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Researchers Find Industry Shifts Contributing to “Noise” in Price of Securities

A recent article by Ohio State University academics examined the consequences of recent developments in the asset management industry, particularly industry concentration and the shift toward index-based passive investment vehicles, and suggested that the changes are leading to “noise” in the prices of securities particularly during times of market stress. The authors concluded that “the performance and risk of securities is not only determined by their cash flows and prospects but also by the nature of their investors.”The authors noted that increasing industry concentration has led to disproportionately larger trades by asset managers, which in turn has led to greater volatility in the underlying securities.  The article cited the example of the September 2014 departure of Bill Gross, co-founder of PIMCO, which led to large withdrawals in PIMCO’s Total Return Fund and the liquidation of some of the fund’s holdings -- the effects of which spread to wider bond and futures prices. The researchers observed that while the PIMCO event may have been unusual, massive trades by large institutions as a result of portfolio rebalancing or correlated trades across large organizations could cause market disruptions “since their trades are large relative to typical market volume.” The authors also noted that the rise of ETFs affect the character of the securities and illustrated how one event – such as a large hedge fund purchasing a large number of ETF shares to rebalance its portfolio -- can result in disturbances in ETF prices that could be then transmitted to underlying stocks.