Passive Investing Risks Market Meltdowns (w/ Jon & Pete Najarian)

Passive Investing Risks Market Meltdowns (w/ Jon & Pete Najarian)

only way you can
hedge that is with your
ego, because there’s
no way you can stay up with it.

First of all, the XIV failed
because it was built to fail.
Honest to God, Tony, that
was the dumbest product and–
PETE NAJARIAN: To be blunt.
TONY GREER: Yeah, I agree.
Our credit’s gone.
Suisse the rest
of the guys that put
that thing together.
So I mentioned this to a friend,
Nancy Davis, over at quadratic.
And I said, Nancy, when we
saw this thing, I said then–
and I continued to say
through the meltdown of it,
when it went from 99 or wherever
it was to basically 6 in one
day, when it lost 90% some
odd of its value, I said,
the only way you can hedge
that is with your ego,
because there’s no way
you can stay up with it.
No way possible you
could stay up with it.
I’m not against leveraged ETFs.
I know this was an ETN,
an exchange traded note.
But I’m not against
leverage with ETFs or ETNs.
But something like this that’s
a derivative of a derivative
of a derivative–
What could go wrong?
TONY GREER: Yeah, exactly.
could go wrong?
I mean, crazy, stupid stuff.
So will there be more like that?
There’ll be more moves, like
February of 2018, I think.
We saw one in December.
It was about as ugly as I
can remember, going back
to the 2008, 2009 debacle.
But we’ll see more.
Quite frankly, we’ll see more,
because what Pete mentioned
about combination of
artificial intelligence, or AI,
and high frequency trading.
And again, I’m not
demonizing them.
But I would say that,
at a very minimum,
the SEC and FINRA
should be fighting
for putting the uptick rule
back in, because the uptick
rule worked for–
whatever– 80 years from
the time they put it in.
And then when they
repealed it, they
said, well, more or less, with
40 disparate different markets,
how do you know what
the last uptick was?
The same computers that make
high frequency trading possible
make it possible to know
you can’t sell on that,
cause it’s a lower tick
than the last traded price.
So you can’t sell there
if you don’t own it.
If you own it, you can
get out anytime you want.
If you don’t own it, you can’t
just pound it into the ground.
But like I say, when you’ve
got artificial intelligence
and algorithms that are
built to, OK, every time
I get hit on the
bid, lower my bid
and lower the
quantity on my bid.
So what am I doing?
I’m withdrawing liquidity
on the side that needs it.
Instead of adding,
I’m pulling back.
When you were a
market maker, you
got special margins
and all the rest
for being there and
guaranteeing that you
would make a market as the
market was falling apart.
Might not be a great
market, but you’re
guaranteeing to be there.
Otherwise, they’ll take that
market maker designation away.
We don’t have that anymore.
And they could go a long
way towards dealing with it,
putting the uptick rule
back in for securities.
think that’s the biggest
problem is the fact that we have
allowed this to occur where–
I catch a lot of
flak– so does John–
because we bring this up a lot.
The uptick rule being
one, and the algorithms
are not market makers.
When you make a market,
if you have a bid,
that means you absolutely
have an offer available
and vice versa.
And the fact that these
computers are not,
the AI is not–
they’re not in those
same restrictions.
They are just going one
direction off of one word
from Jay Powell or
President Trump or whomever.
It’s one word, and
that’s all they need.
And then that’s when you
get these just crazy moves.
And you brought up, well, what
do we think going forward?
I would think that there is
enough going on in the world,
and we’ve got a
pretty interesting guy
sitting in the White
House who, in terms
of how he communicates.
And because of that,
I think that no matter
who it is going forward, because
of the social world that we
live in and everything
else, I think
we are in a more volatile space.
Now, I say that on a day
where we’re seeing volatility
actually has come down to a
reasonable level these days.
But I’ve always
lived by the thing–
John has, too– the old adage
that, you buy when you can,
not when you have to.
So there are times
to protect yourself.
And then there are times where
you can let some of that go.
And I just think the range
is different than it was.
Like you mentioned, there
was an eight to 10, maybe
even call it a eight to 12
range for quite some time.
And now, I feel like we’re
probably in a different range.
And it’s probably something
closer to a 12 to 16
under normal circumstances,
but we can very easily
get right back to 22, 24, 25
if enough different pieces
of the puzzle come out.
couldn’t agree more.
could easily be 25.
couldn’t agree more.
And I’d love to
speak a little bit–
you said I don’t want to
demonize the high frequency
I want to demonize
them a little bit.
I want to demonize them a little
bit, because like you guys,
I came from a market
where they did not exist.
And trades were consummated by
looking each other in the eye
and counting the badge
number and looking
at the time on the clock.
And then those were all cleared.
Now, we’ve created quite a bit
of a free for all situation.
And like you guys say,
I mean, you clearly
have the same ax that I do.
And that is, what is the
disconnect between the SEC not
noticing the distortions
that they create,
not noticing the underlying
danger of having derivatives
built on derivatives built on
derivatives, and you and I–
you guys and I both know that
we’re probably in for a day
of reckoning at some point–
you know what I mean?–
with those products being
stacked on top of each other.
What is the disconnect
with the SEC?
Do you think that they’re
just happy to see the volume
Do you think that they’re
looking the other way
on a set of high
frequency funds that they
don’t want to investigate?
Or what do you think
the disconnect is?
Can you speak to that at all?
PETE NAJARIAN: I think it’s that
they don’t fully understand it.
I think that they try to look at
things after an event happens,
like we all would.
I’m not saying that I
have this clairvoyance
and I can see out
into the future.
But they’re always–
what do they say?
Fighting the last war?
So that’s what
they’re looking at.
So in the case of the
flash crash in 2011,
it did exactly what we said.
The algos were withdrawing
liquidity right when you
needed it and lowering prices.
And when they all
do it in concert,
you get just a sharp drop
to the downside like we got,
and then a very sharp rebound
when the money comes back in
to cover.
And then some of the guys
that are late to cover
are now short covering
and chasing that thing up.
So you get that
incredible V-shaped bottom
that you had in 2011.
we just saw now.
PETE NAJARIAN: And so they’re
going to fight that war.
They’re going to say, OK,
well, here’s we’re going to do.
We’re going to put a
circuit breaker in.
That’ll do it.
We’re going to put
a circuit breaker
in that’ll stop if this
following terms are met.
Then we’re going to stop.
And if it happens within the
last half hour of the day,
then all bets are off.
We’ll just let it–
let it happen.
without having that clairvoyance
that I mentioned, since they
lift most of those stops
into the last few
minutes of trading,
I’d say that’s when one
of the big next things
is going to happen.
So when you replay this,
whenever that happens,
you’ll say, boy, I think John
was really right about that.
Look at this thing.
It fell 2,000 points
from 2:50 to 3 o’clock
because there were no
circuit breakers to stop it.
TONY GREER: Exactly.
Well, we’re going to
have some sort of crisis,
because the growth
of passive management
has become astronomical.
A lot of the biggest
funds, clearly,
are owners of the five biggest
stocks in the market, the FANG
stocks, et cetera.
And my biggest fear is that if
they all turn south in one day
in major quantities or in one
week, et cetera, and having
major magnitude moves
lower, then there
are going to be a lot of sellers
and lower prices are probably
going to bring out more sellers.
So that’s my concern
with the markets.
Do you guys agree with, that the
passive investing’s going to be
something that leaves us–
passive investing, yes.
My only pushback at all is I
realize the FANG names really
are a lot to do with the market.
But I think sometimes, we have
focused so much on those names.
And I realize market
cap and everything else.
I get it.
I mean, they’re huge
movers of the S&P 500,
and blah, blah, blah.
But I still look at a lot
of the other side of, well,
there are Microsofts out there.
There are Oracles out there.
There’s Intels out there.
And there’s all kinds of
different industrial stuff.
I mean, so I oftentimes
have pushed back at the idea
that it’s just FANG.
I get it.
I totally get it.
But I think, underneath
that level of FANG,
there are some
great support areas,
that I think there are many
companies that are just
still overlooked that they
do have their moments where
they’re going to have a six
month run that everybody’s
like, oh, my goodness,
have you seen this?
And right now, we’re
sitting in the middle of one
of those, where everybody
is still focused still,
I think, on the FANGs.
But if you look at old tech
right now, I just came up with,
I think, 15 different
tech names that
are up over 20% plus
this year alone.
And none of those are FANG.
So I think that part
of it is– what’s
interesting is that FANG
gets a lot of the publicity.
And they should, because
of what has happened
and how big of a
portion they are.
But there’s other
stuff out there.
other drivers.
JON NAJARIAN: Yeah, I think
there’s a little bit more
of a broad movement out
there than gets credit for.
I mean, biotechs had a
great run and nobody’s even
talking about them.
TONY GREER: Yeah, true.
JON NAJARIAN: They have had
a great couple of weeks.
I mean, it’s interesting
how there’s–
and I think that’s
the market that we’ve
been in for probably,
what, two years,
this rotational market
where, who’s leading?
Who’s going to bring us next?
I mean, pharma names.
Merck’s hitting new highs,
Lilly’s hitting new highs.
And nobody talks–
you look at TV,
you won’t see it talked about.
It’s not talked about,
because everybody said, hey,
did you see Facebook?
And the latest thing, the
investigation, or whatever
it might be that day–
Apple, Tim Cook, whatever it is.
But there’s a lot going
on in other places.


  1. How confident can we be that Deutsche Bank's derivatives exposure won't lead to DB's failure — or what is practically the same thing, widespread belief that it's about to fail — in turn having a domino effect on other European (all non-US, really) banks, in turn causing a global contraction/freeze-up of credit similar to Sept. 2008? If the algos sense that anything of the kind is beginning to happen, they can turn it into a self-fulfilling prophecy before the central banks can wade in — am I right or am I missing something?

  2. BAN these A.I. and HFT
    algorithmic trading/ A.I. will completely destroy retail trading if left unchecked.
    think about this. computers reach a more black and white conclusion than us humans do, and they do so at a faster rate.
    when humans' opinion may WIDELY range on a broad spectrum, to a computer, it's more absolute.
    so what does that mean when their (robots) opinions affect stocks? 0 to 100 in split second.
    we are already seeing their damaging effects in the stock market every day. and no i'm not just talking about down moves.
    it's UP or DOWN split second 10 S&P moves in 1 second based on some fucking twitter news.
    think NFP reaction EVERY SINGLE FUCKING SECOND !!!
    you think retail can trade in that environment?
    to robots, it's either THIS, or THAT, where as to a human, it can be either here, there, or in between, and alot of disagreements along the way.
    the industry leaders should really come together and try and ban, or at least curtail, these robot trading.
    just like they will take jobs from normal people, they will also take profits from retail traders.

  3. These people are clueless. Volatility brings in money and liquidity into the markets. Everybody is naturally attracted to volatility because people love to gamble and get rich. It's just human nature. Just look at bitcoin and how much money has gone into it… it went from being worth pennies to almost $20k. People trust bitcoin trading because it's a 24/7 market with 100% certainty that your trade won't be reversed because it has instant settlement. The same can't be said of the stock market. First of all, any time trading is closed or suspended either for the weekend, overnight or various halts, that just needlessly adds huge risk to your trading. Why does the SEC tolerate gap openings that are caused by non-24/7 trading? At any time during a trading day, a regulator can on a whim halt trading (sometimes permanently), bust/reverse trades, etc. without any warning whatsoever. There is massive trade uncertainty caused by that fact and the only solution when designing trading systems/algorithms is to pull the plug and remove all liquidity from the markets. Many people lost fortunes during the 2011 flash crash because a regulator decided on a whim to cancel one side of their trades. We need 100% trade certainty either via instant settlement or by completely abolishing the practice of busting trades.

  4. thats when the market is ready to raspberry, when people are just looking for the "new thing" to bet on.

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