Posts filed under “Quantitative”

Flash Trading’s Dark Volumes

Be sure to read the July Trader Magazine’s article on algorthmic flash trading, a/k/a front running:

Flash orders are also called “step up” or “pre-routing display” orders. The rationale for these order types is simple: Better me than you. They allow a venue to execute marketable orders in-house when that market is not at the national best bid or offer, instead of routing those orders to rival markets. They do this by briefly displaying information about the order to the venue’s participants and soliciting NBBO-priced responses. If there are no responses, the order can be canceled or routed to the market with the best price.

All four markets with flash orders treat these orders in a similar way. If they get a marketable buy order, for instance, that would otherwise be routed to a market quoting at the NBBO, they flash the order to some or all of their participants as a bid at the same price as the national best offer. Exactly who sees the flash, how that information is conveyed and the duration of the flash vary by market. The maximum allowable time for a flash is 500 milliseconds, or half a second, although most of the markets flash routable orders for under 30 milliseconds.

The details are worth a few minutes of your time.

Hat tip Bill King


Flash PointEquities industry clashes over flash and step-up orders
Nina Mehta
Traders Magazine, July 2009

Category: Quantitative, Trading

Stealing Secrets from Goldman Sachs

Former Goldman Programmer Sergey Aleynikov Arrested for Theft Charges on July 3rd

Bloomberg News 4:14

Category: Legal, Quantitative, Trading, Video

Is Goldman Stealing $100 Million per Trading Day?

Here’s something to give the conspiracy buffs a total breakdown: Combine these stories from Bloomberg, Daily Kos, and Zero Hedge, and you can reach a rather unsavory conclusion: •  Goldman Sachs’s $100 Million Trading Days Hit Record • FBI Arrest Opens Goldman-Sachs’ Pandora’s Box • Intraday Observations • “Incredibly Shrinking Liquidity” as Goldman Flushed Quant…Read More

Category: Legal, Quantitative, Trading

Fusion 3.0

I am very jazzed about this: Earlier this week, we unveiled version 3.0 of the FusionIQ quantitative software, and there are a number of new features, upgrades to the software and improvements to the analytics. > Heatmaps > Advanced Technical Charting > Ticker Cloud Overall changes: 1. You can apply IQ rankings to Sectors, Groups…Read More

Category: Quantitative, Trading

A look at LTCM from an Insider

Eric Rosenfeld Analysis of LTCM at MIT




Category: Bailouts, Quantitative, Video

QOTD: Statisticians are the New Sex Symbols

“I keep saying the sexy job in the next ten years will be statisticians. People think I’m joking, but who would’ve guessed that computer engineers would’ve been the sexy job of the 1990s?” -Hal Varian, The McKinsey Quarterly, January 2009 > Well, not quite sex symbols. But as Google’s chief economist (and former NYT columnist)…Read More

Category: Markets, Mathematics, Quantitative

Trading With the Big Boys

Trading With the Big Boys
January 30, 2009
By John Mauldin

This week we are going to do something a little different. I am in Bermuda taking a little weekend R&R after a speech, as well as working on my book. There is not the time for the usual letter this week, but I have asked Barry Ritholtz to write about his new trading program, FusionIQ, for reasons I will talk about below.

But first, and quickly, if you are planning on attending my Strategic Investment Conference this April 2-4 you need to act soon. You can get more details at the end of the letter. And the first of the “Conversations with John Mauldin” is up. We recorded it this week, with Ed Easterling and Dr. Lacy Hunt. I thought it went very well for an inaugural talk. The transcript is there already. For those who have subscribed, you should have received an email and be able to log in and listen or read the transcript. And I welcome feedback as we launch this new service. And I want to thank Tiffani, Ryan, and Anne in my office, who have worked long hours getting this ready. There is a lot of back-room work that has to be done to make something like this available, and I am happy to have their support.

Warning: This e-letter is about a new trading platform that I think is interesting. While not trying to be promotional, it will offer you a product at the end. As I write below, there is reason to think about what tools other are using when you are trading against them; but for those of you who are looking for economic analysis, skip this and wait till next week, when I am back in the office. For the rest of us, let’s jump right in.

Trading With the Big Boys

Tough market!

That’s something I hear in the office every day — from professional traders, money managers, and hedge funds. These markets have been brutal, and the competition has been relentless.

For the individual investor, it is important to understand who your opponents are on the field of battle. Sports and war metaphors abound, because they are consistent with what you are going up against each day. In addition to always battling Mr. Market, as tough an opponent as there is, your rivals are also anyone else buying or selling stocks. They, too, are looking for ways to produce positive returns.

Consider what Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:

“Watch a pro football game, and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, ‘I don’t want to play against those guys!’

Well, 90% of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”

That’s a brutal and very honest observation. The institutions Ellis refers to are mutual funds, hedge funds, and program traders — and all of their professional staff, mathematicians, and researchers. The pros are deploying every possible tool to give them whatever edge they can get. And even they can have a hard time, as most of them will testify to the difficulty of trading in 2008.

Despite this daunting opposition, many individuals unhesitatingly step onto the playing field with the pros. To carry the sports metaphor further, they end up receiving season-ending injuries to their investment and retirement accounts.

My “day job” is finding money managers for clients. It is fair to say I have looked at many hundreds of managers and funds over the last 20 years. I have also talked with countless people who want to break into the investment management business. I must admit I am not always the most encouraging, as my experience says it is a tough world. But there are those who do indeed make it. Some very successful traders are small shops, while others grow into large management businesses.

But they do have one thing in common. They have an edge. Somewhere, somehow, they have developed an edge which gives them the ability to eke out profits, whether from trading stocks or commodities or currencies.

That’s why it is so important to be prepared — mentally, physically, and with the right equipment. It’s not just guns and ammo, but intel and recon tools as well. The explosion of cheap PC power and web-based market data may have given everyone similar technology, but it did not grant them an equal ability to use them. Just as picking up a 5 iron doesn’t make you Tiger Woods, sitting in front of a PC doesn’t make you Jim Simons (Renaissance Technologies). There is a huge difference between accessing data and the knowledge of how to use it.

I have asked Barry Ritholtz (you may know him through his blog The Big Picture and appearances on CNBC) to write today about his new trading and statistical platform, FusionIQ. Barry is a successful, no-nonsense, take-no-prisoners type of trader. His rather blunt manner that you see on TV is what you get in real life. We have become good friends. I have watched him develop this software for the last few years, and I like it, as it marries fundamental and technical analysis. This is what Barron’s had to say about the software:

FUSIONIQ’S MODELS blend fundamental and technical metrics to determine the strength of some 8,000 publicly traded equities. They identify the most tradable issues and sectors with the lowest component of risk.

FusionIQ also finds issues with unusual short-term strength or weakness, issuing Buy and Sell signals accordingly. In general, FusionIQ recommends subscribers hold a rolling portfolio of 15 to 20 issues for the intermediate term.

“Beyond that, it identifies trading opportunities. FusionIQ models pinpoint highly ranked issues whose prices suddenly gap up 5% or more on high volume (and other conditions). They also issue alerts when analysts with good track records offer earnings forecasts outside peer estimates, and when short squeezes are in the offing — that is, when a highly shorted issue exhibits enough relative strength to force short sellers to cover their positions and boost the price further.”

There are three reasons I am bringing this to your attention today. First, there are tens of thousands of investment professionals out there who have lost their jobs in recent months. I was told last month that the number of people sitting for the CFA exams is the highest on record. The explosion of young people coming out of school looking for a job in the financial world is at an all-time high. I get calls and letters from them all the time asking for advice.

I feel somewhat uncomfortable with myself when asked what to do. I know the odds, as the financial world is down-sizing, and there are some really capable and experienced people on the street today. There are just going to be fewer jobs. That is the reality. But I also know that if you can make it, it can be a very rewarding and fascinating career, with some of the most exciting and switched-on people anywhere. I am literally having more fun than I ever have. And telling someone not to chase his dream? I don’t want to do that, but I do want to be honest.

So, if you want to be a trader, listen up to what Barry is talking about, and know that you are dealing with people who AT A MINIMUM are armed with technology like this. I have been on some of the largest trading floors in the world. The tech at their disposal, the data they can call up, the research they can marshal, is impressive. Barry and his partners have spent literally millions. The big trading houses have spent tens of millions. It is not as easy as those commercials on TV make it sound. These pros spend hours learning their systems in front of a screen.

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Category: BP Cafe, Markets, Quantitative, Technical Analysis, Trading

BAC on Repeated Sell Signals

This morning Bank of America hit a new 52 week low, and traded at its lowest level since 1991. Fusion IQ’s Timing Signals put a new sell on BAC after the close on Tuesday. Since it is also such a low rank in Fusion IQ we would have not suggested be long for a while,…Read More

Category: Credit, Markets, Quantitative, Trading

Technical Market Signal Statistical Review

> > One of the things we like to do with Fusion IQ is review the full universe of stock scores and the new Buy & Sell ratings. From time to time we can glean information from our overall statistics to get a handle on what is going on under the surface of the market….Read More

Category: Markets, Mathematics, Quantitative, Technical Analysis, Trading

Risk Mismanagement & VaR

Terrific l o n g article in the Sunday Times Magazine by Joe Nocera, titled Risk Mismanagement. Its all about how Wall Street developed and still uses VaR — Value at Risk.

The application of VaR remains hotly debated today. Did it contribute to the credit crisis — or was it ignored/misapplied/distorted, and THATS what was a key factor.


Risk managers use VaR to quantify their firm’s risk positions to their board. In the late 1990s, as the use of derivatives was exploding, the Securities and Exchange Commission ruled that firms had to include a quantitative disclosure of market risks in their financial statements for the convenience of investors, and VaR became the main tool for doing so. Around the same time, an important international rule-making body, the Basel Committee on Banking Supervision, went even further to validate VaR by saying that firms and banks could rely on their own internal VaR calculations to set their capital requirements. So long as their VaR was reasonably low, the amount of money they had to set aside to cover risks that might go bad could also be low.

Given the calamity that has since occurred, there has been a great deal of talk, even in quant circles, that this widespread institutional reliance on VaR was a terrible mistake. At the very least, the risks that VaR measured did not include the biggest risk of all: the possibility of a financial meltdown. “Risk modeling didn’t help as much as it should have,” says Aaron Brown, a former risk manager at Morgan Stanley who now works at AQR, a big quant-oriented hedge fund. A risk consultant named Marc Groz says, “VaR is a very limited tool.” David Einhorn, who founded Greenlight Capital, a prominent hedge fund, wrote not long ago that VaR was “relatively useless as a risk-management tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. This is like an air bag that works all the time, except when you have a car accident.” Nassim Nicholas Taleb, the best-selling author of “The Black Swan,” has crusaded against VaR for more than a decade. He calls it, flatly, “a fraud.” . . .

What will cause you to lose billions instead of millions? Something rare, something you’ve never considered a possibility. Taleb calls these events “fat tails” or “black swans,” and he is convinced that they take place far more frequently than most human beings are willing to contemplate. Groz has his own way of illustrating the problem: he showed me a slide he made of a curve with the letters “T.B.D.” at the extreme ends of the curve. I thought the letters stood for “To Be Determined,” but that wasn’t what Groz meant. “T.B.D. stands for ‘There Be Dragons,’ ” he told me.

Best line in the article: “When Wall Street stopped looking for dragons, nothing was going to save it.”

I particularly loved the graphics and illustrations that were part of it:

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Category: Credit, Data Analysis, Derivatives, Markets, Mathematics, Quantitative, Really, really bad calls