Archives of “February 2019” month

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High-frequency trading: when milliseconds mean millions

  
  Education
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Asked to imagine what a Wall Street share-dealing room looks like and the layman will describe a testosterone-fuelled bear pit crammed full of alpha males in brightly coloured jackets, frantically shouting out bid and offer prices.

He couldn’t be more wrong. Technological advances mean that stocks are now traded digitally on computer servers in often anonymous – but heavily guarded – buildings, generally miles away from the historic epicentres of finance, meaning the brash men in sharp suits depicted in films such as the The Wolf of Wall Street have been dethroned as the kings of finance.
Computer programmers have taken their crown thanks to the code they churn out, which is able to execute trades thousands of times faster than any human. (more…)

Money management is like sex

  
  Education
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So how much thought have you given to money management recently? Or are you still too preoccupied by all kinds of indicators or fundamental buy, sell and holds to focus on the subject? Eventually, however, you’ve got to ask yourself the most important question of all, “How much?” right?

Getting a straight answer to that one may be tough. There’s still a lot of confusion about risk or money management from so-called gurus. I recently saw the following comment regarding money management from a “guru”:

[We] use very simple money management: Trade one contract per trading signal in the markets with no pyramiding.

This is NOT money management. When you hear someone describe money management like this trading guru, run don’t walk the other direction as you are about to be conned.

So if money management isn’t some set amount of shares or contracts picked out of thin air, what is it? Money management answers the question of “how much?” At all times, given the risk you are taking, the money you have, and the volatility of the market — you must know the optimal number of shares or contracts to be long or short.

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Training rats to trade markets? Rats "outperformed some of the world’s leading human fund managers.”

  
  Education
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An intriguing book has turned up: Art and Economy, the first volume of a catalogue of projects on the global economy supported by the Landia Foundation and Universität der Künste Berlin.

One project is Michael Marcovici’s Rat Trader. The book describes the training of laboratory rats to trade in foreign exchange and commodity futures markets. Marcovici says the rats “outperformed some of the world’s leading human fund managers.” The rats were trained to press a red or green button to give buy or sell signals, after listening to ticker tape movements represented as sounds. If they called the market right they were fed, if they called it wrong they got a small electric shock. Male and female rats performed equally well. The second generation of rattraders, cross-bred from the best performers in the first generation, appeared to have even better performance, although this is a preliminary result, according to the text. Marcovici’s plan, he writes, is to breed enough of them to set up a hedge fund.

The point the project makes is that trading does not require human interaction. It prompted in my mind as well the question of the circumstances in which the standard assumptions of rational self-interested maximisation apply – whether by humans or rats or any other creatures – and when we should be looking to adopt alternative ‘behavioural’ assumptions.

I also liked Anke Strauß’s The Mechanic and the Machinic: Thoughts on Economic Systems. The essay argues that machine-metaphors for the economic system – “calculable, controllable and manipulable” – are sterile. “Mechanics always need an outside stimulus, some kind of energy.” Worse, “We are the weakest link in a world that has a mechanical way of thinking.” Schumpeter is the hero of economics in this essay.

I’ve not finished reading yet but it’s a very intriguing catalogue.

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