Spending a few days with traders can be an eye opening experience. I just wanted to distill a few more things I picked up in the halls and presentations of the TradeTech conference.
How is this market trading? - Short Version
Well it depends on who you ask. Informally I asked quite a few head traders from both the traditional buy side (think big mutual & pension funds) and the alternative side (hedge funds) for their answers. A common refrain; the biggest problem facing mutual funds is the fact that they need to be in invested in the market. Staying in large cash balances is a no-no for any long period of time, given the terms of a fund's prospectus. Add to that the increased volatility and you have a recipe for difficult day to day trading mechanics for the folks in the trenches trying to execute a PMs strategy. So staying in cash is not an option and trading other products may be out of the question. For the hedge fund traders, strategies may shift in order to take advantage of events or volatility. As one trader mentioned to me they were seeing "more of the market as trading with high frequency strategies" Think of this as machine automated tick by tick trading. The Institutional version of day trading. Bottom line - continued craziness.
David Leinweber's Presentation
David gave a talk on the Great Financial Mess or '08. He had some great slides and insights. My favorite part was this Time Magazine Cover from 1994
Time magazine was about 15 years ahead of it's time in reference to the current blow up based on sophisticated products whose pricing and value were difficult to ascertain. These instruments which were mostly confined to the debt side is what killed us. According to David, playing to an equities crowd, "you guys didn't do it this time ... it was those guys on the other floors in your building" He also pointed to the Wired article by Portfolio's Felix Salmon on David X. Li's Gaussian copula function in Recipe for Disaster: The Formula That Killed Wall Street
David is also about to release a new book on the space. Here are the details from Amazon and the link
Nerds on Wall Street tells the tale of the ongoing technological transformation of the world's financial markets. The impact of technology on investing is profound, and author David Leinweber provides readers with an overview of where we were just a few short years ago, and where we are going. Being a successful investor today and tomorrow--individual or institutional--involves more than stock picking, asset allocation, or market timing: it involves technology. And Leinweber helps readers go beyond the numbers to see exactly how this technology has become more responsible for managing modern markets. In essence, the financial game has changed and will continue to change due entirely to technology. The new "players," human or otherwise, offer investors opportunities and dangers. With this intriguing and entertaining book, Leinweber shows where technology on Wall Street has been, what it has meant, and how it will impact the markets of tomorrow.
David Leinweber, PhD (Pasadena, CA), is Haas Fellow in Finance at the Haas School of Business at UC Berkeley, and founder of the Center for Innovative Financial Technology at Haas. He is the founder of two pioneering financial technology firms and has consulted, published, and lectured widely on the use of advanced technology, artificial intelligence, and intelligence amplification in finance.
David is a buddy and he has spoken at Dow events in the past [future]. I didn't get a chance to give him a back of the book blurb -- but here is my shot.
"Dave does us a courtesy by stripping off the varnish of trading with heavy technology. He makes, normally, out of reach topics easy, without skipping around the details. If you want to understand where we've been and where we're going with machine trading on Wall Street, this is the book."
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