Inevitably one of the first ideas people have when they start thinking about how to write a trading algorithm turns out to be among the hardest: trading the news. The problems are many and in some cases not so obvious…but the natural appeal of the idea seems universally compelling.
Just after the dot.com craze, a brilliant friend of mine (who had just sold his web consulting startup) decided to write a book. The premise was glorious. A bunch of clever college-age kids formed a startup to predict the stock market. The method they used was to constantly comb the web with ultra-sophisticated algorithms which would run across giant server farms overnight and ultimately generate tomorrow’s headlines. Based on the headlines that their system generated, they would place trades that would take advantage of these predicted events.
Sadly, my friend never went on to complete his book, so I don’t know how it all turned out. (Instead, he went on to start another successful company, this time in the field of robotics.) While he was writing it, I loved getting new drafts as they were filled with clever ideas. But the core idea of predicting headlines and then using those headlines to trade always struck me as especially cute.
For those of us without access to news-predicting algos, writing strategies based on the news is rather less straight forward, though there are a growing variety of products and services aiming to fill the gaps. Today must have been trading-the-news-day as I found a few articles on the topic in my mailbox and even received a cold call from a vendor, Need to Know News, with just such an offering. Below I’ll look at some of these offerings and consider some of the issues involved in writing trading strategies based on the news. Read more…
back-testing, market data, startup, strategy development, technology
Photoillustration by: Ji Lee
This afternoon I read by far the best and most interesting article yet on “The End” of wall st by Michael Lewis. Of course, as I was reading this engrossing tale on the inevitable failure of greed to create a perpetual money machine, the market rallied some 6%…
While the hero of Lewis’ piece found value in effectively shorting the credit bubble just as it reached its shimmering peak, this set of “investors” looks to profit in these tougher times ahead by going long man’s baser tendencies…
dereferenced, hedge funds
I came across this gem of a quote in a comment on the big picture and it reminded me, somewhat circuitously, of another one of the things I view as axiomatic about algorithmic trading.
In The Alchemy of Finance, George Soros observed that one of his advantages as a trader was that while he held beliefs strongly, he was also capable of abandoning or even reversing them quickly as conditions evolved. An algorithmic trader needs something like this but more so - an automated trader is best served free of opinions entirely.
I think this is why the sunken ship quote made me think of this. While charts are an effective means of quickly communicating potentially a great deal of information to a human viewer, the cult of chart technicians and the endless supply of books, lecture series and training materials they actually make their money on might convince you that you can form your opinions based on chart patterns…
Read more…
books, strategy development
Normally I spend my design-oriented thoughts on object models - when I’m working on StratBox - or about volatility, latency, executions, &tc - when I’m working on a trading strategy. But a recent trip abroad has inspired me to consider more fanciful design horizons.
After more than a year of blogging I’ve finally decided to refresh the look of the site and you’re looking at the first iteration of this effort. Blogging software is pretty remarkable as it allowed me to essentially change the “skin” of the blog without affecting its content. This is like Kirill Grouchnikov’s lovely open source “Substance” Look&Feel for Java which does the same trick for swing-based applications: just include his magic code and your system automagically looks a lot better!
More substantively, my recent trip to Israel and the subsequent agreement to open a Tel Aviv office to take advantage of a felicitous new partnership and Israeli algorithmic talent, has led to a broadening of our mission. This in turn led to the foray into graphic design I describe below. Read more…
dereferenced, open-source software, startup
I’ve written here about exchange simulation in service of back-testing trading algorithms and briefly mentioned the difficulties of simulating the behavior of an order book. I just came across “A stochastic model for order book dynamics” by Cont, Stoikov and Talreja of Columbia and Cornell financial engineering groups. (I’ve also saved a local copy of the paper here.) While their focus isn’t on simulation for the purpose of back-testing but on probabilistic reasoning in real-time for high-frequency strategies, they illustrate a variety of models/methods for such reasoning. The equation depicted above is part of their description for reasoning about the likelihood of being able to make the spread in a stat arb strategy which places orders simultaneously at the bid and ask. It’s very technical, but interesting even if only to illustrate the kinds of tools being wielded in the service of algorithmic trading!
EMS Internals, dereferenced, strategy development
There’s an old wall st saw: “Sell Rosh Hashanah, Buy Yom Kippur” that, according to this guy at least, has had good performance since 1915.
I haven’t tried to reproduce his work to confirm it, but I’m certain that anyone who bought today’s close is a serious mensch!
events
I was looking for a couple of books on amazon today and came across this offering of a hoodie (pictured above) which reads: “I helped bailout the banking system and all I got was this lousy tee shirt!” which I’d (admittedly more rancorously) suggested only a few days ago…
Just as curious, the search that revealed this gem was meant to find books similar to one I’ve recently read by Dr. Andrew Lo, “Hedge Funds: an Analytic Perspective” (pictured left) and which, like all of his work, I found interesting and informative. I’m not sure exactly how Amazon matched these two products together, but it’s funny to imagine that the same people buying the one are also buying the other!
books, dereferenced, our managed markets
A reader, Chris P, (following up on this post) recently inquired by email about the specific rules on Market-On-Open orders. In particular, he was interested in the cut-off times for MOO orders. Market-On-Close orders have a cut-off time of 3:40 and 3:50 on the NYSE and Nasdaq, respectively. That is, MOC orders can’t be entered, modified or cancelled after the cut-off.
He pointed me to two documents, one excellent and concise guide to the open and close from the Nasdaq and another relatively useless piece of documentation from the NYSE. The Nasdaq doc indicates that MOO orders must be entered by 9:28am and my own informal experiment confirms this. MOO orders bound for the Nasdaq after 9:28 will be rejected as invalid orders.
The NYSE doc was less precise (didn’t specify any time) and I was able to enter a MOO order after 9:28 which was filled, while orders after the 9:30 open were rejected. If any reader has more precise information or some experiences to share on the topic, kindly use the comments to do so.
execution quality
Evidently our transition to state-managed capital markets was completed last night. These worthies will now decide who the winners and losers will be. JPM seems to have done pretty swell. Lehman not so much. I guess Fuld wasn’t in with the Goldman crowd that’s running the show. Tant pis.
While the impact this will have on our children is beyond the scope of this blog (we could give them conciliatory t-shirts: “My parents pissed away my future and all I got was this lousy t-shirt”), the impact on our markets remains to be seen but is of great interest to the algorithmic trader.
From a regulatory perspective, sufficiently large traders need to be ready to explain why they shorted particular names. I can just imagine that interview for a quant manager, blinking at the SEC official and stammering something about how “my computer told me to…” But this probably won’t be an issue for most.
In the short term, we still can’t short nearly a quarter of the markets biggest names for a bit longer. And what the markets will look like when this cloddish bit of seat-of-the-pants regulation expires, should be some kind of bonanza for sellers of vol. Though they’d have to be pretty brave to wade into this environment in size as our new market managers might pull another 2am rabbit out of their hats…
On the market-microstructure front, the unseemly asymmetry of the up-tick rule will likely be reinstated to our equity markets causing all sorts of difficulties for strategies which had been relatively recently modified or introduced to adapt to the removal of that arbitrary imposition of asymmetry to our equity markets.
Lots of uncertainty. What’s certain is that the rules are changing and strategies we may have deployed profitably for some time must now be viewed, like the markets on which they operate themselves, with a newly critical eye.
our managed markets
