Quant-Driven Correction: Is It Deja Vu All Over Again?

Nov.19.07 | About: SPDR Dow (DIA)

The correction we experienced last July/August was widely blamed on troubles at quant funds. They allegedly ran into trouble and liquidation concerns as a result of CDOs, mortgage debt and other exotic investment instruments. As a result they were forced to unwind complex trades, which were usually done using powerful computerized trading programs. We could not help but notice at least the similarity between the two corrections in the second half of the year: the late day selling.

Since the peak on October 6th, 80% of the month's decline has occurred in the last thirty minutes of trading. In August, 65% of the total decline occurred in the final half hour. Below we present snapshots of the two corrections - August and October - with the large late-day declines highlighted.

click to enlarge