"There is no force on earth more powerful than an idea whose time has come" -Victor Hugo

The Bot Brief

The Bot Index edged out the performance of the S & P 500 for the week with an eleven-basis point margin. The bots jumped 1.33 percent with the broad market increasing 1.22 percent. While the S & P 500 hit an all time high during the week, the Bot Index is approximately 16% below its highest level recorded on September 21, 2018.

There were quite a few holdings within the composite that performed in excess of four percent. The two strongest names in the portfolio were ABB LTD. and NVIDIA Corp. who stocks rose 9.76% and 7.37% respectively. ABB’s stock jumped as a result of producing better than expected earnings. The company reported $515 million in third quarter profits. NVIDIA’s stock was bolstered by an RBC upgrade to ‘outperform’ and a new price target increase from $217 to $250. The stock closed at $204.54. The announcement caused Barron’s Magazine to run a feature entitled, ‘NVIDIA is the Best Large Cap Chipmaker to Own Now!’

The other eight companies that provided 4%-5% weekly returns included Yaskawa Electric (+5.31%), Lincoln Electric (+4.97%), Rockwell Automation(+4.84%), United Technologies Corp (+4.51%), Accuray Inc. (+4.51%), Oceaneering International Corp (+4.36%), 3D Systems (+4.35%) and Apple (+4.30%).

There were three stocks that experienced dips of note. iRobot fell 13.73% on lowered revenue guidance from management, a Bank of America reduction in 2020 results, an article by Zacks that cited IRBT in ‘New Strong Sell Stocks for October’ and no less than twenty law firms that have sought litigation against the company for misleading investors. Ekso Bionics slid another 7.29% as investors became wary of Wednesday’s earnings announcement. Finally, Intuitive Surgical gave back 3% of the 9% gain of the previous week when it reported strong earnings.

Wall Street and Robotics:

Two weeks ago, we ran a story entitled ‘Wall Street and Robotics’ in which we cited AllianceBernstein’s introduction of a robot trading platform. Instead of the normal equity trading conducted by robots, this venture involved corporate bonds trading with other robots in different institutions. Robots already account for the majority of stock placements, but the unique nature of bonds make them a bit more complex than stocks. Issues such as float, interest rates, call features, coupon level, accrued income, and quality issues are just a few of the difficulties that robotic trading of corporates, munis and mortgages present to the development of value. However, the ever- expanding use of algorithms and artificial intelligence are allowing automation to factor through all the characteristics of bonds and facilitate the transfer of the securities.

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On the cusp of a Yahoo Finance video entitled, ‘Robots to Replace 200K Jobs in Banking over 10 years’, the Bot Brief had an opportunity to discuss the industry with Michael McKinney. Mr. McKinney is the President and Head Trader of Nathan Hale Capital LLC. who operates as a medium sized securities broker dealer. McKinney is a graduate of University of Connecticut with MBA from the Hough Graduate Business School at the University of Florida. Before he started his firm, he had worked in trading desks at National Alliance Capital, Amherst Securities and Wachovia. As head fixed-income trader his firm works the municipal, corporate, government and MBS markets for only the top tier trading institutions. In his role he has noticed the expanding use of automation in his industry. He explained that his firm has six municipal bond traders whose customer base is only tier one accounts and all of their trading is conducted on electronic trading platforms. These traders don’t ever talk to the end purchaser of their inventory. That helps with turnover, generally running 500 to 1,000 trades a day, which could never have been accomplished prior to automation. Spreads are narrow but the volume enhancement makes the area profitable.

Mr. McKinney expressed concerns that algorithmic municipal trading of $500,000 pieces at major institutions are all being done by smart machines. These computers have the capability to review all recent trading histories of an issue to develop a pricing matrix that completely removes any human intervention. Spreads are micro thin and transactions are immediately executed. With this form of competition, his fear is that his firm couldn’t afford to invest the $2 to $3 million to create his own robo trading platform. His apprehension is that his current trading model will become obsolete and, like many firms his size, he will be unable to compete. The result will be the domination of a few capital intensive mega financial institutions, as the smaller players are squeezed out. Unfortunately, this aspect of the robotic revolution is likely to be duplicated in a variety of industries. It will be a major problem which government monopoly experts will have to face in the coming decades to which there may be no answer.

Member: American Economic Association, Society of Professional Journalists, United States Press Association. Institute of Chartered Financial Analysts, Robotic Industries Association.

The Bot Brief is a weekly newsletter designed for economists, investment specialists, journalists and academicians. It receives no remuneration from any companies that may from time to time be featured and its commentaries, analysis, opinions and research represent the subjective views of Balcones Investment Research, LLC. Due to the complex and rapidly changing nature of the subject matter, the company makes no assurances as to the absolute accuracy of material presented