If it wasn't for me, I'd do brilliantly

Christmas has come. Christmas has gone. The tree remains. The wrapping has gone. The decorations still sparkle. Christmas markets are still around (as above), but quieter. The days between Christmas and New Year are here, that odd period of limbo, where the last year, 2015, lingers, hanging on to time as an outstretched hand seeks that embrace of the familiar, whilst, the new year, 2016, awaits the chimes of Big Ben, an unknown artist ready to grab its 15 minutes of fame. It's a time to recollect what we have done, and indeed, what we have failed to do, which we had planned for in the past year. One of my favourite quotations about explaining success and failure, is from Chamfort, the eighteen century French writer (which is incidentally the opening quotation in my book, Trading Thalesians and the title of this post):

'If it wasn't for me, I'd do brilliantly.'

When it comes to plans, we know the saying that the best laid plans of mice and men, often go awry! What is a plan, but an ill suited straitjacket for the future? It is somewhat disconcerting to accept that randomness plays such a deep role in our lives, given that the more randomness an event seems to exhibit, the less power we have to influence it. It feels so much more satisfying to believe that we have a casting vote over our lives. My earlier comment on planning might have been somewhat facetious, given a modicum of planning does have its place. Having no plan whatsoever, surrenders all your control to randomness. At the same time, a plan which assumes little or no space for randomness is doomed from the start.

So much of modern life is random. Who we meet for example is so often a product of randomness. In particular if we think of the modern day, both cheap travel and the advent of social networks have suddenly increased the number of connections we can make exponentially. If we seek to eliminate all randomness from our life, yes, we might eliminate the potential downsides, yet, we simultaneously remove any opportunities for upside from randomness.

A good trader recognises that randomness is an intrinsic part of what he/she does, trading is the monetisation of managing risk. Yet, a good trader also understands, that it is sufficient to skew the odds in their favour to be successful, rather than to be right all the time. This want to coax value from randomness, need not be confined to trading. The same approach can transcend so many other parts of our life too: making the most of randomness, rather than attempting to master it (which is impossible).

So maybe this time of limbo in the calendar, isn't so much a time for planning, maybe it's simply a time to accept, that randomness will happen. Rather than being fooled by randomness, embrace it. Best of luck for 2016!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

20 Jan - London - Nick Firoozye - Managing Uncertainty, Mitigating Risk
29 Jan - Budapest - Robin Hanson - The Age of Em: Robots
08 Feb - London - Saeed Amen/Delaney Granizo-Mackenzie - CTA/Pairs trading (joint Thalesians/Quantopian event)
29 Feb - London - Jessica James - FX option performance (TBC)
21 Mar - London - Robin Hanson - The Age of Em: Robots

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Margin is too small

Saturday mornings are perhaps not the times at which we associate that the brain is most awake. It is more time for slumber, than the gathering of thoughts. Unable to come up with anything remotely useful to say on an early Saturday morning, I tweeted the following:

trying to think of something truly inspirational to say on a Saturday morning, I think I have it, but it's too long to fit in 140 chars

It is perhaps somewhat facetious to compare myself to the great French mathematician (in retrospect, that sentence sounds more accurate without the word "somewhat"). However, the tweet alluded to something Fermat wrote in the 17th century and well done, to @ewankirk for recognising the Fermat reference in my tweet too. To quote that fountain of all knowledge, Wikipedia, with some help from Google, Fermat claimed that he discovered a proof to the following, Fermat's Last Theorem, which states that:

no three positive integers a, b, and c satisfy the equation aⁿ + bⁿ = cⁿ for any integer value of n greater than two. The cases n = 1 and n = 2 were known to have infinitely many solutions.

However, Fermat wrote that the proof was too small to fit in the margin of the notebook he was working on. Alas, he never thought to buy another notepad to write it down... either that, or he didn't really have a proof. The theorem remained unsolved till the mid-1990s, when Andrew Wiles solved it. He was subsequently knighted recognising this great achievement. His proof amounted to around 150 pages. So Fermat was right in some respects, the proof was indeed far too big to fit into his notepad's margin.

Mathematics is often about the proof, not so much purely the statement of fact. There are many ideas which are very easy to understand in mathematics (and might seem intuitively true), but their proof is so much more difficult to articulate. Indeed, if we consider Fermat's Last Theorem, it isn't that difficult to understand what it says.

Unlike in mathematics, in markets, there is very little that we can actually "prove". We can have theories about how markets behave, we can use historical data to illustrate them. I can use statistics to show a trading strategy would have made money. We can use our intuition to judge that the conditions necessary for the strategy to make money, are likely to be there in the future (or indeed that they won't be there). But can I "prove" that you will definitely make money in the future. No.

In a sense, trading and in particular, quantitative trading (or least successful variants of it) requires a modicum of skills from many different areas. The first one is common sense. Sorry, no amount of mathematics can erase the necessity for common sense when it comes to trading.

Instead mathematics and statistics, needs common sense to guide its correct usage when trading. You may have found the best ever strategy in the world (ever, ever, really!), but a bit of common sense, might tell you that it's impossible to execute in practice or that transaction costs you've assumed are totally unreasonable. As well as common sense and a good knowledge of statistics, an ability to code is important for systmatic trading, after all, the more data you have to play with, the less likely it is that Excel will be sufficient to crunch it. Oh, and a bit of luck can help too! We might live by our median result (which we hope is above zero), but a good start is always a bit of a luck.

I can't prove any of this obviously. But if we could prove everything easily, wouldn't everything suddenly become very boring? With that, I wish you a very merry Christmas!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

20 Jan - London - Nick Firoozye - Managing Uncertainty, Mitigating Risk
29 Jan - Budapest - Robin Hanson - The Age of Em
08 Feb - London - Saeed Amen/Delaney Granizo-Mackenzie - CTA/Pairs trading (joint Thalesians/Quantopian event)

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Fed up of hikes?

In recent years, Christmas in London has been accompanied by the sparkling lights and loud sounds of Winter Wonderland in Hyde Park. I've never been to real German Christmas market, so for me this "faux" version is still a bit of a novelty and never fails to cheer me, even if it is somewhat hectic and busy. For markets, in the run up to Christmas, it hardly seems like a time of cheer and no amount of visiting Winter Wonderland is likely to change that. With the FOMC, likely to hike rates at their meeting this week, markets have already begun to feel jitters (although it could be argued that this is not all related to the potential Fed hike).

The question is, of course, should these jitters derail what seems like a done deal (at least if we consider markets pricing of the likelihood of hike)? I have no clue whatsoever, and do not for a moment claim any better reading of this than anyone else in the market! What I do know however, is that whenever the Fed would choose to hike, it will signal a sea change in monetary policy. For years the market has become accustomed to rates being on a downward trajectory, so whilst 25bps is hardly a massive move, it is more the signalling effect that the first hike will herald. To that end, the Fed have telegraphed the likelihood of a hike for an extended period, clearly attempting to prepare the ground. No one in the market should be "shocked" if the Fed does indeed end up hiking in December! This is in sharp contrast, to the taper tantrum of May 2013, when Bernanke mused about the likelihood of tapering QE: it caught the market totally unaware. The risk is of course, if the Fed fail to hike this time, after preparing the market so long, will the market really take it on board beforehand? Beware of the boy who cried Fed hike.. one too many times.

For systematic traders, the focus on the Fed hiking might well prove interesting, but by definition, they do not make discretionary decisions. They stick to what their model is telling them, and don't simply override it unless they have an extremely good reason for doing so. If you keep on making alterations to your model, you end up running a discretionary strategy! For systematic traders, perhaps a better question is asking, do events like FOMC on average favour their strategy or end up disadvantaging them, and is it dependant on whether the Fed hike or cut rates? Obviously, every FOMC meeting is different and to some extent you could argue this event is fairly unique, hiking from ZIRP, but if you have enough data, it should cover multiple hiking cycles. For instance, if you're strategy is skewed towards being long equities, you can show on average, that long equities positions perhaps well on FOMC days. However, this might not follow for all other types of models.

Good luck for the week, whichever way you choose to trade markets, whether it is from more of a discretionary perspective or using a systematic model. Most importantly have a very merry Christmas and a happy new year!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Dec - New York - Yakov Amihud - The Pricing of the Illiquidity Factor's Systematic Risk (Thalesians/IAQF)

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)
20 Jan - London - Nick Firoozye - Managing Uncertainty, Mitigating Risk

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Writing about nothing

There's a certain deliciousness in writing reams of prose which in effect say nothing, using words merely to enhance the reader's vision of the scene. This sentiment might seem ridiculous but bear with me for a moment. Just as the richness of light envelopes the human eye to enable it to see, it is through the sheer adaptability of words that a writer can render a scene in a reader's mind. To what end you might ask, is the writer's intention to labour so patiently to fashion an image from words? Surely what is important is for the writer to describe what happens, rather than to write about what is there?

My point is best illustrated by describing the difference between a photograph and a film. A photograph captures that single moment, a slither of time never to be repeated, available to us to replay again and again in a photograph whenever we want. A film does something similar, but with moments of time strung together before eyes. Suddenly, those single moments lose their significance in a film, washed up in a sea of time, sweeping away time in its path.

To truly treasure a moment, we need to recall it. If we fail to recall it, it loses its significance. To enable us to understand what could happen in the future, we need to be able to describe what we observe in the present.

The same is true of markets. A market view is not manifested from a void. It comes about through a careful observation of the present and what it could mean for the future. An inability to describe the present situation in markets in detail and indeed to be aware of the past, makes predicting the future so much more difficult. You could argue that the market did this before the last ECB meeting, somehow misreading the current situation, and thus adjusting expectations to such very stretched levels it would be difficult for Draghi to placate the market, when the ECB meeting actually arrived.

Of course, that ruthless punisher of errors, hindsight can never be beaten: we can but do our best beforehand with the information we have at that point, not after the fact. Yet to do our best, we need to sit back and take a snapshot of situation. We only have ourselves to blame if we misread the situation because we have missed something.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Dec - New York - Yakov Amihud - The Pricing of the Illiquidity Factor's Systematic Risk (Thalesians/IAQF)

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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Dovish hike? Our panelists' thoughts on FX

I have always been a firm believer that having discussions with other market participants is a powerful way to test your own views, both for discretionary and quant traders. Furthermore it can be an important way to understand how the market is positioned and to see how your views fit into that. As a result, over the past few years, we have organised several very lively macro panels at the Thalesians. They have been a great way to hear the views of many market experts. Furthermore, they've always been great fun.

Last Thursday, we had our latest macro panel at the Thalesians in London. I moderated an expert panel, which featured Eric Burroughs (Editor of FX Buzz - Reuters), Mark Cudmore (EM strategist - Bloomberg), Mick Grady (Multi-asset strategist & economist - Aviva), Ashraf Laidi (Strategist - Intermarket Strategy) and Jeremy Wilkinson-Smith (Independent). We touched on a number of different areas within macro markets, including the Fed, views on USD, as well as EM. We rounded off the discussion by hearing about the panellists' favourite views for the coming months in macro space.

I began the discussion by asking the panel's view on USD and the prospects of a Fed hike in December. The panel's view on the USD was perhaps more cautious than previous panels, where the view had been much more bullish. Among the panelists, there seemed to be near unanimous agreement that the Fed would hike in December. Cudmore suggested that the long USD trade is not over, however, he also believed the easy part of the USD trade is now over, and will be characterised by higher volatility. Wilkinson-Smith echoed this sentiment to some extent, noting that the risk reward is not there good for being long USD, with potential for squeezes on day of the Fed hike, especially given the possibility that the Fed would be conducting a "dovish hike".

Grady was more constructive on the dollar. Further ahead, he believed that the Fed is likely to hike more rapidly than what has been priced into the market, on the back of his more bullish view on the US economy. He also noted that his bullish USD view was helped by the Fed's policy divergence with both ECB and BoJ, which both remain in easing mode. In the short term, Burroughs suggested there was room for a short term covering rally in EUR/USD. He noted that one supporting reason was that the market was long gamma. However, following that, he could see a move back towards parity for EUR/USD. He agreed with Grady's view that the Fed could hike more than the market expected. Burroughs noted that the market is not prepared for further downside in EUR/USD, citing the median 12m forecast on Reuters is 1.05, and very few forecasting below parity, aside from Reuters' team forecast at 0.94 and a few other forecasters.

Laidi thought there was not much further downside in EUR/USD and over time spot could go higher. He suggested that the Fed would not hike in December, disagreeing with the rest of the panel. He was bearish on the US economy expecting the spectre of recession to return to the USA next year. Laidi also believed that USD strength would make it difficult for the Fed to hike. The panel broadly agreed that there wasn't much credence in the notion that the Fed would hike, purely to cut later. Wilkinson-Smith argued that if they really wanted to stimulate the economy, a more obvious path would be QE. There was also the question of the impact of the USD move as "tightening". Grady suggested that tightening due to USD strength, was equivalent to 2 to 3 rate hikes. The panel also discussed the potential reaction of equities on a Fed hike. Grady, thought that a hike would be welcomed by equities, given that it could be viewed as a vote of confidence.

On USD/JPY, there was consensus that we have already seen the high. Laidi suggested there could some downside in spot from here. Burroughs noted that the JPY is very weak on long term valuation metrics. He noted that the BoJ has been getting to limits of what more it can do. On Japanese equities, Grady was bullish, noting there was room for reallocation from retail, which was underweight.

Taking the discussion towards EM, Cudmore noted that the best performing currencies were INR, RUB and CHN (excluding ARS, which is much less liquid). Cudmore was bullish on INR, citing that it was growing strongly. He noted other opportunities in Asia, which remain comparatively cheap, such as PHP, also driven by strong growth. However, his view on EM, was not universally bullish. Notably he was bearish on ZAR and also BRL. Grady suggested that on EM, you need to pick your spots carefully. He agreed with Cudmore on the bearish BRL view citing massive current deficit and very high inflation, among other factors.

I ended the panel by asking what the panelists favourite views. Cudmore was bullish INR vs CAD. Grady saw upside in AUD/CAD, based on the differences in the non-commodity sectors, citing the green shoots in the Australian economy. Wilkinson-Smith suggested receiving AUD rates. He didn't see RBA hiking rates, with the state of their terms of trade. In FX space, he saw AUD/NOK downside, citing his constructive view on crude versus his bearishness on Australia's biggest commodities, such as iron and copper. Burroughs suggested being overweight PLN. Among Laidi's favourite views, was downside in GBP/AUD.

I hope to organise further Thalesians macro panels in the future, mostly likely in the spring. We hope to see you at the next panel!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Dec - New York - Yakov Amihud - The Pricing of the Illiquidity Factor's Systematic Risk (Thalesians/IAQF)

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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Another year over

So, this is Christmas
And what have you done?
Another year over
And a new one just begun - John Lennon

Time is jumping and skipping its way to that point of the year, when the current year fades into the past and the new year beckons us to the future. The lights of Christmas have begun to shine, sweeping up memories of the rest of the year in their wake. It is natural to ask, so, this is Christmas and what have you done this year?

A year might seem like a long time, before it starts. Yet, when the year is close to extinguishing, there is a realisation that it has passed quicker than you expected. The past is littered with the shadow of failure, or engraved with the glossy shine of success. The future is a place of promise unfulfilled or full of grand plans and ambition.

Whilst we should allow the conditions which allowed the past's successes to bloom into the future, it is unfortunately, all too easy to allow also the failures of the past to corrode the future, a vicious circle without an end.

A modicum of failure can however, be a necessity for success. If all you experience is success, it can lead to recklessness, a somewhat irrational view that whatever you do will be successful. A trader who has successful run, might feel somewhat infallible in the face of the market, and simply take too much risk, which magnifies his or her downside should the market turn against him or her, in an unexpected Black Swan event.

So when thinking about the coming year, treat it as canvas not yet sullied by the shadow of the past. The future is your time to shine, not to muse over what could have been, this year. Make use of the failures that have happened, and refashion them into lessons for success. And if you have indeed been successful, be cautious ahead. Just because there have been Black Swans in your past, there might well be a Golden Swan ahead!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

25 Nov - London - Panel - Macro Markets Discussion

26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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A sunny life trading?

Let me take a guess! You're sitting in America reading this? If you are, I hope you're not too far from a burger joint I'd like to visit one of these days! Well, it's probably a fairly good guess, given the Internet traffic that comes to this website, is mostly from US IP addresses. However, wherever you are sat in the world, you'll see the same article, the same text, the same photos in front of your eyes. True there might be a marginal delay in how quickly, the webpage reaches you because of where it is hosted, but that's about it.

First, there was world of mouth, then the printed word, then the telegraph, then the telephone and now all manner of electronic ways of communicating. News now travels quicker to their destination.
For markets, it opens up the question of where should I trade? Before you had to physically be near to an exchange. That is now irrelevant, you can collocate a server physically at an exchange and login from a different continent.

So from a technology point of view it seems irrelevant where you create a trading operation. You can choose a place that is more in keeping with how you want to live. No longer does it always have to be in London or New York, the traditional financial centres. It can be in warmer climes and indeed cheaper places to run a business, like in the photo above.

However, this ignores the point that trading is still very much a human operation, whether you trade in a more discretionary or systematic way. A quantitative trader is still a person at the end of the way, a person tapping away code into a computer to make it trade. They need to be recruited somehow. Where you are based will impact the pool of talent available to you. Some colleagues can of course work remotely. But even then, do you want every one of your traders to be working remotely? The flow of ideas can be aided by technology, be it through Skype and Twitter, as examples. Yet, this approach cannot fully dispense with human contact. I've worked remotely on client projects and it has been successful, but being able to sit down and have a chat about how a project is to be put together makes the process so much quicker and easier, even when compared to using Skype (and certainly when compared to using a phone or email).

When I've presented my work to a real audience, I get far more interaction than I do sending out work via email. It's obvious why: it's just easier to respond, when the person is sitting next to you. Furthermore, being able to gauge people's expressions as you are presenting, can be invaluable in allowing you to adjust your message (if they seem puzzled, it's your job as a presenter to fix that!)

In a bigger city, the number of random interactions you have can be exponentially more, than in a small city. One thing I consider is that whilst luck is an important in trading, the luck of meeting the "right" people is potentially the most important form. I've been lucky enough to work with very smart folks in banks, and after I started working full time at the Thalesians, I've tried to make an effort to keep going to industry events, whether it is conferences or more informal Meetup groups (including the Thalesians!) to keep in contact with the market. It's been an invaluable way to compliment the more "new" ways I try to stay in the "market's loop" like Twitter or LinkedIn. Ironically as useful as Twitter or LinkedIn have been, it's been as a way to meet people in real life (yes, the traditional way!), who are in markets. Finance Twitter has been a great resource, filled with many smart people!

So yes, technology might make it easier to trade wherever you want in the world. Indeed, a place which might work for one fund, might be totally inappropriate for another. But it hasn't totally dispensed with the need to keep on meeting people in real life. Life would be very boring indeed if our interactions were confined to only 140 characters on a computer screen. Now, I just need to find a place to trade, in the sun and next to a great burger joint... any ideas for where?

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

25 Nov - London - Panel - Macro Markets Discussion

26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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In Notts over Salford-ing the stream

At the top of the English football pyramid sits the Premier League, with the likes of Chelsea and Manchester playing in front of tens of thousands of spectators, cheering (or jeering) as well known footballers ply their trade. Below, that, there's the Championship, League One and League Two, collectively known at the Football League.

Then we have National League System, consisting of semi-professional clubs, such as Salford City, below that. Salford City is in the Northern Premier League Premier Division. To get into League Two, they would have to first be promoted to Northern League North, and then have to win the National League. So if the Premier League were level 1, Salford City would currently be level 7.

Why am I talking about Salford City? Well, this week, Salford City managed to overcome Nott County, sitting 59 places above them in League Two in the first round of the FA Cup, quite an achievement! By any standards, there isn't a level playing field in football. Whilst, the Premiership might bask in vast sums of money, at Salford City's level, most of the players have other jobs. Whereas, players in the Premiership might change teams for millions of pounds, for Salford City, their recording signing, cost 5k! 

When it comes to markets, there has also never been a level playing field. Large institutions have a large amount of capital not only to invest in markets, but also to fund analysis of the markets and skilled traders to risk manage that risk. So should, we just give up, if we don't have their advantages?

No, because in fact in many other areas of the market, the gap has been closing because of technology and the greater availability of data! The growth of open source software, means for example it is far easier to analyse markets, without having to write all the code yourself. Take Quantopian's platform, which uses a Python based library zipline. All the nuts and bolts for downloading data and backtesting trading strategies are already there for you. It'll even trade in automated way for you. You can just spend your time on coming up with signals, rather than all the plumbing around it. I've written my own open source library PyThalesians for doing backtesting, and have used it for developing trading strategies myself. Whilst, I haven't open sourced the specific trading algos I use, pretty much everything else, I have open sourced. I've used a lot of open source libraries myself, to develop it such as pandas for manipulating time series and numpy for doing mathematical calculations.

So just like Salford City, facing big league competition, even if the playing field isn't quite level, it doesn't mean we should give up! Just means we have to work smarter, using open source software where we can, so we don't have to reinvent the wheel, so we can concentrate our efforts on building the trading strategies themselves, which of course will still require time. It's just about focusing your time where you can add the most value. There's always a rainbow somewhere, provided you can find it!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Nov - New York - Thalesians/IAQF - Andrey Itkin - Efficient solution of structural default models
25 Nov - London - Panel - Macro Markets Discussion
26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming
14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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Ice hockey fighting markets

Ice hockey is one of those games, where even the casual observer can understand the basic gist of the game. You literally have to score goals to win, however difficult that might be. I don't claim to understand every rule of the game, but whenever I've watched it, it's been fast and fun to watch. The NHL is rarely on UK TV, and when ice hockey is on UK TV, it's usually from the Winter Olympics, which only comes around every four years.

A feature of ice hockey is the fighting. From my research (ok, a quick look at Wikipedia), in the NHL players are not sent off automatically for fighting, although you can be punished through a penalty, such as sitting out the game temporarily for 5 minute. I suppose the hope is that 5 minutes should be sufficient time for the player to calm down and at the same time to act as a suitable deterrent.

Fighting in hockey is also not an uncommon occurrence. According to HockeyFights.com (yes, there really is a website dedicated to hockey fights), in every hockey season several hundred fights occur. I'm not going to debate whether fighting should or should not be allowed, but regardless, of where you stand, you would have to acknowledge that in a fast moving game, such as ice hockey, a fight is going to slow down the action temporarily.

In a sense, markets are like this. There's calm and calm, till suddenly, volatility picks up and there's a break in the market, price action fights against the previous regime. If it's a sufficiently large vol spike, market participants can flip from seeking yield to capital preservation, and try to cut down their risk. If central banks see contagion risk they might seek to give markets a "5 minute penalty" to calm down, stimulating the economy through looser monetary policy. 

The financial crisis was obviously a classic example of this. I recently went to a public event, with Ben Bernanke, who is currently on a tour to promote his new book Courage To Act, a lot of which centres around the events of 2008. He robustly defended QE, noting that "there is no better thing for the middle class as job creation in the labour market, and that is what QE did". 

Revisiting our analogy, just as with penalties in an ice hockey game, after a while, there's a limit to how much monetary policy can do in isolation. If a player is seriously angry, a short 5 minute break won't calm him down. Bernanke made the point that central bankers have been expected to do too much of the heavily lifting around the crisis. Fiscal policy is also an important part of the dynamic and it is also up to politicians to act. Similarly, if consumers are in a state of severe risk aversion, looser monetary policy might not be enough of an incentive to get them to start spending again.

Sometimes, if a fight a severe enough, it'll take more than a penalty to stop it: monetary policy can only do so much...

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Nov - New York - Thalesians/IAQF - Andrey Itkin - Efficient solution of structural default models
25 Nov - London - Panel - Macro Markets Discussion
26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming
14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

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The Fed mandate for chocolate

For a moment, imagine you are in a chocolate shop or one which sells delightful cakes (as above). I suspect, your objective is to buy some chocolate or something similar. It is unlikely that you are visiting in order to lose weight. If you have a mandate to lose your weight, then visiting a chocolate shop somewhat conflicts with that. However, if your mandate, is occasionally enjoying some chocolate, you have probably come to the right place.

In this instance, it is easy to formulate a mandate for behaviour. More importantly, it is easy to see whether we have stuck to our mandate or we have broken it. For any job, you are essentially given a mandate, which governs how you behave. Often, the mandate can be more implicit, rather than explicit. Let's say you are a trader. Your mandate involves maximising P&L, whilst at the same time ensuring that risk is managed prudently. Other aspects of the mandate are also important, for example ensuring compliance with the rules of your institution and of the market. If you overshoot your risk limit repeatedly, you are breaking your mandate. If you repeatedly flout rules around market behaviour, you are not keeping your mandate.

The behaviour of central banks is also governed by mandates. If we think of the Federal Reserve, their mandate involves striving for: maximum employment, stable prices, and moderate long-term interest rates. Sometimes obviously, these multiple objectives can conflict with one another, and they need to temporarily emphasis certain elements of the mandate. There are some things that their mandate doesn't include:

• hiking, because the market is fed up with waiting for hikes
• hiking, because traders are finding it difficult to generate P&L
• hiking, to do the "right thing" and teach people a lesson who are on the wrong side of the trade
• cutting, because stocks aren't high enough
• cutting, to boost trader's P&L

Yes, central banks make mistakes and sometimes they can stick too rigidly to some of their mandates. Trichet's hikes in 2008 and 2011, were generally seen as policy mistakes at the time (and even more so afterwards). The Fed has also come in for criticism for the length of its asset purchase programme. Yes, maybe the impact of QE waned over time. But the initial Lehman shock was so severe that it called for unorthodox measures and the Fed could not simply walk away. In addition, the TARP program, which was sanctioned by Congress, also helped to stablise the market, by giving banks some breathing room and remove the very real possibility of a collapse in banks. Yes, it essentially was a bail out of the banks, but again think about what would have happened without TARP. Would Main Street really have been "better off" with a collapse of the banking system? Somewhat I think the Fed's mandate for maximum employment, would have been dented.

It's very easy to criticise central banks, and sometimes that criticism is warranted, they make mistakes too. At the same time, their mandate is very much different to that which governs the behaviour market participants, so what market participants might want, might not be best for broader economy. On a more focused look at when the Fed might actually hike, I'd also recommend reading Des Supple's latest note on the state of the US economy at present and what it means for when the Fed might hike.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

25 Nov - London - Panel - Macro Markets Discussion
26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming
14 Dec - London - Matthew Dixon - TBA (Thalesians Xmas Dinner)

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Burgers or macarons?

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We all face choices, every day of our life. However, often the questions we might ask ourselves aren't really choices, because we are not always forced to choose. For example, in a restaurant, when we browse a menu, there is not really a choice between a main course or a dessert. The courses are specifically designed to be complementary, as opposed to replacements for one another.

Just because you might elect to have a burger as a main course does not prevent you from having a macaron for dessert, something sweet to end the meal. When it comes to main courses, it's not really customary to order several large dishes for yourself (unless you happen to be extremely hungry: I admit there have been occasions, when I might have had more than one burger!). So in effect, what might be framed as a choice, is not always a choice at all.

If we think of the way people talk about different trading styles, it's precisely the same! Often, they frame the question as a choice, when in fact, different styles are complementary. Take the choice between systematic and discretionary trading. On a personal level, you might be forced to choose between the two, simply because of a lack of time to do both and also because some people are better at discretionary, whilst others do a better job at systematic trading. On a higher level, if you are allocating to these strategies, there isn't necessarily a choice between either discretionary or systematic trading. If the strategies are in principal uncorrelated, you can choose to invest in both, being careful to manage the risk between them.

Back to burgers and macarons, now... there is also the question of knowing what you are eating. With a burger, it's fairly straightforward. Even to the least culinary of observers, it's clear that the burger is made up a bread bun, garnished with lettuce and tomato, separately by a patty, made of minced meat. Contrast that to a macaroon. Ok, it's clear it has sugar in it, but aside from that, if you have never made them and don't have a recipe book to hand, it is simply not clear how they are made or even the ingredients. In fact the most important ingredient of a macaron is ground almonds and the process includes making Italian meringue (which I never guessed until I tried to make some).

If we head back to our discussion about systematic and discretionary trading, we see another parallel. Systematic traders are often said to be running black box strategies. If anything, the strategies that systematic traders can run, can be far more transparent than those which discretionary traders do. Take for example CTA strategies, which are typically trend following. They literally buy assets which are trending higher in price and sell those trending lower in price - that is the whole idea, in a single sentence! In practice, when implementing it, there are many little details which complicate the matter, but the principal is pretty transparent - and hardly a black box. Let's instead ask, whether we can easily define what a successful discretionary trader does in a single sentence. It is extremely difficult to do so! If anything, I'd argue that discretionary trading is more "black box trading" than a lot of what goes under the name of systematic trading, because it is so difficult to define the process by which a discretionary trader makes a decision. With a well designed systematic model, you should be able to understand why it is putting on certain trades and the principal which the system follows.

So maybe, when you see a burger, in actual fact it's more like a macaron.... and vice versa, at least when it comes to classifying trading strategies? Maybe you can have both your burger, macaron and even cake and eat it, when it comes to allocating risk!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

21 Oct - London - Robert Carver (FULLY BOOKED!) - Lessons from systematic trading
25 Nov - London - Panel - Macro Markets Discussion
26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming

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Not always plane sailing

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Travelling is rarely about the journey. People generally don't fly across the Atlantic to endure hours up in the sky cramped in a seat for the sake of it. It's all about getting to your destination and the time you spend there. Yet, the journey bit is the inevitable part of the whole travelling experience.

I've been travelling over the past two weeks for work. It's taken me to the Federal Reserve Board to present my research in Washington DC, Bloomberg TV in New York, as well as to a number of funds on the East Coast, a Thalesians talk in New York, Quantopian in Boston, an innovative startup helping retail traders create trading models with Python, as well as to the WBS Training Fixed Income conference in Paris. It's been challenging, at times questions I was asked about my research, I couldn't answer. However, it's definitely been a good learning experience and I definitely go away with loads of ideas for future research after meeting so many other market participants. During the downtime, I've also been lucky enough to meet a lot of friends and folks from finance Twitter along the way, via quite a few burger joints, which has been great!

It has got me thinking more broadly about the whole notion of travelling for work. I've been on planes, I've been trains, I've been in cars, during the last two weeks. At times the journeys have actually been fun, when trains have taken me through scenic landscapes. At other times, somewhat frustrating, being diverted to random airports in mid flight, when all I've wanted to do was get back home. Has it all been worth it? I think so. All the tweeting, emails and phone calls you can do, will never make up for a face to face meeting to present your work.

On a phone call, you'll never notice the sudden waning of interest from the audience as you mistakenly labour over a point which they find irrelevant. By contrast in real life, you can quickly shift focus to something your audience finds more interesting. Tweeting can be fraught with misunderstanding, in particular if you've never met in real life. True, it's easy to miscommunicate face to face, but there are so many more clues in body language versus 140 characters alone. As for emails, the more verbose they become, strangely the less meaning that can be deciphered from them, given the amount of emails we all have to deal with.

In real life, it also far easier for clients to tell you what they really think about what you present. Getting honest feedback is probably one of the most valuable things you can ever receive in your work. When you make mistakes, sometimes you'll only notice when other people point it out to you!
Yes, it can be tiring, it can be frustrating, it can be disorientating, but travelling for work really can be one of the best ways to get exposure for what your work and for learning about what you can improve. If you're organised you can pack as many meetings as you can on a trip, to get the most benefit for hopefully, the least amount of time spend on a journey. Travelling for hours on a plane, for just a single meeting, might not be the best use of your time, and might mean you have to make more return trips to meet other clients.

Social media and other forms of electronic communication are of course important and can help to reduce your travelling, but I do think they more compliment rather than replace meeting all clients in real life. Although, despite what I've written here, here's to hoping that the next time I travel it'll be for a holiday rather than for work!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Oct - New York - Dan Pirjol - Can one price Eurodollar futures in Black-Derman-Toy? (Thalesians/IAQF)
21 Oct - London - Robert Carver - Lessons from systematic trading
25 Nov - London - Panel - Macro Markets Discussion
26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming

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Trading cookies

I've spent nearly a week in the USA, mostly to present my research at various funds, public talks and also at the Fed. I have admittedly, spent a rather large amount of my spare time sampling the most calorific parts of American cuisine: burgers, cheesecakes and cookies (including the one pictured above, which I'd describe as more like a quasi-cake, than a cookie). It has got to the stage, where I suspect I won't be having another burger for a very long time (too much of good thing I suppose).

I suspect, not everyone will agree with my taste, when it comes to food. The thought of a burger dripping in cheese and fat, is likely to make some seem less than hungry. However, as someone said (no amount of Googling will likely reveal the original quotation), you'll never make friends over salad. I would conjecture though, there's a distinct possibility of making friends over a burger. It might seem a bit irrelevant, talking about food on this blog and the matter of taste when it comes to food, given this blog essentially purports to be about "finance".

However, bear with me! When you invest, what are your main motivations? Do you prefer higher risk strategies, which offer more reward, but potentially more reward. Do you like more quantitative trading strategies, or would you prefer to use more in way of discretion when you trade? The questions are indeed endless. Just as with food, where tastes are not shared by all, when it comes to these investing questions, often there will be no answer which is suitable for everyone. One person's favourite trading strategy, might be totally inappropriate for another person.

It's something I can often encounter when I'm presenting my research on various systematic trading strategies. Often it is based upon some sort of basic premise, whether that is some of sort intuition based on economics or general market behaviour etc. However, if you don't agree with the general rationale, then it's difficult to see how you can believe in a general strategy. More unusual trading strategies, which use novel sorts of data, can often face an uphill battle to face acceptance, for this reason. In a sense, your doubts need to be disproved.

Without having an underlying rationale (or if you have difficulty believing in one), it can be troublesome to discern between a random trading strategy and one you have developed. That's why whatever rationale you have needs to be fairly well thought. Experience, is probably one thing which helps most of all when attempting to understanding the rationale behind a trading strategy (or indeed the converse, that it has no rationale and shouldn't be used!)

I'll be in Paris 6-9 Oct at the WBS Fixed Income conference, where I'll be hosting a systematic trading workshop and at some of the events below.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

05 Oct - Boston - Saeed Amen - Trading Thalesians Book Talk / PyThalesians Python Interactive Demo (Boston Algorithmic Trading Meetup Group)
09 Oct - Budapest - Taylor Spears - On the Sociology of CVA
14 Oct - New York - Dan Pirjol - Can one price Eurodollar futures in Black-Derman-Toy? (Thalesians/IAQF)
21 Oct - London - Robert Carver - Lessons from systematic trading

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Predicting the past

I can predict the future. Although, if that were even remotely true, I probably wouldn't be sitting here writing a blog. Instead, I'd be lounging about on a beach somewhere. However, despite it being a totally inaccurate statement, I hope that it has encouraged you, the reader, to take a few moments to finish reading this article.

The problem with the future is that no one really knows what will happen. I remember when I was a kid. The notion of a phone having a computer in my pocket would have seemed laughable. The idea that computers would be so ubiquitous would simply be beyond my comprehension. Indeed, a similar point about the role of technology in trading was made by my good friend Pierre Lequeux speaking on a panel at the recent TradeTech FX. The difficulty with trying to predict the future doesn't prevent us from trying. Over the past weeks and months, the market has been musing about when the Fed could begin a hiking cycle, it's first in over several decades (ok, not quite, but it has been a long time since the Fed actually started a hiking cycle). What has complicated matters, is that even if the Fed does hike, what will that mean for markets?

A systematic trader does not attempt to predict the future (to an extent). I find it incredibly difficult to forecast when the systematic trading strategy that I've been running will make or lose money from day to day. This is despite the fact that the overall trajectory of returns has been upwards since I started trading my own cash just over 2 years ago. The objective is more about creating a strategy which is profitable over the long term on average.

Systematic traders rely upon patterns from the past persisting into the future, which on average have been profitable and have a good rational explanation. We can also look at the past to try to understand what happened to our trading strategy in similar situations, which might crop up in the future. The great thing about having a systematic trading strategy is that whilst we can't tell the future with certainty, we definitely know the past! I've been in the market for around a decade, and during that time I've run all manner of different systematic strategies. I can create a new trading system and then use historical data to understand how a strategy coped with the start of Fed hikes as an example, well before I even started working in currency markets.

Hence, even though I can't tell you precisely when a Fed hike will be, I can tell you how confident (or not) I would be with a trading strategy to cope with similar historical events. A discretionary trader can look back at their own P&L history to see how they coped with historical events, but unless they have been trading for a long time, they might be a bit stuck when trying to identify events before they started trading. I recently published a Thalesians paper, for example, discussing how CTA strategies have performed at the start of Fed hikes to test this idea.

Of course, there are caveats. The past is never precisely like the future. There will be unusual events that are not in our historical sample, which could impact our portfolio significantly. Indeed, this Fed hiking cycle could be very different to previous ones as an example (the Fed has never begun hikes from such a low level). At the same time, there are likely to be many historical events similar to future ones.

Whilst systematic trading isn't for everyone (just as discretionary trading isn't), the ability to look at historical data, gives us an ability to see how robust our portfolio has been to historical shocks and to check how our strategy has behaved. Even with all the mathematics that goes on behind creating a systematic trading strategy, perhaps the most important thing, is to have a modicum of common sense and understanding of risk!

If you're on the US East Coast, I'll be in Washington DC 27 Sep, NYC 29 Sep-3 Oct and Boston 5 Oct if you'd like to meet me and hear more about systematic trading! If you're in mainland Europe, I'll be in Paris 6-9 Oct at the WBS Fixed Income conference, where I'll be hosting a systematic trading workshop.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

21 Sep - New York - Agostino Capponi - Arbitrage-Free Pricing of XVA (Thalesians/IAQF)
23 Sep - London - Stephen Pulman - Multi-Dimensional Sentiment Analysis
01 Oct - New York - Saeed Amen - How to build a CTA? / interactive Python demo
05 Oct - Boston - Saeed Amen - Trading Thalesians Book Talk / PyThalesians Python Interactive Demo (Boston Algorithmic Trading Meetup Group)
09 Oct - Budapest - Taylor Spears - On the Sociology of CVA
14 Oct - New York - Dan Pirjol - Can one price Eurodollar futures in Black-Derman-Toy? (Thalesians/IAQF)
21 Oct - London - Robert Carver - Lessons from systematic trading

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Burger parity

I recently visited Frankfurt and Zurich to help launch Thalesians quant finance talks there (a special thanks goes to Jochen Papenbrock, Adrian Zymolka and Swati Mittal for organising the events there). Travelling from Frankfurt to Zurich, I noticed several major differences.

One difference is the language. I can vaguely understand Hochdeutsch, as it is spoken in Frankfurt and the rest of Germany, owing to a few years studying German, during a period of my life when I could be called young (and importantly, my mind has not yet quite expunged all the German I learnt then). By contrast, my ears have some trouble understanding Schweizerdeutsch, the dialect of German spoken in Switzerland, simply because I am not used to it.

Another difference is the geography. Frankfurt to my untrained eye is relatively flat, making it pretty easy to get around on foot. In Zurich, the hilly terrain makes it somewhat more challenging to navigate to certain neighbourhood, such as the area around ETH, where I gave my Thalesians talk and where I had the opportunity to meet Nassim Taleb, through a combination of randomness and Twitter!

However, the difference I'd like to focus on is price. Perhaps, it is not an understatement, to note that Zurich and Switzerland in general feels expensive for visitors. One of the easiest ways to test this is to use the Big Mac index, maintained by the Economist, which gives you the relative cost of a Big Mac in a number of different countries. The idea is that you can work out how overvalued (or undervalued) a certain currency by assessing the price of similar goods in different countries. In practice, you would aim to choose a basket of goods, rather than a single item, like a Big Mac in such an index, which is referred to as a Purchasing Parity Power index,. As an aside, how much do this the burger costs at the top, which I had in Zurich (clue: it was rather more expensive than I would have liked...)? Using the Big Mac index, we note that in Switzerland, a Big Mac costs 6.82 USD. By contrast in the UK, it is 4.51 USD and in the Eurozone it is 4.05 USD.

We are now going to use this information to work on a little problem. Let's say, we had 5 USD and we wanted to share out Big Macs in Zurich, London and Frankfurt, as prizes. Whilst, in London and Frankfurt, we could give people a whole Big Mac and still have change. However, in Zurich, we would end up giving out less a full Big Mac. This would be kind of unfair, a prize in Zurich would be far less.

Yet, this is exactly what people can do when they invest, based on notional amounts of different assets. However, the "risk" that such an approach buys is unequal. A dollar worth of bonds is less risky than a dollar of equities. If you have a fund which runs a multi-asset strategy, trading all manner of different assets, if they scale purely by notional, rather than risk, the portfolio could have considerably different exposures to those intended.

There has been much in the press recently, talking about the recent performance of risk parity, which basically attempts to allocate in this fashion based on risk, rather than purely notional. Of course any strategy is not going to outperform all the time. What has been lost in the argument is why risk parity is used, namely that assets do not all have the same risk profiles. For example for trend following funds, if they had no method to adjust for the risk differences in their portfolios, they would end up being dominated by the highest volatility assets, like crude oil, whilst having little exposure to lower risk assets like bonds.

So yes, strategies might not always outperform all the time. But it is important to consider, what the alternatives are. In the meantime, parity is just as important for burgers as it is for risk...

If you're on the US East Coast, I'll be in Washington DC 27 Sep, NYC 29 Sep-3 Oct and Boston 5 Oct if you'd like to meet me and hear more about systematic trading! If you're in mainland Europe, I'll be in Paris 6-9 Oct at the WBS Fixed Income conference, where I'll be hosting a systematic trading workshop.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

21 Sep - New York - Agostino Capponi - Arbitrage-Free Pricing of XVA (Thalesians/IAQF)
23 Sep - London - Stephen Pulman - Multi-Dimensional Sentiment Analysis
01 Oct - New York - Saeed Amen - How to build a CTA? / interactive Python demo
05 Oct - Boston - Saeed Amen - Trading Thalesians Book Talk / PyThalesians Python Interactive Demo (Boston Algorithmic Trading Meetup Group)
09 Oct - Budapest - Taylor Spears - On the Sociology of CVA
14 Oct - New York - Dan Pirjol - Can one price Eurodollar futures in Black-Derman-Toy? (Thalesians/IAQF)
21 Oct - London - Robert Carver - Lessons from systematic trading

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Fed (mountain) hikes

The market has been awash with speculation about when the Fed might hike, continually watching for clues from Fed communications. The recent symposium of central bankers at Jackson Hole, organised by the Kansas Fed, presented the market with another opportunity to search for clues. Comments at Jackson Hole struck a hawkish tone. Fed vice chair Fischer suggested that inflation did not need to pick up for a Fed hike to happen. If we consider the start of previous Fed hiking cycles, whilst growth and employment levels might have been similar, for the most part, inflation was a lot higher than it is at present. For a wrap up of what happened at Jackson Hole, I'd recommend have a look at Sam Ro's write up at Business Insider. If you're interested in understanding central bank communications from a systematic viewpoint I'd have a look at my recent Thalesians quant paper on the topic for Prattle, where I show how patterns in central bank sentiment gauged from communications can be used to trade FX.

Whilst the market has been obsessing about when the Fed is likely to hike, perhaps a more pertinent question is what the market will do, when a hike actually happens? A recent tweet by Emanuel Derman got me thinking precisely about this point. (Incidentally if you don't follow him on Twitter you should do!). Derman suggested that:

Raising rates 25 bp is actually going to be a massive non-event. There will be a brief positive reaction by markets, then back to business - Emanuel Derman @EmanuelDerman

By the time the Fed actually does hike, the market will have had such a long lead time, that a considerable amount of market adjustment to the hike will have already occurred. Let's consider the dollar rally from July 2014 till just before January's ECB meeting. The Fed had not hiked during any of this period, nor had the ECB actually announced full blown QE. However, the market was primed to expect both these scenarios. The market was essentially adjusting to expectations, rather than significant changes in monetary policy.

Whilst the market were busy discussing Jackson Hole over the past few days, I was busy hiking in the Alps. The process of the mountain hike can very much be seen similar to the way the market is approaching the Fed hike. We're currently in that phase, getting closer and closer to the top. When the Fed finally does hike, it'll be like getting close to the mountain peak. Most of the hard work of climbing will be done by then, and the market will be moving on to other issues.

If you're on the US East Coast, I'll be in Washington DC 27 Sep, NYC 29 Sep-3 Oct and Boston 5 Oct if you'd like to meet me and hear more about systematic trading! If you're in mainland Europe, I'll be in Frankfurt 7 Sep, Zurich 8 Sep and Paris 6-9 Oct.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

07 Sep - Frankfurt - Saeed Amen/Jochen Papenbrock/Miguel Vaz/Adrian Zymolka - Quant Evening (Thalesians/Quant Finance Group Germany)
08 Sep - Zurich - Saeed Amen - How to build a CTA? / interactive Python demo
10 Sep - San Francisco - Steven Pav - Portfolio Inference and Portfolio Overfit
21 Sep - New York - Agostino Capponi - Arbitrage-Free Pricing of XVA (Thalesians/IAQF)
23 Sep - London - Stephen Pulman - Multi-Dimensional Sentiment Analysis
01 Oct - New York - Saeed Amen - How to build a CTA? / interactive Python demo
14 Oct - New York - Dan Pirjol - Can one price Eurodollar futures in Black-Derman-Toy? (Thalesians/IAQF)
21 Oct - London - Robert Carver - Lessons from systematic trading

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All along the watchtower

In days past, I had compact discs (or even cassette tapes). I'd listen to albums from end to end. With the advent of music compression such as MP3 and subsequent innovations like Spotify and Apple Music, we digest our music in very different ways. I've noticed that I listen to a much more eclectic array of music genres with streaming. No longer do I simply restrict myself to listening to albums from end to end, by artists I already know. Instead, I dip into the unknown and hear whatever Apple Music might throw at me. At times, it fails (hey, Apple, I don't like teenage pop bands). However, other times, I stumble upon music that I actually like, helped along by some weird algo concoction.

Recently, I came across some of the music of Bob Dylan. I'm sure we've heard of a lot of his music, whether it's in the original or in the many covers of his works. What struck me, when you listen close to the lyrics of tracks such as All Across the Watchtowers, is that interpretation, very much depends on the listener. It's just often, sometimes the lyrics go over my head, because I tend to hear the music first and the lyrics later. Try Google-ing the lyrics, and you'll find many conflicting interpretations. It also depends at what level we seek to interpret a song. The same approach applies to images. Take the image above, we could either interpret as 5 hoops, or more likely, it is related to the Olympic movement and Hungary's place in it. One anonymous interpreter of the song noted, rather comically a quotation by James Joyce:

I've put in so many enigmas and puzzles that it will keep the professors busy for centuries arguing over what I meant, and that's the only way of insuring one's immortality.

The many ways we can interpret song lyrics and images more broadly, got me thinking about the market. The way in which we are always trying to read something into it. Unlike of course, songs, there is no writer of the market. Instead, we have traders individually "writing" to the market, with differing views (after all, without differing views, you would have no market) - each them interpreting the potential future in a differing ways and with different time horizons. When traders' views about the future coalesce, markets trend. When there is disagreement, we see markets without a clear direction. Show a chart to two technical analysts and you can often get different answers about what they think it might all mean.

So who is right? In a sense, it is not so much about having the "right" or "wrong" interpretation about markets. It is more about understanding which interpretation the market will have. Furthermore, we need to recognise that some strategies might well be wrong more than they are right.. is it the size of the winning trades that matter, which is the case with trend following strategies.

But hey, it's Saturday evening, as I'm writing this, time we are went to listen to some Bob Dylan.

If you're on the US East Coast, I'll be in Washington DC 27 Sep, NYC 29 Sep-3 Oct and Boston 5 Oct if you'd like to meet me and hear more about systematic trading! If you're in mainland Europe, I'll be in Frankfurt 7 Sep, Zurich 8 Sep and Paris 6-9 Oct.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

07 Sep - Frankfurt - Saeed Amen/Jochen Papenbrock/Miguel Vaz/Adrian Zymolka - Quant Evening (Thalesians/Quant Finance Group Germany)
08 Sep - Zurich - Saeed Amen - How to build a CTA? / interactive Python demo
10 Sep - San Francisco - Steven Pav - Portfolio Inference and Portfolio Overfit
23 Sep - London - Stephen Pulman - Multi-Dimensional Sentiment Analysis
01 Oct - New York - Saeed Amen - How to build a CTA? / interactive Python demo
21 Oct - London - Robert Carver - Lessons from systematic trading

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