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Passive index / algorithmic funds impact on market-moves


perulv
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There has been different variations of market crashes that has been caused by, or at least affected by, different forms of algorithmic trading ("flash crash", Long Time Capital Management, portfolio insurance). Today index-funds are more popular than ever, and I guess one could argue that an index fund does algorithmic "trading", just that the algorithm is simple (and known to the outside).

 

Could this combination of "dumb" index-funds, and the highly sophisticated algorithmic funds, impact/cause crashes in a new way? I can't come up with a good answer myself. Perhaps less human judgement will make the crashes smaller? After all, we are not a rational bunch. Or could it make it worse, if e.g index-funds started dumping stocks blindly, adding to the selling? Not sure how though, are there scenarios where a change in "the market" would force an index-fund to trade large volumes?

 

My knowledge of "quant funds" is limited to reading about it in books, and I have no idea how often an index fund (have to) trade. But software-systems in general are complex, and tends to fail (or act) in ways that are only obvious after the fact. Combined with a complex and chaotic stock-market, it is not hard to image it can "go wrong" in some way. But will the higher percentage of stocks in index-funds affect this, in some way?

 

I ask out of curiosity, not as part of some investment scheme :)

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