“Quant Quake”: What Was Behind Last Week’s Historic CTA Crash, And Is Another One Imminent

While on the surface the market last week did nothing all that exciting, below it things were in abrupt turmoil – driven by the decoupling between stocks and bonds and the volatile, countertrend move in commodities and oil in particular – which was nowhere more evident than in the world of Risk-Parity funds and CTA, which suffered their worst two-week plunge since 2003.
A subsequent report from Bloomberg revealed that the damage among trend-following CTA was especially severe, “by some measures, commodity trading advisers are on track to post the worst yearly return since 1987, when data were first collected on the group.” It also prompted the WSJ to write “Oil Up? Oil Down? Blame the Algorithms.”
But what really happened last week, and will it happen again?
For the answer we go to one of the foremost vol experts on Wall Street, the team of Chintan Kotecha, Ben Bowler et al at Bank of America, who today described what took place last week ‘Quant quake’, and who continues a long trend of pointing out just how “weird” and fragile the market is (no really, in late May he wrote “While not obvious on the surface, these Markets Are Very Weird“) by noting that markets continue to set long-term records for price instability or ‘fragility’, with a five standard deviation (5-sigma) sell-off in the S&P 500 on 17-May, a 3-sigma drop in the Nasdaq 100 on 9-Jun, and most recently a sharp rise in the bank’s cross-asset Fragility Indicator.

This post was published at Zero Hedge on Jul 11, 2017.