Fisher Investments Reviews Whether AI Trading Increases Market Volatility

Transcript

Ken Fisher:

So there's a lot of myths in markets, and I've written a lot about myths in the past. I've got a book all about myths. But a myth that I haven't really covered very much in writing is the one you hear said often— which is things like: "AI-driven funds will create volatility." Or another version of that, that's a little bit older, is: "Algorithmic-based trading entities create volatility."

Now, I want you to see this more correctly. They actually don't. They actually do not create more volatility. They create less volatility. Think it through this way. Once upon a time, before I was ever in this realm of endeavor —in fact, before I was ever born three quarters of a century ago— you had very much thinner markets. Less trading. Big bid-ask spreads. Sometimes a stock would be bid $10, offered at $12, and if you wanted to trade it you're going to have to give up two points, which would be 20% of a $10 stock. Then if some big buying or selling came in, that could drive that stock down another 20%, or up, which, with the spread, would make a 40% movement in terms of the real cost of trading the stock. I just want you to think that through.

Today, you never see that kind of spread, and much greater volumes exist. And when you think of volatility, it's: "How much money does it take to push a stock how far?" And that thought—when you keep that in your head: "How much money does it take to push a stock how far."—is one where —and the same question, not just AI-driven for the future or algorithmic, which we have.

I remember in the 1990s when day trading was a faddish thing. The notion that day traders create volatility. No. The more you have what I view as rapid trading, the more you have basically kind of senseless trading. And the more senseless trading you have, the more you have people on both sides of markets. And the more of that that you have, the less volatile the markets actually are.

It's a point that people don't believe, because people tend to be scared of things they don't fully understand, and things like AI-driven funds or algorithm-based funds they don't tend to understand very well.

But the fact is, if I could have people doing stupid trades all the darn time —over and over and over and over— I'd like to send them a thank you card, because they're providing more buying against when I want to, on rare occasions, make a trade. I can trade in to what they're being on the other side of. And otherwise my dollars to buy or sell have on the margin a little bit of push against the stock price. But if there's all kinds of people on both sides doing all kind of stupid stuff, mine becomes a smaller impact. And other sensible traders' things become a smaller impact. And therefore markets actually end up being less volatile. Stupid traders reduce volatility. Rapid trading reduces volatility. Computer-based trading reduces volatility. Are there days and times with all of these where the market makes big movements? Of course. What people forget is that in days long before any of this stuff happened, you also had days with big movements. And markets are actually a lot less volatile today than they were 30 years ago, 60 years ago and well before my birth. Thank you so much for listening to me. I hope you found this useful.