Richard Brennan

SI402: Why Markets Can’t Stop Trending ft. Richard Brennan

- Complex adaptive systems framework — Markets operate as flocks (murmuration of starlings), not clocks. Participants follow local rules with partial information; emergent behavior (trends, cascades) arises from interactions, not central direction or external news alone. - The endogenous engine and reflexivity — Most price movement is driven by the system processing itself, not external information. Price-sensitive participants respond to price, altering conditions for the next participant; the recursive loop sustains trends far beyond initial catalysts. - Passive investing's structural impact — As passive capital grows (now ~60% of US equity fund assets), it reduces the population of price-sensitive, value-based agents who provide balancing feedback. Passive amplifies the reinforcing side (momentum, forced flows) while thinning resistance. - Feedback architecture and inelasticity — Markets contain reinforcing feedback (momentum, volatility targeting, index inclusion) and balancing feedback (value investors, market makers, counter-trend traders). Passive dilutes balancing agents, making markets structurally inelastic: roughly $1 of net flow moves prices by a multiplier of 3–7×, creating larger moves per unit of capital. - Phase transition at 25% threshold — Agent-based modeling shows markets shift from equilibrium-like behavior (Gaussian, no memory) to real-market behavior (fat tails, memory, clustering) when price-sensitive reinforcing agents reach just 20–25% of the population. This fingerprint persists across 68 futures markets, eight asset classes, 40+ years. - Global coupling of markets — The world's futures markets are not independent; they share a persistent feedback signature because systematic investors deploy correlated models across asset classes. Cross-market coupling has averaged 0.6 (vs. 0.55 for independence) across 40 years, with no year falling to the independence baseline.