Models vs. Programs vs. Systems

May 20, 2010

I was having an e-mail conversation with a long-time friend in the business yesterday about the Matrix Market blog post last week.

A little background – my bud has been modeling deals for more than twenty years, and we often discuss the internals of the behavior we try to capture in choosing variables and basis functions to apply to those variables.

He came up with a wonderful image of “algo” trading systems I thought I would share:

I might have compared algorithmic trading to two dueling rube goldberg machines.

He has a point.  I don’t think many outside the business, including the regulators, realize just how Wall Street systems come into being, or how they grow over time.

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Teaching the ECB a Lesson

May 19, 2010

Yesterday’s very limited restriction on bearish speculators by Germany is being met with a harsh object lesson.

The bears have enjoyed nearly unlimited leverage in their bets, something the bulls don’t have.  If only I could buy as much stock as I wanted and pay for it only when I feel like it.  That’s what naked short sellers get to do.

It’s even more extreme in bondland.

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Moving Cash In – Too Soon?

May 18, 2010

I began buying today with some of the cash I’ve had on the sidelines.  Naturally, the gremlins informed me I was too soon.

Still, I continue to like the amREITs below book value, especially when the futures market is saying LIBOR won’t be going anywhere for a couple of years.

The Fannie/Freddie buyouts are more than half done at this point, and the outsized hit to Annaly (after their assurances that they owned the kind of paper that wouldn’t be called) has resulted in a really major hit to their stock price.

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One Word

May 18, 2010

Can make all the difference.

But that won’t stop the financial media from throwing a tantrum.

Santelli and the anchor cow at CNBC just got done reading the headline that Germany was going to ban naked short selling of certain stocks and bonds, and they couldn’t scream loud enough about how that was terrible for the markets.

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Matrix Market

May 13, 2010

Last weekend I fielded several calls from friends asking my opinion of what was going on in the stock market after the “Flash Crash.”

Some had heard there was a big order mistakenly entered (n0t true), and others had heard that there was some kind of computer program glitch (also not true).

After the first couple of calls, I settled on using the analogy of the cyberstential movie series The Matrix.  As if they were reading my mind, the Turner Classic Movie cable channel featured the first in that series as a “classic” over the weekend.

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Good Bots, Bad Bots

May 11, 2010

Over the next few days I’ll be introducing you to some software that makes decisions about money and trading.

Unlike Cliff’s benign bots that use our group cyber consciousness (the web) to project how the human family will be faring in the future, some bots are designed to emulate, or even exploit, human investment choices.  They aren’t all good bots.

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May 6, 2010

Take my eyes off the screens for a couple of hours, and look what happens!

IOC printed a trade at $50.50 today when I wasn’t looking, and then managed a rally to $59 into the close.  That’s still a few dollars under where it was trading when I left to do some errands and then came back to watch C-SPAN follies.

They were debating an amendment to add a measure of consumer protection to the financial reform bill, and I was struck by the series of speeches I heard, every single one of which said they supported consumer protection from financial misdeeds.

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