UBS Analyst Sees $150 Billion of Quant Selling by End of Juneby
Pressure would come from risk strategy and VIX ETP rebalancing
The S&P 500 is down 2.3 percent, the most since January 13
Selling in the U.S. stock market in the wake of the U.K.’s decision to secede from the European Union is just getting started for quantitative traders who make buy or sell decisions based on price trends, according to UBS Group AG.
Their sales could total as much as $150 billion should equity volatility persist in the S&P 500 Index for the next week, derivatives strategist Rebecca Cheong said on Friday. The benchmark stock gauge fell 2.3 percent to 2,054.25 at 11:27 a.m. in New York, erasing a 2 percent rally over the prior four days.
Strategies designed to mitigate risk will actually add to downward pressure in the S&P 500 over the next week as computerized selling ramps up to keep pace with falling prices. It reminds Cheong of the rapid stock selling that roiled markets in August, when the S&P 500 fell 11 percent to a 10-month low while facing similar behavior from algorithmic traders.
“The bigger the down move today, the more they have to sell, which would basically create a vicious cycle,” Cheong, head of Americas equity derivatives strategy at UBS, said in a phone interview. “We’ll see front-loaded selling in the range of $100 billion to $150 billion over the next two to three days. It could be very similar to August in terms of model-based selling.”
Rebalancing of risk control funds could result in up to $98 billion in S&P 500 selling should the index see price swings of about 3.5 percent or more over the next several days, according to Cheong. Risk parity instruments may stir up as much as $30 billion in selling given similar volatility, she said.
Additional downward price momentum will be created as owners of leveraged exchange-traded funds linked to the CBOE Volatility Index buy more shares as part of their own rebalancing process, according to UBS. The volatility index, which generally trades inversely to the S&P 500, climbed 27 percent on Friday.
“They’ll be buying volatility and selling the S&P,” said Cheong. “On days like today, when the VIX goes up, they have to buy.”