Professor Della Vedova Shares Insights on What Killed the Stock Market with InvestorPlace

University of San Diego School of Business Assistant Professor of Finance Josh Della Vedova

In an article that defends that bad news killed the stock market during the COVID-19 pandemic, University of San Diego School of Business Assistant Professor of Finance Josh Della Vedova argues that "algorithmic trading may actually have had a positive impact on financial markets during the coronavirus selloff." Professor Della Vedova's areas of expertise include behavioral finance, market microstructure and asset pricing anomalies.

Article as it appears in InvestorPlace:

Bad News, Not Algorithmic Trading, Killed the Stock Market

Despite its bad wrap, algorithmic trading may have actually prevented a worse stock selloff in March, according to one expert

Stocks sold off sharply in March, and as they always do, people are looking for a boogeyman. Insert algorithmic trading.

Over the past month, an increasing number of market participants and observers have partially blamed the sharp and sudden decline in stocks on algorithmic trading.

According to one expert, wrong.

“The Covid-19 virus has led to an incredibly negative shock to financial markets, brought upon mostly by the macro disruptions and changing firm fundamentals, and therefore it is unfair to lay this crisis at the feet of HFTs,” Joshua Della Vedova, an assistant professor of finance at the University of San Diego School of Business, told InvestorPlace in an email.

In other words, bad news — not algorithmic trading — killed the stock market.

Indeed, Della Vedova argues that algorithmic trading may have actually helped stabilize financial markets during the coronavirus pandemic — not exacerbated the sell-off.

How? Two words: market making.

Not the Boogeyman

It appears that algorithmic trading may not be the boogeyman that many make it out to be.

According to Della Vedova, HFTs have two main functions in financial markets: price discovery/information integration, and market making.

On the price discovery/information integration side, HFTs simply do what every other investor in the world does. They receive new information, process it, and price it into the markets. HFTs just do it much, much faster than everyone else.

“They have been shown to use algorithms to receive, interpret, and trade on information to push a stock to its new fair value in as quickly as two seconds total,” says Della Vedova.

In it of itself, this price discovery/information integration does not inject volatility into markets. But it does mean that when markets are hit with a flurry of bad news — like they were during the coronavirus pandemic — stocks will sell off quickly. The swiftness of the selloff might spook investors, which could lead to panic selling.

But, that’s not the fault of algorithmic trading. It’s the fault of an irrational human reaction to algorithmic trading.

And such irrational reactions are...


Renata Ramirez
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