27,000 risk managers at Lehman?

This September, it will be seven years since Lehman Brothers collapsed, triggering the financial crisis. I was working at Lehman at the time. Hence, it's an episode that I'll probably be thinking about for many years to come. I've gone over the subject on several occasions both in my blog (Lehman Brother can you spare a yard?) and it also formed the backdrop for the introduction in my new book Trading Thalesians - What the ancient world can teach us about trading today (Palgrave Macmillan).

This week, we heard from one of the main protagonists in the whole sorry episode of Lehman's demise. Dick Fuld, Lehman Brothers' former CEO made a public appearance, speaking at the Marcum Microcap conference (I suppose his previous public appearances in front of US politicians were a more case of being "volunteered", if there is such a phrase??). Perhaps unsurprisingly, Fuld's appearance, attracted a large amount of media coverage: what would he say after all these years? The most reported soundbite to come out of his speech was his statement that Lehman had 27,000 risk managers, namely all the employees. Unfortunately, this appears to ignore the point that as CEO and also the biggest shareholder, he was the most important risk manager of all. If you lead a company, you are paid to take responsibility, you are not paid to blame all your employees for your failure to manage them. Lawrence MacDonald, the author of a Collosal Failure gave his own interpretation of Fuld's comments on Twitter:

It wasn't "27,000 risk managers" at Lehman, it was 26,992 people making money at Lehman, and 8 guys losing it

Fuld seems to be of the view that the blame for Lehman's collapse was the US governments decision not to bail out the bank and there was a "perfect storm" of events. Whatever you might think of the U.S. government's decision in 2008, the fact that Lehman *needed* to get bailed out was not the doing of the U.S. government. They did not force feed Lehman Brothers a diet of leverage to gorge on illiquid and toxic assets, which came unstuck when the U.S. housing market changed direction. It's like a builder using very cheap materials to build his own house, which then collapses as a result. Rather than admitting he used poor building materials, he then blames the police for failing to stop him building in the first place.

Significantly, there were no apologies from Fuld or an acknowledgement of mistakes made at Lehman. He seems to be lost in a web of events, where Lehman Brothers' adversaries were all apparently outside the company, rather than inside its boardroom overlooking Times Square. Yes, external events eventually conspired to pull Lehman under, but only because Lehman had a significant risk exposure to them. Furthermore, those who were shorting Lehman were proved right.

Every trader makes mistakes. It's the inevitability of the activity called trading. You take a risk to make a profit, thats the dictionary definition of trading. Sometimes, risks you take will land you with losses. A loss is never something to cherish. What a loss does give you however, is the opportunity to both admit and learn from it. If you manage your risk effectively, these losses will not be enough to destroy you. It's not even something confined to trading, arguably the ability to learn from mistakes is crucial for any business. I've made many mistakes along the way trying to go independent in creating a financial research business, after working in banking for a number of years. Sure, I've had great advice, some of which I took on board and some of it which I've (mistakenly) ignored, whilst making this transition. What is clear though is that any difficulties I've had going independent have taught me a huge amount (although I really don't wish to repeat them!). Reality is the harshest of teachers, one you can't ignore!

You can only learn from mistakes, if the mistakes you make are small enough that you can survive. If you place all your risk on a single massive trade, if it goes wrong and you lose everything, it becomes difficult to blame anyone else but yourself. Moreover, an inability to admit a mistake is probably the biggest disqualification for a sound risk manager, that you could think of. If Fuld wants to be congratulated, the best word he can say is "sorry" - for that, he will get 27,000 rounds of applause.

(I'll be in Frankfurt speaking about my book and doing a live Python FX demo in Wed 3 Jun - register here - and also speaking at Open Source in Quant Finance also in Frankfurt on Fri 5 Jun - hopefully see you there!)

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 interesting 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 and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

03 Jun - Frankfurt - Trading Thalesians book talk / Python FX intraday demo - Saeed Amen / The Thalesians (tickets here)
17 Jun - London - Using Python to build trading strategies - Man-AHL & Saeed Amen
18 Jun - New York - Dr. Tim Leung - Exchange-Traded Funds and Related Trading Strategies - IAQF-Thalesians
22 Jul - London - TBA

Read More

Rembrandt selfies or selfie sticks?

Wandering through the city of Amsterdam over the past few days, it was difficult not to appreciate the grandeur of the past, and to make comparisons between the past and the present. It can sometimes be tempting to think that the old times were truly better. Where once a "selfie" was an evocative painting by Rembrandt or Van Gogh which now hangs in the Rijksmuseum, today, it is the product of a selfie stick, which is now banned in most museums. What starker contrast can there be between the past and the present?

In Amsterdam, the bridges, the canals, the cobbled streets: it all comes together to create a very picturesque view of the past. It is of course only a partial snapshot and a somewhat skewed one at that, which has been preserved over the ages. The difference is that everything around these preserved streets has changed. The canals are no longer arteries of commerce, but of tourist boats. The pathways surrounding them are clogged with cars as opposed to horses and their carts. What has been less than picturesque about the past, has been erased, the physical toil, the lack of healthcare and a society which was significantly more violent.

We need not purely look back over the ages to have a rose tinted view of the past. Even within the space of our own lifetimes, we might lament the passing of time. Indeed, in the industry of finance, this is no different. My career has been comparatively short, around a decade, yet, it is just about long enough, for me to make comparisons about how the industry has changed.

My main reason for being in Amsterdam, was to attend the Global Derivatives conference. One of the panels discussed this very point, about whether the past was indeed better in finance, in particular for quants. The panel consisted of a number of very well known and experienced quants.

It was noted that the job of a quant has changed over the years and the finance industry itself was reducing in size. Where once quants purely used mathematics to price options, in recent years, maths skills have become more important in other areas such as systematic trading. The panel seemed largely in agreement that the past was a more fun time to be a quant. Alex Lipton, of BAML, in a light hearted comment, suggested that the reason being a quant was more fun 20 years ago, was because everyone was 20 years younger, which elicited audience applause.

I have to agree with Alex's point. Very often, the more emotional reasons for wanting the past, can somewhat overshadow the more practical reasons in favour of the present and indeed the future. Indeed, I feel that it is a very exciting point in time to be a quant. It's purely that, the "new" areas for quants before, like pricing options have become more mature and established fields. The area of systematic trading, whilst it is hardly new, has become a bigger focus for quants and creating new questions to solve. Indeed, not every problem has been solved in quantitative finance. The recent financial crisis, suggests there is a huge amount of work left to be done.

For the past, our memories do a wonderful job of scrubbing away the less desirable, whilst in the present, problems cannot simply be "unmemorised" and have to be confronted. Let's celebrate glories the past, but remember, that just like today, it was not perfect.

(I shall be publishing a full takeaway of my quant thoughts from Global Derivatives 2015 over the next few days. It has been kindly been sponsored by the team at Global Derviatives and hence the full version will be available. Let me know if you'd like a copy! Also a summary of my tweets from the conference can be seen here)

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 interesting 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 and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

27 May - London - Gaining the alpha advantage in vol trading - Artur Sepp
29 May - Prague - Trading Thalesians book talk / Interactive FX intraday demo - Saeed Amen / The Thalesians (tickets here)
03 Jun - Frankfurt - Trading Thalesians book talk / Python FX intraday demo - Saeed Amen / The Thalesians (tickets here)
17 Jun - London - Using Python to build trading strategies - Man-AHL & Saeed Amen
18 Jun - New York - Dr. Tim Leung - Exchange-Traded Funds and Related Trading Strategies - IAQF-Thalesians

Read More

Seeing something in nothing

My brain has been constantly whirring over the past day or so, desperate to find an idea for a blog article. The problem is that my brain is invariably focused on topics for a blog, which have nothing to do with finance like burgers. Yes, I could write about burgers and somehow skew the end of the article to finance. But I've probably done that more than enough times by now (and want to leave that opportunity for a week when I really do not have any ideas). Alternatively, I could just take a break from writing something financial, and focus on more important subjects (despite being in currency markets for a decade, even I recognise, that where EUR/USD is trading, is perhaps not the biggest concern of most people). Possibly, although, I do quite enough of that already on my Twitter feed (@thalesians if you're interested in following!)

The whole exercise has however, got me thinking. Maybe sometimes doing nothing, tinkering with your thoughts and engaging only in that thing called idleness can sometimes be the best course of action. Always wanting a positive result from what you do, is not always possible.

I'm not for a moment suggesting that doing nothing all the time is a solution for success, merely that it has its time and place. Working hard has an element of usefulness, if it's on a project where the outcome could yield a tangible benefit.

I recently went to a conference organised by the London Quant Group, which featured a myriad of exciting talks, one of which was on the subject of data mining by Mark Salmon, which I enjoyed very much (I also gave a talk, although I must confess I probably should have avoided telling any jokes - my subject of the Impact of Scheduled Events on FX Implied Vol was perhaps not the best avenue for my brand of humour!)

However, returning to the narrative about Mark's talk, the crux of data mining can be simplified into the problem of spending too much time finding "value" in a dataset where there is nothing to be found. He outlined a number of different methods to try to avoid data mining.

In the context of a systematic trading strategy, excessive data mining can result in a strategy which might work fantastically on historical data, but potentially awfully when you run it live with real cash. Doing nothing, rather than endlessly searching for something which isn't there would have perversely been more productive.

In a different context, even with discretionary trading, sometimes doing nothing can be the answer. Trading for the sake of it, when you have no conviction in any market view at that time, is worse than doing nothing. Overtrading your book, is one thing to avoid, and is the bane of many traders. Only your broker will make money from overtrading!

So perhaps sometimes, doing nothing might well be better than doing something. In the next blog, I promise to discuss a bit more than simply, well... nothing.

(as an aside, I'll be in Amsterdam next week speaking at Global Derivatives on Big Data based trading and impact of scheduled events on FX implied vol. Let me know if you'll be around!)

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 interesting 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 and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

27 May - London - Gaining the alpha advantage in vol trading - Artur Sepp
29 May - Prague - Trading Thalesians book talk / Interactive FX intraday demo - Saeed Amen / The Thalesians (tickets here)
03 Jun - Frankfurt - Trading Thalesians book talk / Python FX intraday demo - Saeed Amen / The Thalesians (tickets here)
17 Jun - London - Using Python to build trading strategies - Man-AHL & Saeed Amen
18 Jun - New York - Dr. Tim Leung - Exchange-Traded Funds and Related Trading Strategies - IAQF-Thalesians

Read More

Expecting a holiday from general elections?

The notion of forming expectations seems ingrained into our psyche. It is crucial, because without having expectations decisions become purely random exercises. Expectations give us a guideline, however imperfect, to judge both the state of the present and future.

Take for example, when you go on holiday. One way to pick a holiday destination is to spin a globe, close your eyes and place you finger somewhere on the map's surface. Alternatively, we can draw up a short list of destinations. From those, we pick a place to visit, for which we have the most positive expectations.

Our expectations can be a product of many things. In this holiday case, something we might have read could impact our expectations. Friends might have traveled a certain place. We could have visited a destination a long time ago and have vague memories of it. The expectations we form might well end up being markedly different from other people too (the "consensus").

The problem with expectations around holidays, is that we nearly always go on them with very high expectations. After all, if you expected a holiday destination to be utterly awful, it would be unlikely you'd visit there in the first place!

Are all holidays fun? Not if they fall short of your very high expectations. If you're a keen swimmer, expecting spotless sandy beaches with tropical temperatures, and instead face water which feels like ice, your expectations are dashed! If on the other hand, you hate swimming and instead yearn to visit museums, the state of the beaches would be of little concern.

In the short term, markets are like holidays (however implausible this might seem) and we had a prime example this week! After the exit polls came out at 10pm LDN for the UK General Election showing a potential Tory win, GBP/USD immediately jumped. Polls had been pretty wishy-washy going into the election, some showing a Labour victory and other others indicating a Tory win, with relatively small margins of victory compared to the exit poll. Had anything actually changed materially, about the economy in that moment at 10pm? No, of course not. GDP did not suddenly change because of an exit poll! It was merely that real events surprised compared to real events.

In the longer term fundamental factors are a driver for markets. However, we shouldn't lose sight of how in the shorter term, the difference between expectations and news, can be a much more potent driver. Be careful what you expect, before you make a decision, because that will impact how you feel about the result, just like markets!

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 interesting 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 and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

27 May - London - Gaining the alpha advantage in vol trading - Artur Sepp
29 May - Prague - Trading Thalesians book talk / Interactive FX intraday demo - Saeed Amen / The Thalesians (tickets here)
03 Jun - Frankfurt - Trading Thalesians book talk / Python FX intraday demo - Saeed Amen / The Thalesians (tickets here)
17 Jun - London - Using Python to build trading strategies - Man-AHL & Saeed Amen
18 Jun - New York - IAQF-Thalesians Seminar - Dr. Tim Leung / Exchange-Traded Funds and Related Trading Strategies

Read More

Discomfort zone

The phrase "leaving your comfort zone" is the most cliched of cliches (I tried to use clichiest - but my word processor refuses to acknowledge the existence of that word). Perhaps a more apt description, would be what follows from this, namely reaching a discomfort zone. Essentially any sort of change will result in leaving an area, where you know what you're doing to one, where you need to learn.

It's like the first time you try to ice skate. Your initial steps seem to be disconcerting, rather than enjoyable. The overwhelming urge is to be very cautious, hands grasping the handrail, seeing the other skaters zoom past. If anything an excess of caution and a reticence to take part, makes skating more difficult. The only way to master ice skating is to leave your comfort zone and allow yourself to move more freely. For me, the only way I really learnt how to ice skate, was on an ice skating rink, which had no hand rail, thus forcing me to learn!

In trading, you might learn something when you're in your "comfort zone" and your strategy is performing well. However, from experience, it's when everything that can go wrong, has gone wrong, that you really do learn. Of course, this doesn't mean you should aim to lose money! It's simply, that everyone will have a drawdown sooner or later in their career. It's how you react and learn from a bad patch that can make it such a valuable experience. Another time you learn in markets, is when you try a totally new strategy. For me, this happened, when I started researching the use of news data to trade markets. Continual research, even when you appear to be making money, is the best hedge against any sort of complacency.

Of course, whether or not you trade, the idea of leaving your comfort zone can come up very often during your professional career, in particular, when deciding whether to move on from your job. Hence, it's rarely something you can avoid. Rather than fearing it, it can be seen as an opportunity, albeit one where initially, you might feel that you're not quite going forward in the manner you intended it.

We've encountered it, in trying to expand our Thalesians finance talks, out of our base in London? Would the idea work elsewhere? Should we just stick to London, where we already had an audience for our talks? Luckily, we took the plunge (another cliche I usually prefer to avoid) and expanded to other cities. It was never easy at first, but slowly, we found our way.

We now have a successful series of talks running in New York and Budapest, albeit a lot of the credit for that needs to go to the local organisers (Harvey Stein/Matthew Dixon in NYC and Attila Agod in Budapest). The next step (to leave our comfort zone) is to start a series of talks in Prague and Frankfurt. We have our first talks in those cities in late May and early June respectively, where I'll be speaking about my new book Trading Thalesians, as well as giving a fun demo on intraday FX markets using Python (and I hope if you live in those cities you'll join us - register for those talks here). Hopefully, with your support they will be the first of many!

There are risks involved in leaving your comfort zone and sometimes it can be the wrong decision. But then again no risk, means no reward! It's not simply a matter of trading, but can apply to major decisions you make.

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 interesting 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 and Budapest - join our Meetup.com group for more details here (Thalesians calendar below)

27 May - London - TBA
29 May - Prague - Trading Thalesians book talk / Interactive FX intraday demo - Saeed Amen / The Thalesians (tickets here)
03 Jun - Frankfurt - Trading Thalesians book talk / Python FX intraday demo - Saeed Amen / The Thalesians (tickets here)
22 Jun - London - TBA

Read More