Notes From my Inbox

THE MACHINES HAVE THE FLOOR

Something fundamental has shifted in how share prices are set. For most of the past century, the daily traffic on global stock exchanges was dominated by fundamental investors weighing a company’s worth against its price. That is no longer the case. Research from J.P. Morgan and financial exchange operator Cboe Global Markets suggests that fundamental, valuation-driven investors account for only around 10% of daily equity volume in US markets. The other 90% is a combination of high-frequency market makers[1], the price-indifferent rebalancing of passive funds, retail speculators trading zero-day-to-expiry (0DTE)[2] options, and the systematic, risk-averse flow of the large multi-strategy hedge funds.

The consequence is a market in which the price of a share and the value of the underlying business can suddenly diverge and stay that way for extended periods. Index-level volatility (as measured by the Cboe Volatility Index, aka the VIX) can appear unremarkable, but, beneath the surface, the volatility of individual shares has risen meaningfully over the last two decades. The same goes for liquidity, which may be tighter on quiet days and more likely to disappear on bad ones.

BRITTLE, NOT BROKEN

The first of these mechanical forces, and perhaps the most consequential, is the relentless rise of passive and rules-based investing. Index funds and quantitative funds, often organised as exchange traded funds (ETFs), now account for roughly two-thirds of all US equity fund assets, and their flows have a structural, price-indifferent quality: that is, when a saver’s monthly contribution arrives, the fund must buy the index constituents in their benchmark or model weights regardless of whether those shares are cheap or expensive. The largest companies attract the largest inflows by construction. This pushes their prices higher, which, in turn, increases their index weight – a self-reinforcing loop that has little to do with the underlying economics. Beneath this sits the ETF creation-and-redemption mechanism, where authorised participants arbitrage[3] the price of a fund against the basket of shares it holds. On ordinary days, this quietly keeps ETFs trading in line with their holdings; on volatile days, it forces large, mechanical trades in the underlying constituents in the space of minutes, amplifying moves in the exact shares that are already under pressure.

The vast machinery of high-frequency trading (HFT), the second force, accounts for more than half of daily equity volumes. On a normal day, HFT firms effectively provide the bid-and-offer liquidity that everyone else transacts against. On a bad day, their algorithms withdraw that liquidity in a fraction of a second, widening spreads and thinning order books – precisely when ETF authorised participants are firing large creation or redemption trades through the same shares. The result: what should be a tidy arbitrage becomes a short, violent price cascade.

A third force is the rise of the multi-strategy “pod[4]” funds – Millennium, Citadel, Point72, and their peers – which have reached record AUM in early 2026. These businesses run hundreds of small portfolios under tight risk budgets, with automatic stop-losses[5] that force selling when a position moves against them. The effect at market level is that perfectly good and even high-quality companies can be sold indiscriminately, not because anything has changed in the underlying business, but because a risk limit, somewhere, has been breached.

Finally, layered on top of all this is the fourth force: the explosion of 0DTE options trading, which by 2026 accounts for more than 60% of S&P 500 options volume. These speculative trades have become a major component of retail investor activity in response to aggressive promotion by ‘no fee’ stockbrokers who are, in turn, paid by HFT traders for access to their order flow. To hedge the exposure these option contracts create, market makers are required to buy and sell the underlying shares mechanically throughout the day. The result is a market that looks liquid and efficient on the screen, but which, in the words of one observer, is “brittle” – prone to sudden, unexplained price gaps in either direction.

A GIFT FOR THE PATIENT

For investors with a short time horizon, this alien, machine-driven market structure is an uncomfortable backdrop. Noise feels like information, and it is tempting to mistake movement for meaning. For investors with a long time horizon, it is the opposite. If nine out of every ten trades are unrelated to the intrinsic value of a business, then the market prices reported on any given day carry less information than they used to. The corollary is that the opportunities for well-prepared and patient investors are greater, not fewer.

When a multi-strategy pod is forced to cut a position because a risk model has flashed red, the share it is selling is not suddenly worth less. When a wave of 0DTE option hedging pushes a quality company’s price down 10% in an hour, the cash flows that company will generate over the next decade have not changed at all. These dislocations are not a bug of the modern market; they are a feature, and they are the raw material from which superior long-term returns are built.

Our job, as we see it, is to keep our heads when others are reflexively reacting to the machines. We aim to hold positions in businesses we understand, bought at prices significantly below our assessment of fair value. This discipline enables us to not become sellers when the market becomes brittle and provides the opportunity to obtain exposure to winning businesses when they trade at attractive prices. In a world where the signal-to-noise ratio has thinned to one in ten, the simplest advantages – a willingness to seem out of step for a quarter or two, while retaining a clear view of what a company is actually worth over the long term – have rarely been more valuable.

For added insight into where we currently see opportunities for outsized long-term returns, you can read the portfolio manager commentaries for our Global Equity Select and Global Optimum Growth Funds.

Thank you, as always, for the trust you place in us to manage your long-term capital.

[1] Firms quoting continuous buy and sell prices, acting as the counterparty to everyone else's trades.
[2] Options contracts that expire on the same day they are traded
[3] The practice of profiting from the same thing being priced differently in two places
[4] Multi-strategy hedge funds employing independent trading teams, each under strict automatic risk limits
[5] A pre-set rule that automatically closes a position once it loses a certain amount of money, designed to cap how much can be lost on any single trade.

Insights Disclaimer