Quants Trading the Butterflies

Matt Levine, writing a Money Stuff:

Another view of quant trading is that it reinforces market inefficiencies: Your algorithm notices some correlation, everyone else’s algorithm notices the same correlation, you all pile into the correlation, the correlation increases, and the original reason for the correlation goes away, or was spurious to begin with. The butterflies and the wheat prices were just a coincidence, but now all the hedge funds are buying wheat whenever they see butterflies, so wheat prices correlate with butterfly populations for no good reason. Wheat prices get further away from fundamentals, but eventually the fundamentals reassert themselves and the trade collapses.

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