Evidently our transition to state-managed capital markets was completed last night. These worthies will now decide who the winners and losers will be. JPM seems to have done pretty swell. Lehman not so much. I guess Fuld wasn’t in with the Goldman crowd that’s running the show. Tant pis.
While the impact this will have on our children is beyond the scope of this blog (we could give them conciliatory t-shirts: “My parents pissed away my future and all I got was this lousy t-shirt”), the impact on our markets remains to be seen but is of great interest to the algorithmic trader.
From a regulatory perspective, sufficiently large traders need to be ready to explain why they shorted particular names. I can just imagine that interview for a quant manager, blinking at the SEC official and stammering something about how “my computer told me to…” But this probably won’t be an issue for most.
In the short term, we still can’t short nearly a quarter of the markets biggest names for a bit longer. And what the markets will look like when this cloddish bit of seat-of-the-pants regulation expires, should be some kind of bonanza for sellers of vol. Though they’d have to be pretty brave to wade into this environment in size as our new market managers might pull another 2am rabbit out of their hats…
On the market-microstructure front, the unseemly asymmetry of the up-tick rule will likely be reinstated to our equity markets causing all sorts of difficulties for strategies which had been relatively recently modified or introduced to adapt to the removal of that arbitrary imposition of asymmetry to our equity markets.
Lots of uncertainty. What’s certain is that the rules are changing and strategies we may have deployed profitably for some time must now be viewed, like the markets on which they operate themselves, with a newly critical eye.
A friend of mine sent me this chart and it reminded me of those spot the difference games. I guess we’re all commercial bankers now…
Somewhat more poignantly, it also reminded me of this great article in the NYT a few years ago which cited a couple of studies (one specific to careers in IB) suggesting that one of the strongest determinants of the pecuniary success of a career is the state of the economy when you graduate. Graduating in a recession is bad timing indeed and the effects are measurable over the long term. If you are clutching a sparkling new MBA (and its attendant debt!) we can only hope that you were greatly enriched by the experience…
The Greeks had it right: even mighty Zeus need fear the capricious Fates!
I went to assemble my day’s market-neutral portfolio this morning – including, of course, its fair share of shorts – when I came across this fun bit of news:
“The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,”
SEC Chairman Christopher Cox said in a press release. (I got this from Forbes, but it’s everywhere…)
Pretty rich stuff. Talk about manipulating markets.
As a small business owner, I love seeing the taxpayer-financed backstop our financials are getting… Where’s mine?
A friend recently asked me what I considered to be the “axioms” of alpha-seeking trading strategies. I think there are a few, but probably the one that seems to me most important is that the atomic element of a trading strategy should always be a portfolio as opposed to a single instrument.
In a scenario of perfect knowledge, this wouldn’t be true. If you somehow *know* with certainty that crude will go up or that Citigroup will go down, then concentrating all of your resources into a position based on that belief might be reasonable. But knowledge seldom comes in such a neat package (and will frequently be illegal to act upon when it does!).
Instead, knowledge will typically come in more conditional and less certain forms: “commodities tend to rise during periods of FUD [Fear-Uncertainty-Doubt]” or “companies who announce stadium naming rights deals tend to under-perform.” In some cases, perhaps the knowledge on which you’ll base your strategy can be quantified probabilistically.
Depending on the nature and quality of the knowledge or hypothesis that forms the basis for a given strategy, one can adapt one’s portfolio construction/optimization based on customized relationships amongst the potential portfolio constituents. But one doesn’t need to be so fancy to see the concrete benefits of our first axiom. Below I detail a simple strategy I’ve put together to explore the forces involved.