- JPMorgan’s global head of quantitative and derivatives strategy, Marko Kolanovic, has long warned against unstable market liquidity conditions.
- He recently made an extended analogy comparing the current market environment to Uber’s pricing model, all while warning of further liquidity issues.
JPMorgan‘s quant guru, Marko Kolanovic — a man whose opinion is valued so highly that it can move markets — doesn’t think investors have learned their lesson from the meltdown that rocked stocks in early February.
That’s because they’ve become used to a low-volatility environment — one that hasn’t been conditioned to withstand sharp fluctuations. As a result, outsized price swings can hamper liquidity, making it difficult for markets to function properly when it’s most crucial, says Kolanovic, JPMorgan’s global head of quantitative and derivatives strategy.
At the root of the issue are so-called systematic investors, which are forced to reduced positions during times of turbulence and frequently trade in price-insensitive fashion. For evidence of their impact, Kolanovic notes that futures-market depth plummeted more than 90% during the chaotic February period.
If this dynamic still isn’t clicking for you, Kolanovic offers a handy analogy, comparing market liquidity to Uber.
When the market is functioning normally, there’s ample liquidity, and transaction costs are low, benefitting participants. It’s similar to how Uber fares are competitively priced in a normal environment.
But when there’s a volatility shock, liquidity vanishes from the market. That’s akin to Uber’s surge-pricing model, which charges customers more amid external impediments like traffic and weather.
According to Kolanovic, the major difference between markets and Uber is that when the going gets tough for a traveler, they can elect not to accept a ride. In markets, however, there are investors forced to transact — a group that includes the systematic strategies, among others.
“This results in significant intraday volatility and causes damage to investors’ confidence in the market,” Kolanovic wrote in a note to clients. “Given that financial markets are a critical part of the economy’s infrastructure, perhaps more attention should be paid to the risks posed by the Uberization of financial markets.”
It’s not the first time Kolanovic has warned against the perils of inflexible market liquidity. For months before February’s market reckoning, he stressed investor caution. Then during an interview with Bloomberg Television early last month, he downplayed a series of market headwinds, saying that “the only real problem now is low liquidity and market volatility.”
Sound familiar? That’s because little has been done to remedy the situation.
But fear not — Kolanovic will continue beating the drum as long as there’s an issue. And based on his track record, market participants would be foolish not to listen.