"Rise ( & Fall ) Of The Machines" …
Courtesy of Jan-Martin Feddersen at immobilienblasen
With volatility finally creeping back into the markets i think the "Rise Of The Machines" aka the QUANT story is deserving extra attention….Especially with market stats shown in Does Anyone Detect A Hint Of Complacency? from 2 weeks ago….. Make sure you also read the UPDATE….
Ich denke das dank der etwas gestiegenen Volatilität das Thema ROBOTRADING aka QUANTS einen ganz genauen Blick wert sein sollte….Das gilt umsomehr als das noch vor 2 Wochen ein kollektiver Realitätsverlust ( siehe Does Anyone Detect A Hint Of Complacency? ) die Marktteilnehmer erfasst hatte…. Verweise ausdrücklich auf das UPDATE……
The Minds Behind the Meltdown WSJ
How a swashbuckling breed of mathematicians and computer scientists nearly destroyed Wall Street
Instead of looking at individual companies and their performance, management and competitors, they use math formulas to make bets on which stocks were going up or down.
By the early 2000s, such tech-savvy investors had come to dominate Wall Street, helped by theoretical breakthroughs in the application of mathematics to financial markets, advances that had earned their discoverers several shelves of
Nobel Prizes.
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PDT [the largest prop desk at Morgan Stanley], one of the most secretive quant funds around, was now a global powerhouse, with offices in London and Tokyo and about $6 billion in assets (the amount could change daily depending on how much money Morgan funneled its way). It was a well-oiled machine that did little but print money, day after day.
That week, however, PDT wouldn’t print money—it would destroy it like an industrial shredder.
The market moves PDT and other quant funds started to see early that week defied logic. The fine-tuned models, the bell curves and random walks, the calibrated correlations—all the math and science that had propelled the quants to the pinnacle of Wall Street—couldn’t capture what was happening.
At the time, few quants realized what was happening, but over the next few days a theory would emerge: The U.S. housing market was unraveling, leading to big losses in the mortgage portfolios of banks and hedge funds.
The result was a catastrophic domino effect. The rapid selling scrambled the models that quants used to buy and sell stocks, forcing them to unload their own holdings.
Authorities, meanwhile, had little idea about the massive losses taking place across Wall Street.
That Tuesday afternoon, the Federal Reserve said it had decided to leave short-term interest rates alone at 5.25%.Investors on Main Street had little idea that a historic blowup was occurring on Wall Street.
Oddly, the Bizarro World of quant trading largely masked the losses to the outside world at first. Since the stocks they’d shorted were rising rapidly, leading to the appearance of gains on the broader market, that balanced out the diving stocks the quants had expected to rise. Monday, the Dow industrials actually gained 287 points. It gained 36 more points Tuesday, and another 154 points Wednesday.
The huge gains in those shorted stocks created an optical illusion: the market seemed to be rising, even as its pillars were crumbling beneath it.
A source of the extreme damage Wednesday and the following day was the absence of some high-frequency statistical arbitrage traders, firms that use high-powered computers to trade rapidly in and out of stocks and can act as liquidity providers for the market.
As investors tried to unload their positions, the high-frequency funds weren’t there to buy them—they were selling, too. The result was a black hole of no liquidity whatsoever. Prices collapsed.
UPDATE:
Rise of the news-reading machines FT Alphaville
The arms race in trading technology is set to intensify this week as Thomson Reuters, the news and market data company, on Monday unveils a service for “high-frequency” traders allowing them to make split-second trading decisions based on news articles “before the information moves the market” . . .
So-called “machine readable news” services, such as the new Thomson Reuters product, have grown up in parallel with the emergence of high-frequency and algorithmic trading, which depend on lightning-fast delivery of data and news to traders specialising in such computer-driven trading strategies.
Machine readable news systems use computers to “scrub” thousands of breaking news stories, prioritising their relevance for traders – often based on simple key words – and delivering them in a special feed. This provides traders with “signals” that are used to drive their strategies
Sounds reassuring… 😉 For more on this topic i recommend Kass: The Quant Bubble
