Silver as an investment

JPM Head Quant Explains How The Algos Traded The Brexit Crash, And Why He Sees “Elevated Risk” / by Tyler Durden / Jun 30, 2016 5:17 PM

When looking at the kneejerk devastation in the aftermath of the Brexit vote, JPM’s head quant Marko Kolanovic said that he expects up to $300 billion in program selling, coupled with 5-10% in near-term downside to the S&P500. While Kolanovic was correct about quant and technical fund flows, what he likely did not factor in was the dramatic crisis response by central bankers who have now made it very clear their only mandate is to keep global equity markets disconnected from reality and artificially bid higher no matter the cost.

So what does he think happens now that the S&P has wiped out all losses from Brexit in the past three days?

Here is his explanation, released moments ago:

Flows and Price Action—Largely a Repeat of August 2015

In our note last week we discussed how the impact of Brexit would likely be similar to August 2015. Market price action and flows observed so far this week are fully consistent with the moves that followed August 24. The Figure below (left) shows S&P 500 moves over the four days starting with the “crash” day (i.e., August 24, 2015, and June 24, 2016). The “crash” day itself both witnessed futures hitting limit down during pre-market hours and a significant move on the day itself (-3.9% on 8/24 vs. -3.6% on 6/24). The following day’s move was again lower, largely driven by flows from convex strategies (e.g., CTA outflows, derivatives hedging). The bounce-back that followed on days 3 and 4 were also similar in August and this week (in fact, the market rallied more on days 3 and 4 in August 2015). We would like to point out that both in August and now, market realized volatility reset significantly higher, and market outflows from various “VAR-based” investors (volatility targeting, risk parity, etc.) followed in the days and weeks ahead. This contributed to the market bottoming only weeks after the crash (in 2015, the market bottomed on 9/28).


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