to keep entertained, the most notable of which was a game called Bit-coin. He never got involved with that.

The Covid epidemic in the early 2020s produced the largest dip in US stocks since GFC. Not because the algo did not work, but because people genuinely got scared… That’s when they introduced the latest version of the algo – the “Nvidia AI” version. Just like with ‘QE’, no one really knows what it does, but supposedly, they are working on an eventual version of the algo which allows investors to buy US stocks even when their physical bodies give up, by uploading their brains in the metaverse and continuing as avatars. That’s where he gave up.

Anyway, everyone is onto the algo by now, not just US investors but the entire world. No other country has managed to come close to matching the US stock algo yet. Japan started a few years ago with buybacks, China last year. But come on, seriously, ‘buybacks’! This is like ancient history as far as US stocks are concerned. Sure, it is a start, but everybody knows that if you want the real thing, you’ve got to buy US!

Are there any side effects of the US stock algo? Sure, boredom? But only for those who are disciplined like him, yes. Others keep discovering new ways to invest with excitement: bankrupt companies that rise like the phoenix, meme stocks, meme coins, etc. But even there, technology has improved so much that people invented algos that take away all the pride and joy of making a buck! Take the oldest coin, Bit-coin. After Covid they introduced an algo called ‘MSTR’, which has pushed its price to $100k. I mean, what is the point? When is enough enough? And more importantly, where is the buzz?

So, he was longing for a dip. Anything to change the rhythm in stocks. Anything to make him stand out in the crowd. He was not stupid; after the Covid pandemic, it became obvious that not even a natural or man-made disaster could topple US stocks, so he would not put on a naked short. But he secretly was hoping that if the Chinese really got angry at the US, they would be the only ones capable of beating the Nvidia AI algo. And then he would buy the dip one more time…

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