With stock prices that seem stranger than fiction, investors have been reaching for any explanation that makes sense.
Earlier this week on LinkedIn, a portfolio manager posited a few thoughts about what was happening with AMC stock and how the market makers were toying with retail traders.
This was grander than your garden variety theory about price manipulation and front running. In defense of those accusers, there have been a number of enforcement actions against large trading firms for doing exactly that.
The full post is screenshotted below, but the juiciest morsel is here:
“I am told #Citadel employs a team of psych Phds to design price moves designed to drive retail interest away.”
Billion dollar trading firms are nothing if not eccentric. Hedge funds pay for satellite photos of Walmart parking lots to make bets on earnings. Portfolio managers have been known to gaze into the stars, or even the patterns of the Great Migration in search of alpha.
While it doesn’t seem crazy that Citadel would take advantage of guerilla tactics, the truth is they don’t even need to.
Humans are pattern finding machines. We learn through monkey see monkey do, and repeat what works. As we get better at this, we develop more and more cognitive shortcuts, and start to feel confident that “I’ve seen this movie before.”
There’s even a fancy greek word for it - pareidolia. Human faces are a particularly common visual here - from the Shroud of Turin to the Old Man in the Mountain. While originally seen as a form of psychosis, anyone who’s done a captcha check knows that this is what separates man from machine.
Watching the ticker tape is fascinating. The visualization of animal spirits buying and selling is a mesmerizing swirl of numbers. Large buy orders bump the price up, and then a slow grind of sell orders brings it back down. It’s hard not to start seeing patterns and opportunities.
My personal theory about technical analysis is that it works because enough people think it works. Patterns are appealing, round numbers are comforting, and if enough people buy on a Fibonacci support level, it’s a self-actualizing truth.
The meme stock phenomenon is the perfect cauldron to brew something intoxicating and disorienting. The narrative backdrop builds to a point where billions of price and quote updates are happening every minute. The ratio of signal to noise is poor.
Market makers don’t have to employ the psych Phds to create alluring price movements, the market does that on its own.
Our own greatest enemy in investing is often ourselves. No one is consistently rewarded in the marketplace, and it takes an immense amount of mental fortitude to stick to a plan. We talk about saving for the next big dip buying opportunity, but then panic sell when it happens and the world feels near collapse.
One day later, a retraction for that original claim was posted - Citadel’s lawyers work just as fast as their traders. Pulling back the claims of manipulation and collusion, the author notes that market makers in fact thrive on high volumes and continued retail participation.
Viewed through the lens of “retail vs. Citadel”, it can feel like investors have the deck stacked against them. Well funded and technologically advanced, the high speed liquidity providers are always going to be bigger and faster - it’s their job.
But the competition amongst these firms has led to tremendous benefits for the main street investors. Fees have approached zero, and spreads have never been tighter. Access to global capital markets sits in all of our pockets and purses.
With that broad access and reduced friction, the remaining enemy to our savings is within our own heads. Price discovery was never meant to be a comfortable or easy process. We must fight the instincts that play tricks on our emotions, and look deeper than scapegoats.
If you believe that the liquidity provider is the enemy out to get you, everything gets clouded by that, and it becomes a form of gullibility. As the 90’s kids would say… “I heard Citadel has a psy-ops division….. SIKE”
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