Chasing the Same Signals: How Black-Box Trading Influences Stock Markets from Wall Street to Shanghai

Chapter 2. The Automation of Trading

When Machines Became the Most Active Investors

Investors are a diverse group of individuals and financial institutions, each with unique objectives and strategies. Pension funds, retail investors, investment banks, speculators, hedge funds, and part-time cab drivers each express unique views and risk preferences as they transact in buying and selling stocks. We assume that markets reflect all these diverse expressions, forming an equilibrium that reflects the "rational" value of the market. We have few insights, however, into the relative activity of the members of each group.

We know that the major holders of the most common large-capitalization stocks are often marquee institutional investors. Fidelity Investments, Capital Research & Capital World, The Vanguard Group, State Street Corporation to name a few, mark the top-10 holders of all most every major corporation in the S&P 500. In the past four decades, U.S. institutional investors have quadrupled their assets to over $10 trillion dollars (see table 2.1).^[4]

Although the occasional hedge fund breaks the top 10, the list of major holders by and large is composed of traditional mutual fund managers, who are by nature "buy-and-hold" investors. Mutual funds assume large positions in the stocks, owning several percentages of outstanding shares, and then typically hold these positions for years.

Is it safe then to assume that mutual funds also represent the most active investors in the market place? ...