Quants vs The Market

[giolucas]

With the impact of hedge funds using high speed computers and with Quants like the  trader creating "flash crashes" and most importantly manipulating the actual price of the underlying security and commodities, will we see the markets exposed to additional risk in the future?  Did we screw up, in not saving the floor traders for additional oversight now that we have all gone electronic?  Time will tell.     

Bloomberg, by Silla BrushTom SchoenbergNick Baker 12:12 PM CDT April 21, 2015

U.S. authorities accused a lone trader based in a house under the flight path of London’s Heathrow Airport for intensifying the 2010 global markets shock known as the flash crash, part of an alleged pattern of cheating dating back as far as 2009. The trader, 36-year-old Navinder Singh Sarao, was arrested in the U.K. on Tuesday, and the U.S. is seeking his extradition, the Justice Department said in a statement. He earned almost $900,000 trading futures on the Standard & Poor’s 500 Index on May 6, 2010 -- when investors saw nearly $1 trillion of value erased from U.S. stocks in just minutes -- and a total of $40 million from 2010 to 2014 buying and selling the contracts, according to the U.S. government.

Although the U.S. says Sarao’s illegal activities spanned from at least June 2009 through April 2014, the government gave special attention to what happened during the flash crash, which damaged perceptions about the safety of global markets. The trades by Sarao, a resident of Hounslow, England, took place on an exchange run by Chicago-based CME Group Inc. He was charged on Feb. 11 with wire and commodities fraud in a criminal complaint filed in federal court in Illinois.

[elcheapo]

AND WHAT HAVE I BEEN SAYING ?

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[childofthecorn]

Maybe what where seeing here is the Skynet affect (Terminator 2).  With the computers fully in charge of our livelihood maybe we are second guessing the whole thing?

[glenlivet18]

I don't think any of this affects the average American and it's going to be hard to prove he "caused" the crash.  Prosecuting the case will be a sham.  I mean a drunk driver can kill someone and get probation, but Brent Dooley, the 2008 rogue trader, got seven years for trading too much wheat.  And Corzine was never touched!  Total sham. This will be the same.

[timetippingpt]

The quants create real opportunity if you can learn to exploit their weaknesses. If a herd of HFT elephants is racing towards you, you do not stand in the way, you let them run until they are too tired to stand up and then you walk up behind them and reap the harvest.

Quants are so specialized...they become extremely poor at most things...there is the opportunity. Palouse is very good at value and trends. The quants don't stand a prayer against him long-term. We focus on timing to determine when the elephants are too tired to stand up any longer...and then we bring the hammer. 🙂    Harvest is a nice euphemism..

[giolucas]

glenlivet,

I understand your point and I know this UK trader's number one objective was to make  money, just like all of us I guess.  I know the details will come out on how he exactly did it but this trader is obviously super smart to create his own platform and outsmart the market.    

Once again, I do not know the details and I guess the formal charges are wire fraud, commodities fraud and market manipulation.  So my question is, are we punishing this guy for trying to get an edge on other traders?  Don't all traders wish they had some edge over other traders in some fashion?  

 

[hardnox]

I think the incentive to use HFT in ag markets is relatively small because there aren't multiple markets to arbitrage against in high speed. As far as scalping a couple quarter points, the only folks that would really consistently benefit would be the very large commercials who could trade against their own large cash sales and purchases and I'm not sure that even for them there would be enough consistent flow to justify it.

As far as quants using longer term directional trading techniques, I'm pretty sure that everything under the sun has been tried or will be soon and there are no silver bullets out there.

[hardnox]

PS, I'm realtively sure that Sarao did something wrong technically but seriously doubt that he alone was responsible for the flash crash.

If anything he's probably guilty of being less technically advanced than the folks who run the game now- they spent a $B on a fiber optic line from Chicago to NY just to shave a few nanoseconds off the orders between the two points, and then, if fairly well substantiated rumor is to be believed, have been surpassed by a few additional nanoseconds by an above ground laser link.

BTW, I can't find a single, solitary argument for anything that produces any social benefit whatsoever from that activity. Merely that some folks figuring out how they can place a "legal" private tax on everyone else's savings.

[timetippingpt]

Excellent comments Noxy.

[hardnox]

http://www.zerohedge.com/news/2015-04-24/why-nav-sarao-had-be-destroyed-he-found-way-beat-hfts-their...

An interesting take and one that I imagine is at least partly true.

HFT is a real scandal, unlike most of the outrages du jour that cycle through regularly, and I don't see either Hillary or any of the 19 dwarves going anywhere near it.

Probably only Elizabeth Warren would and a cynic might conclude that is only because she's already burned her bridges with that particular (and spectacularly flush) money crowd.

The folks out here in Hooterville have been pretty well programmed to believe that the cause of American decline is all the lazy folks on the lower end of the sprectrum. That's been carefully inculcated into the middle class remnant so that they will stand guard for the elite.

As the saying goes, a fish rots from the head down.