Imagine

The days between Christmas and the impending new year seem like days in limbo. The current year is withering away by the hour too quickly to amount to anything, whilst the new year is still somewhat of an intangible mirage. Whilst these days might be occupied by the tail end of left overs and frenzied shopping, they seem made for contemplation.

Whilst I might be advocating the idea of idle contemplation, I have to say I fail abysmally at this. My fingers must always be continually typing, my eyes reading something written on a page, my ears continually listening. Even now, the clock has swept past midnight, and my brain is whirring in and out of Twitter, like a child trying to avert sleep. Indeed, Twitter is perhaps the most indefatigable enemy of deep contemplation, a persistent stream of consciousness interlaced between your own thoughts. Contemplation by definition, is the absence of all these things I mention, simply the time to think, unhindered by distractions and pauses. It takes effort to think and to think only. Imagine.

Invariably, thoughts spring forth concerning the year that has passed, and plans form for the year which follows. It is of course somewhat of an artificial edifice, the turn of the year. Indeed, there are other forms of year. The tax year in the UK starts in April, whilst in Japan, April also has a symbolic meaning as the beginning of a year. Whether or not it is an artificial creation, the ending of one year into the next, nevertheless provides an ideal way to break up the various phases of our life.

So what should the next year hold, given I have advocated that this is an ideal time to ask this question? Ignoring markets for once and thinking more abstractly, what will you do next year? These two questions are subtly different. What will happen, influences what we do and how we are impacted by events. We cannot control everything in our path, but it is our choice, which path we lead.

We can sit idly by, allowing events to subsume us or we can do act in a decisive manner. A trader sitting in the market, with positions which are at odds with the price action can berate the market for being wrong. That trader might well end up being right, but at that moment in time the market is right. Moaning is of course simpler than taking a step back and understanding events.

Let this be the time for contemplation for the following year and a time to reflect on the past year. A mistake is the worst sort of mistake, if we are intent on repeating it. Whether or not next year proves to be your year, a modicum of contemplation might just help. I have no idea what 2015 will bring. However, that won't stop me from doing that one thing humans do best, thinking. So whilst the fireworks shower the skies, the year advances by one, the sound of Auld Lang Syne whispers to me, I'll be contemplating for what lies ahead, whatever it might be. Imagine.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you!

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Consensus-ing agreement in FX markets in 2015

Why is Manhattan real estate so expensive? The simplest explanation is that a lot of people want to live there. There seems to be a consensus that Manhattan is a great place to live. At the same time, supply is relatively constrained. Yes, developers are continually building higher, providing more apartments, but many of these are to the upper end of the market.

Despite being such a desirable place to live, it might not be the right place for everyone. Perversely, the fact that it is so sought after and hence relatively crowded, results in a scarcity of certain amenities that we can find elsewhere. Want a garden? Central Park is likely the closest thing you'll get. Want a house? You'll likely have to share it. Want some quiet? Again, try Central Park and not the streets heaving with traffic, punctuated by the sound of car horns.

Depending on your viewpoint, these compromises are either too much to make, or for someone like me who has lived in a city for twenty years, entirely reasonable. We could also argue that the fact that Manhattan is crowded, is the reason people want to live there, and which makes it so lively. So often the word crowded has negative connotations, that the benefits seem to be forgotten. Whilst real estate is an asset class, when it comes to your own house or apartment, a primary concern is to live in it (whilst hopefully benefiting from rising house prices). When it comes to financial markets more broadly and investing, the idea of consensus and a crowded market can be more nuanced.

If we think of the market today, particularly in FX, the consensus for market moves is deafening. Despite reading numerous bank views in the media, talking to many contacts in the industry, scanning Bloomberg and Twitter on a repeated basis, it's been incredibly difficult to find anyone who is bearish USD in 2015 (think I only managed to count one so far). The consensus is overwhelmingly bullish USD, and this is made even clearer by the forecasts from the various sell side banks available on Bloomberg, which as a group see EUR/USD lower and USD/JPY higher. I also agree with them, although I think we're closer to the end of this USD bullish move than the beginning.

After all the rationale behind the view is fairly simple: the Fed likely to hike, the ECB likely to embark on full blown QE and the BoJ engaged in QEn (where n might end up being a large number, if I'm being really facetious). If you'd like to read my fuller thoughts on 2015 please download my latest Thalesians quant paper (free to download given it's Christmas!)

Does this necessarily mean that USD will actually strengthen? Of course, if we look into the past, the market has been bearish EUR/USD for a while. In 2014, the consensus view finally worked. For over a year before it evenutally fell, EUR/USD seemed to be driven more by peripheral spreads tightening following Draghi's promise to do "whatever it takes", rather than more traditional drivers such as monetary policy expectations. As a result EUR/USD had remained stubbornly bid. Even though in 2014, forecasters saw the move in EUR/USD, they failed to see the move lower in UST 10Y yields, I suppose you can't have it all!

So should I be afraid of being with the consensus? Furthermore, will the fact that the consensus is so strong for a bullish USD view cause a crowding of positions and a potential for painful unwinds? I have no easy answers, only to say that these are questions every investor should be asking. All I would say, is being on the side of consensus is always "safer". Even if you get it wrong, many others will be in the same group. If you are against consensus, it is far more difficult to rationalise a loss to your boss! Also, we could argue that simply fighting the consensus and the broader market narrative, simply for the sake of it is questionable. (Of course, if we think the market narrative might change and use that as a reason for going against the consensus that is an entirely different matter!)

Best of luck for 2015. Whilst luck is key for trading, it cannot be bought by skill!

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of consensus in markets (mixed in with a bit of ancient history). You can order the book on Amazon. Also read my thoughts in 2015, in my Thalesians quant note here (given it's Christmas, I'm giving it out for free!)

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Tip of the ice-burger

Minetta Tavern. New York. Black Label Burger. Everything about this burger suggests it has a certain quality lacking from most other burgers. The meat is tender, from a sirloin steak, without any of the unpleasant stringiness that might afflict other burgers. It appears that many people agree, judging by the difficult in finding a table here. Yet, at $28, perhaps this burger defies the whole logic of a burger: a relatively inexpensive meal, which is also thoroughly satisfying. With such a high price, any diner is expecting something thoroughly phenomenal, but still, $28 for any burger seems to be expensive.

If we instead focus on price, we might be cajoled into having a Whopper from Burger King. Whilst, it will satisfy my hunger, the meat is of somewhat lesser quality than the black label burger. Then, we need to address the controversial issue of "accessorising" a burger. For some the notion of lettuce and tomato, sullies the whole experience (well, you never make friends with salad?), whilst for me, it breaks up the richness of the beef patty. We haven't even begun to mention the types of cheese or how onions in a burger should be prepared. It also depends on what type of mood you are in. At times, I might be in a MeatLiqor mood, a fashionable burger joint in London. The burgers are fantastic, but the music always seems to loud, and the decor is perhaps not quite what I would term as decorous. Maybe burger sliders are the answer, mini tapas style burgers, offering diners the possibility of sampling several different flavours on a single plate?

At other times, I might eschew the greasiness of beef burger, in favour of a chicken burger (I know this might seem shocking). If there is one thing I find tough to cut out of my diet, it is the humble burger. I tried for one week, and it simply made my fondness for them increase. Or could the chain burger of places by Shake Shack be sufficient to satisfy most diners?

It brings us to the question, which I am asked regularly by friends, who are aware of my love of burgers. What is the best burger? This is a question which I confess has no real answer. Trying to use Google gives approximately 43 million responses. I like burgers, but perhaps not quite enough to sample 43 million burgers, to answer this question. Furthermore, my answer is unlikely to be as other judges. There are also so many degrees of freedom in this question. Does it refer to classic burgers or cheeseburgers etc?

So how do we solve this problem? You could argue it is a somewhat trivial problem and not worth answering (unless you are a burger aficionado, a self confessed burgermeister!). However, it does illustrate a problem which faces everyone, whether in markets or in any form of decision making. We have to make decisions in absence of imperfect information. Markets in particular produce too much information to deal with. The notion that traders can adequately absorb every single piece of relevant news article, whilst somehow dispensing with all the "noise" seems optimistic. Yet, despite this, traders still need to make their best judgement when it comes to putting on positions. For quants, creating systematic trading models, they might have the ability to process more information and use advanced techniques such as news processing. Even in this case, there is a limit to how much information they can aggregate. It is also often the case, that simplicity underpins the best trading strategies. Excessive complexity can often render a trading strategy less robust when it comes to running it out-of-sample.

The best we can do is to find a solution. It might not be optimal, but might be good enough for our purposes. Spend too much time deciding which burger to eat, and you might become hungry. In the meantime, I might start writing a bit more about burgers (and probably eating a bit less of them). If you're interested in reading more about burgers let me know (or if indeed you don't!)

Feeling hungry after reading this? If you are in London this Wednesday evening (10th Dec), come to our Thalesians Christmas dinner, a 3 course meal at La Tasca, a tapas restaurant in Canary Wharf. The dinner will be preceded by a talk on Deedle, a time series library for .NET. Get dinner tickets and details here - a great way to celebrate Christmas and be part of the Thalesians community.

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What's the best way to trade?

Boston is to America what Cambridge and Oxford are to Britain. Indeed, the neighbouring town to Boston, Cambridge is named after its English predecessor and has within it both Harvard and MIT. Boston also served as one of the hot beds of the American revolution, being the home of the Boston Tea Party. However, I must confess that my knowledge of American history, is somewhat sketchy, although I'm endeavouring to improve. Indeed, if you have any suggestions on history books to read about America, I would love to hear from you!

Walking along the streets of Boston, it seems easier to become immersed in history than perhaps in other large American cities. Whilst skyscrapers occasionally dot the landscape in Boston, there are regular reminders of the past, such as the historic houses of Beacon Hill or Quincy Market, which today is thronged by tourists eager for lobster roll.

I took many photos on my recent visit to Boston, which was perhaps too short, including the graffiti at the top of this article. The graffiti suggests it is "not art". Whilst the point is somewhat simple, it made me think. What precisely qualifies as art and what doesn't? I am sure that artists have grappled over the ages with this question. Personal taste clearly plays a role, as well as so many other metrics, such as originality. For someone who is versed in mathematics, a well written proof can in itself seems artistic (although perhaps artists amongst you might disagree?)

When it comes to trading, we might attempt to ask a similar question: what precisely makes a trading good strategy? Is there a best way to trade? Moreover, what makes a trading strategy good enough for me to run? There might be commonalities which govern "good trading" such as not leveraging up more than you can afford. Yet, as soon as we get to specifics, here again, the answer to the question is related to the person making it.

Each investor has their own criteria for what would make a successful investment and the capital available to them differs hugely. Some investors have a long time horizon and are less leveraged. Hence, investments in more illiquid assets are more feasible for them. Some might prefer a more discretionary style, whilst others could be more comfortable with systematic strategies. When I'm trading my own capital, I am much more sensitive to drawdowns, in particular because I employ a modicum of leverage. As a result, I prefer high frequency strategies in liquid instruments, which typically have higher risk adjusted returns. They can of course have drawdowns, when a strategy becomes crowded out, and part of my job is to identify where these points could occur (somewhat difficult, but I am willing to give it a try).

I am also running fairly small amounts of capital on my personal account compared to when I was in bank. Everything is relative, when it comes to risk taking. Thus, the fact that these types of higher frequency strategies have lower market capacity are less of a concern. For a hedge fund running billions of dollars, there would be capacity issues. Indeed, in that scenario, the solution would be to come up with a large array of different high frequency strategies. The cost here is not so much purely the cost of capital, but also the cost of time. Even once we have identified the frequency or the assets we would like to trade, there are a massive number of other choices which we have. By the time, we have actually chosen a trading strategy which we believe is suitable for our investment style, we have discounted countless other ones.

What seems clear is that other investors faced with the same question, could have chosen totally different strategies, once they have jumped through all the hoops necessary to come up with a trade. Hence, whatever we have chosen to trade has been tailored for us. Whatever constitutes the best way to trade is merely the best for you, rather than for everyone else.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can order the book on Amazon.

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New York Style of Trading

Martin Amis is a master of the English language. I remember reading one of his books (or maybe it was Hitchens quoting Amis, somehow after reading so many books, they all seem to coalesce into one another). The whole discussion in the book was an attempt to describe Las Vegas using a single word. I'll leave you in suspense to guess that word, although I'm sure you can think of some obvious suggestions! Whilst I've never been to Las Vegas, I have been to another beacon of very different version of Americanness, New York. Indeed, I am currently writing these words ensconced in Starbucks in this wonderful city, with the sound of country music whispering past, sung by someone is distinctively not Taylor Swift.

When it comes to New York, an attempt to classify this great city in one word will always fail. Simply walking down the street invites try brain to pick out a multitude of words: skyscrapers, street carts, surprise. Every neighbourhood has a different character. Contrast the low rise buildings of Greenwich to the high rise millionaire towers of midtown snooping a peek at the stars. Burger joints sit amongst Michelin starred restaurants, each delivering their take on what is New York cuisine.

Each word is somewhat unique in its ability to describe a certain facet of the New York experience.

The same is true of a good trader. It is very difficult to find single factor in isolation which can explain why the approach of a trader should be successful. Instead, it is an amalgamation of many factors which can at some level explain the profitability of successful traders. There are several obvious points, such as the ability to risk manage these views effectively, being able to cut losses, and allow profitable trades grow and accrue larger returns.

However, perhaps the most important attribute of a successful trader is what they don't do. This might seem contradictory. The ability to recognise when not to trade is perhaps just as important as knowing when to trade. Sometimes markets are simply not amenable to your style of trading. Despite this market participants might feel that they nevertheless need to trade despite the lack of opportunities. The result is overtrading.

The FX market has been a prime example of this. For much of the past year, markets were simply not producing sufficient trading opportunities because of a lack of trends. Obviously in recent months, the USD rally has spurred many trading opportunities. This has been reflected in the recent pick up in returns from trend followers (in particular in September). It feels as though the good times of strong returns are slowly returning to FX investors, although this has somewhat been tempered by the controversy around 4pm FX.

In hindsight, things are clearer, in terms of knowing when it was right to get involved in the market and when it wasn't. However if something really isn't working with your strategy or trade, perhaps blaming the market is unhelpful. Simply trading for the sake of it, might seem to fulfil your role as a trader (as in person who trades). Yet, from a returns perspective it is suboptimal.

Instead, patience is one facet of trading and waiting for the right opportunity. Trade when you want to, not when you need to.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can order the book on Amazon.

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Learning Rhapsody

I see a little silhouetto of a man
Scaramouch, scaramouch will you do the fandango
Thunderbolt and lightning - very very frightening me
Gallileo, Gallileo,
Gallileo, Gallileo,
Gallileo Figaro – magnifico

Song lyrics, they always seem faintly odd, when written down on a page. In a sense, it’s akin to watching a lion in a zoo, wondering around his cage, aimlessly thinking of better days in the wild. Indeed, take a look at the lyrics above. Recognising their origin is far easier with a melody, which is after all, the way we usually interpret lyrics. The melody itself acts as a memory aid for the lyrics themselves. Melody somehow seems simpler to remember, forming a base on which to build the words. Whilst I love music, I am incapable of producing it. I managed to screech my way to playing the violin as a child, but I suspect for anyone listening, the sound I produced in this manner, was perhaps more noise than music. Yet, despite being a repeatedly failed musician, music is still one of things that I enjoy.

For me at least, the lesson of music, is that music is an interaction of so many things. Clearly, there’s the melody, the rhythm, the lyrics. There’s the infectiousness of live music, singing along to your favourite band or singer (such as Souad Massi, pictured above), in a crowd of others doing the same,

In finance, we don’t really sing along to price action in the same way. However, like music, markets are an interaction of many factors. Is there a secret to trading and a way to understand the markets? Sorry, to dampen your joy, but there is unfortunately no secret sauce to trading!

Perhaps the one “secret”, is not even a market based trading strategy. It is simply that you learn from others more than you learn from yourself or a book (although, I would hope my book is somewhat informative). Whilst hard work and reading are of course important to understand markets, they cannot replace real life communication with others. I have been particularly lucky in my career to learn from many market practitioners such as traders in banks. Had I not had this luck, I suspect my knowledge of markets would be far narrower.

Now working in the Thalesians, I'm now away from a massive trading desk in a bank. I no longer have continual interaction with traders. Hence, I've found it even more important to meet market practitioners and hear their thoughts in person. One result has been that I have started to attend and also speak at more financial market conferences. Whilst I do enjoy presenting my research, chatting to market practitioners at events has been incredibly useful.

Indeed, there's always something I should have added to a presentation, which someone in the audience has spotted. At the same time, I would hope that in every presentation I make, there's at least one very usable theme for the audience to take away. In the past, I've found that hearing just a single point has given me enough ideas to go away and build or improve a trading strategy. It even be one sentence, which someone says, which is sufficient to spark an idea.

However, sometimes perhaps a single talk isn't quite enough to articulate a subject. I'm also going to start doing workshops, to provide a bit more of an interactive way to present my research work. The first Thalesians led workshop will be held at the new AlphaScope conference in Geneva in February 2015. I shall be leading the workshop alongside Paul Bilokon, Director in MET (Market Electronic Trading) at DB and my fellow founder of the Thalesians. The idea will be to cover a large amount of my research work on systematic trading, in cash and vol markets, in particular in the subject of Big Data. Paul, will be covering his area of expertise which is electronic trading. I will also be attending the rest of the conference, to hear ideas from the world of systematic trading from other practitioners. So watch this space, if you're interested in systematic trading…

In the meantime, I'll stop reading lyrics and start listening to them.

For further details of the AlphaScope conference can be found here. To learn more about the Thalesians workshop at AlphaScope click here.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can order the book on Amazon.

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Write once, read many

Youth vanishes from the stage first, supposedly to reappear in a later act, as wisdom. As each generation drifts into the past, its wisdom and experience seeps into the fabric of collective memory, weaving what will be called history. Just as the present is debated vigorously among its many actors, so is the past. The interpretation of the past changes over its immediate aftermath and over the ages. History is not so much a chronological list of events. It is more the understanding of how these events relate and why they occurred, which forms the basis of history. Indeed, Herodotus, the father of history, emphasises these points in the introduction of his epic work, the Histories:

This is the Showing forth of the Inquiry of Herodotus of Halicarnassus, to the end that neither the deeds of men may be forgotten by lapse of time, nor the works great and marvelous, which have been produced some by Hellenes and some by Barbarians, may lose their renown; and especially that the causes may be remembered for which these waged war with one another. (Herodotus & Macaulay/trans, The History of Herodotus, 1890)

No matter how hard we might try, events still obey the rule of write once, read many. We cannot undo an event, once it has been "written", despite our continual reinterpretation and "reading" of it. We can of course conjecture about whether a different path, would have altered history.

Finance is of course no different, when it comes to mapping the present with the past. There is a constant need for reflection of the past, perhaps even more so in finance, where traders profit from seeking the future. For specific cases, we have masses of data, which can aid us in the process of interpreting the past. For example when it comes to systematic trading strategies, backtesting can enable us to understand how a model would have performed in the past. Of course, it can be fraught with difficulty, notably the scourge of data-mining, which involves traders "fitting" a model excessively on historical data. The result is often an over-fitted model, which fails to capture the dynamics in the future.

There are more complex scenarios, where alternative paths for the path are somewhat more difficult to model. We recently saw the end of quantitative easing by the Fed, which fits under this category. The policy has had both its detractors and supporters. For supporters, we know how QE has played out in the short term. Would policymakers have liked more growth? Of course, we all would have liked that. However, for detractors, we shall never know quite the world would have turned out without the Fed's policy of QE. Yes, Fed QE has not been perfect. Markets may have been indulged for too long on this fix of morphine. Indeed, will the main memory of QE be S&P500 at 2,000?

Yet, reaching back to the days of the Lehman crisis, those were not normal days, neither for policymakers nor for markets. Policymakers responded with the experiment of quantitative easing, which seemed to stabilize the complete and utter confusion over the most severe part of the crisis. Perhaps, we have been made complacent these days, by comparatively stable markets. Indeed, in recent weeks, when VIX, Wall Street's fear gauge, jumped a few points, or S&P500 dropped a hundred points, it was as though pandemonium had spread through markets. By Lehman standards, it literally nothing and by the end of October this year, it seemed as though markets had recovered.

The past is not an exercise in perfection, after all it is humans who write it. Writing a different past, does not always mean a better present. If only we could write many....?

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can order the book on Amazon.

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