As I was reading about Big data’s role in stock markets, I was wondering if any technology for that matter could benefit investors in Equity. I read some articles that talked about High Frequency trading and algorithmic trading, news sentiment analysis etc. Big data and machine learning has revolutionized so many sectors and finance is one that generates volumes of data in streams. No wonder, it comes under its sphere of influence. But I am somewhat skeptical about big data’s role in equity markets. Not from a technical perspective but rather from the point of view of an investor. I have invested in the Indian equity market for nearly two years now and the amount was something that anyone with no experience in stock markets and no job would ever dare! And the ups and downs were too large for a risk to be taken. However that leap has given me an experience that will forever help me in understanding atleast a part of the politics and serious risks that are involved in the world of finance.
The equity market is crucial for a nation’s fast economic growth. And so far I have seen that all major economies are inter-dependent and connected. Any disaster in developed economies like USA, Europe and China comes banging down on the Emerging economies. The Chinese currency devaluation was in recent times one of the worst financial crisis that the equity markets around the globe have seen. And to my surprise those similar “highly negative” things happened over and over again. Another one was “Brexit” but that impact was minimal compared to the previous one and the market recovered significantly the same day. I have seen the index literally sinking from a 100+ to a 100- in a matter of seconds, but a difference not large enough to trigger a circuit breaker. It was like a free fall. I am still thinking if all individual investors or firms managing funds could sell their stocks so fast at a particular time, say 2:35 pm when the graph became somewhat regular and in streaks rather than a normal irregular pattern, followed by a straight line… downwards! This happened several times in 2015. If you notice the graph of the NIFTY index below, what the market gained over a year was completely nullified by the end of 2015, which is exactly a years time since the beginning of of the bull market in early 2014.
What surprises me more is that those “hammering” impacts and news came up during the negative cycle of the market, meaning when the investors were selling their stocks for a normal profit booking. And that made even long term investors sell, that ultimately brought down the index to unexpectedly low levels! I saw in the news in early 2014 many experts, stock brokers and firms talking about the Indian bull market touching 9000+ levels by 2015 end and by now it should been close to 10,000. But it has reached 9200 levels only a few days back. Stocks that had touched new highs in the beginning of 2015 came tumbling down to levels so low that till today they haven’t recovered. Best example is ICICI Bank which is not touching its expected 300+ plus levels from the past several months. But I am still hopeful and invested in that stock.
When there was an interest rate cut for the first time in India announced by the RBI governor, the market cheered, but the second time the indices sank!
If stock markets were never hacked, I would have believed in those arguments about bull markets correcting 15-20%. But the way some days went in the market, I strongly believe that it is not immune to manipulation. While Algorithmic trading brings automation to the stock market, it can also breach the normal behavior and bring about panic selling, ultimately resulting in a loss for the investors, traders and the nation as a whole. Any negative sentiment in the stock market or an imminent downward trend drives away foreign investments that have a very important role in the growth of every sector and company. The stop loss is a mark that a stock trader keeps for triggering a sell action. When that level is crossed, all traders have sold their stocks at a loss and it’s a golden opportunity for a “stalking” investor to buy in bulk!
I don’t know about the political aspects of the Yuan devaluation decision but what I understand is that, it was taken at the cost of thousands of equity investors around the globe and I really feel for the Chinese traders and investors who were affected the most.
2014 was the time for general election in India and there was a sudden surge in the indices due to some growing positive sentiment. But from around mid 2015, that gain was completely lost.
Financial experts and institution heads talk about various things when it comes to any positive or negative behavior in the markets. Sometimes the market corrects because it was bound to, but not always. No matter what experts or institutions or any other people in the media say, how a particular stock, index or fund will perform can never be predicted, only guessed! Also sometimes the views are biased, so traders need to be very cautious about the buy and sell calls and suggested stop loss values for a stock. And if you are thinking of investing in equity, you need to remember that there are many people out there who will try to manage your money for their own profit! No predictive technology can save you from a loss if the political scenario is bad and some serious hackers are attempting to breach the financial markets.
If techies today take some interest in this otherwise risky and boring business, then perhaps some of these challenges can be overcome. But till something tangible happens, it is an investor’s own responsibility to analyze the patterns and remain alert.