one view on the important stuff
There seem to be two kinds of economists in today’s world.
Keynesians and Austrians? Freshwater and saltwater? Macros and micros? Voodoos and uh well-adjusted?
No. These may be valid distinctions ordinarily, but in today’s debate on how to solve the great self-inflicted wound known as the credit crisis the only two that matter are those who’ve worked for prop trading outfits (or perhaps more broadly, those who would someday like to once their time of public service is up) and those who just practice economics, typically academically.
Among the former, the solution is uniformly, as Mish so memorably put it, “to patch the busted dam with water” and to do it now or the consequences could be incomprehensibly bad.
Among the latter, the views are many and divergent, but they at least agree that throwing trillions of dollars about is a serious bit of work and should be undertaken with deliberation, transparency and a long view.
I’m not qualified to opine on which type of economist has a better chance of saving us from ourselves. But I can observe that the only kind sitting at the decision-making side of our president, pre- or post- January 20th 2009, is the prop trader.
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One of my favorite tools for strategy development is the distribution of returns a strategy will generate. As I’ve discussed before (and here and here), it’s an easily quantifiable characterization of a strategy’s “underlying nature” and can be used to engineer strategies that fit appropriate markets.
Given the enduring value of return distributions, I found this morning’s post in ft.com/alphaville especially interesting. They cite a Dresdner study examining the distribution of returns for Goldman Sachs’ prop trading in 2003 and 2008. Eye opening stuff.
normal
not so much
As I’ve written before, I’m not a particularly big fan of technical analysis or any of the many and varied charting techniques people espouse. That said, we are working with a proprietary futures trading company and some of the successful (non-algo) trading that they do involves point-and-figure charts. Although a trading algorithm doesn’t care about graphical representations, I wasn’t familiar with the technique and decided that the best way to understand it was to try to implement it, which is how I spent my Saturday evening …
The above applet re-uses the one I’d written previously in discussing simple stochastic processes. This time, it illustrates a point & figure chart below the regular line chart. Point & figure charts expose two characteristics: a “box size” (in ticks) and a “reversal” (in boxes). The applet allows you to vary both and then generate a day’s worth of random/synthetic data to view it. One of the nice features of JFreeChart is that you can easily “zoom” into a chart by dragging within the chart. I’ve disabled this in the line chart but you can try it in the p&f chart. (Note: you should right-click and “Auto-Range-Both Axes” before you generate new data or you’ll stay in the zoomed segment of the chart.)
Now that I think I understand the basics of point & figure charting, it will be interesting to see what an algo might do with it…
"We've run out of Federal Firearm Licenses"
Yesterday I read this article in the New Yorker: The New Paranoia: Hedge-Funders Are Bullish on Gold, Guns, and Inflatable Lifeboats.
In his book Wealth, War, published last year, former Morgan Stanley chief global strategist Barton Biggs advised people to prepare for the possibility of a total breakdown of civil society. A senior analyst whose reports are read at hedge funds all over the city wrote just before Christmas that some of his clients are “so bearish they’ve purchased firearms and safes and are stocking their pantries with soups and canned foods.”
It reminded me of my experience on 9/11 and my thought that a really handy item for the paranoid Manhattanite in uncertain times might be a conveniently inflatable raft.
Yes, I was a little warped by the experience. Evidently I’m not the only one, though…
These guys would prefer to be in a high-speed boat or ex-military vehicle, heading off toward their fully provisioned compounds in pursuit of the ultimate goal: to win the chaos.
Then today I came across the above notification from the ATF indicating that we’ve literally run out of firearms licenses. I guess the optimistic interpretation is that there’s “always a bull market somewhere…”
I was gambling in Havana
I took a little risk
Send lawyers, guns and money
Dad, get me out of this
- Warren Zevon
This is *not* Hank Paulson's Piggy bank...
I came across this Bloomberg story on the state of Hank Paulson’s piggy bank. As a dutiful steward of our Nation’s interests, he was forced to place his fortune into a blind trust upon accepting his current position as Treasury Secretary. Now he gets to find out what happened to his money. Always a charmer, he jokes about it:
“I’ve got to find out where my money has been invested,” Paulson, 62, said today after a speech, drawing laughter from the Washington Economic Club.
“You know the old joke about how you make a small fortune? And that is, give a large fortune to a person in a blind trust,” he said today. “I haven’t even thought about how I’m going to be investing my money.”
Ah what fun. Of course, given the impact of his visionary stewardship on most Americans’ portfolios, it’s easy to imagine that many will have forgotten that he likely only accepted his position of unfailing public service for the >$100M tax loophole it afforded him.
Before taking the Treasury job, Paulson sold his Goldman Sachs shares and wasn’t required to pay capital gains taxes, according to a June 2006 divestiture notice about a stake that was valued at the time at about $485 million.
In this day and age, no self-respecting citizen so much as blinks at a mere ~$170M looting of the nation’s coffers. But it does raise the question: which is more ironically piquant? Our ring-side seats for the hollowing out of the American Republic or our knowledge that we paid through the nose for the privilege?
One Big Table (and chair)
Last time I described the trajectory of my research into using hdf5 for large amounts of tick data. This time I describe the basic design of the prototype I implemented and some of its performance characteristics.
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One of the nicest things about the holiday season (Happy New Year, btw) is that it provides a lovely opportunity to spend some quality time with a project that’s a bit more exploratory than might be meaningfully undertaken while trading in lively markets.
A number of months ago, I mentioned using HDF5 to manage tick data as RDBMSes just aren’t up to the task and specialized Tick DBs are absurdly expensive. While I’d spent some time exploring this idea through the fall, I never had a discrete chunk of time to really explore the technology beyond determing that its Java interfaces weren’t production-worthy. This meant that we’d have to drop into C to access the functionality we’re interested in and that we’d have to come up with our own bridge out into Java for access by StratBox while StratCloud could access it directly.
Below, I describe what I’ve learned through my holiday geek-spelunking-trek including some timings on various configurable characteristics of HDF5 (e.g., compression and “chunking”).
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Back when Microsoft was considered a very smart company, they inspired the phrase “eating one’s own dog food“. This meant that they used their own products and was understood to be a superlative practice.
As a small algorithmic trading shop, we certainly eat our own dog food. As we develop StratBox, we continuously trade on it. If we introduce bugs, we pay for them – quite literally and immediately. Believe me, we are highly motivated to ensure that it’s a bug-free environment. Likewise with our models. If we think a model is worthwhile, we trade it. If we’re not sure, we trade it in small size to see. We eat our own dog food – trading and software models alike.
One of the great attractions of wall st has always been its “eat what you kill” mentality which suggests potential for both great reward and, well, hunger. Motivation is clear. Interests are properly aligned.
Thus, the news we’ve been bombarded with out of wall st has been depressing indeed for finance professionals. The culture we admire about our industry has been perverted. After months of solidly horrible and generally worsening news, Credit Suisse’s bold move yesterday was a real ray of light. Their move to “feed” their top management the slop they’ve been creating is a sadly unique example of a finance firm ensuring that interests are ethically aligned.
And it’s the first genuinely good piece of news out of wall st that I can remember in a very long time. Happy Holidays, Credit Suisse!
I’m delighted that Scott Johnston once again allows me to share one of his excellent monthly newsletters. Scott’s an experienced hedge fund exec who’s currently a PM and principal at the Belstar Group, an asset allocator and fund-of-funds. Contact him at sjohnston {AT} belstargroup [DOT] com.
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Dear Partners and Friends,
The Madoff scandal has so many facets, it is difficult to know where to start. The sheer size of it is mind boggling. Many thought that the initial $50 billion number, which came from Madoff himself, was likely an exaggeration, but as of this writing, it may not be. I think back to Ivan Boesky, the singular scammer of the 1980s. I think he managed a few hundred million
Is this a hedge fund scandal? I think you’d have to say that it is, despite the fact that Madoff did not, himself, run a hedge fund. He accepted brokerage accounts, which he then managed through his own brokerage firm. But many formed de facto hedge funds around Madoff for the sole purpose of feeding money to him.
Scammers will always be with us. It should not be shocking to anyone that there are those willing to lie and cheat to make money. Bernie Madoff is simply the latest of a long line of con men: Charles Ponzi, Bernard Cornfeld, Ivan Boesky, Sam Israel, Dana Giachetto, Raffaello Follieri (Anne Hathaway’s boyfriend)…it’s a long list.
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With all due respect to the auto industry and the worthies in washington, the big news this morning is about Bernard Madoff. Although it’s been very well covered by the always insightful and acerbic Cassandra as well as a variety of more traditional news outlets, this bit of news has a particular personal irony for me.
I had visited the offices of Madoff back in May. Situated in the striking “Lipstick” building, his multi-level offices were really gorgeous and impressive. His trading floor was large, modern and immaculate. You could trade there, perform open-heart surgery, make sushi or fab chips. Immaculate.
I was there as I had a trading strategy that I wanted to capitalize and I was hoping some sort of a deal might be worked out. Although they were extremely nice and gave me a fair hearing and asked good and detailed questions on the model, they ultimately declined the opportunity and sent me on my way. Nonetheless, I came away impressed by them and their remarkable money-generating enterprise.
Under-capitalized but game, the strategy I’d pitched them has made us over 200% since that May meeting.
You only find out who is swimming naked when the tide goes out. – Warren Buffett
