Analytical Investments

In his essay ‘The Only Game In Town‘ the investment manager Jack Treynor identified three kinds of traders: naive, liquidity market-makers, and informed.

 

One way to understand Treynor’s distinction is to examine the different analytical investments that each trader makes. Naive traders invest in public information and simple models of how markets work like popular technical analysis indicators. Liquidity market-makers rely on market microstructure to monitor order flow. Informed traders have more sophisticated models of how markets work and may develop proprietary information sources.

 

Treynor’s distinction also applies to how effective research programs are developed. Effective research programs build on knowledge gaps in publicly available information and in scholarly communities and networks. To develop these capabilities a researcher must be aware of relevant signals from journal publications, other research teams, and the priorities of funding agencies. Collecting and evaluating this information – and noting the knowledge gaps – enables researchers to move closer to Treynor’s ideal of informed traders who have proprietary knowledge and skills. Making the necessary analytical investments as part of a research program – from methodology to cultivating new information sources – is key.

Metis Alpha

I’ve started a TinyLetter account about “Resilience strategies for living in an antifragile world.”

 

Metis Alpha will feature excerpts from my reflective trading diary; on-going PhD work; a reassessment of Masters work in futures studies and strategic foresight; and things I find during personal therapeutic work using cognitive behavioural therapy. The title refers to Nassim Nicholas Taleb’s book Antifragile: Things That Gain From Disorder (New York: The Penguin Press, 2012).

 

The first entry is on the Kovner Effect.

PhD Mid-Candidature Review Talk on Islamic State

As part of my PhD mid-candidature review I’m giving the following talk at Monash University in October (date TBC):

 

Islamic State: Insights from Strategic Subcultures Theory and Combatting Terrorist Propaganda

Strategic subcultures theory examines why and how certain terrorist groups persist over time and grow despite counterterrorism measures. Abu Bakr al-Baghdadi’s Islamic State has gained control of parts of northern Iraq and Syria. Islamic State also poses a current national security threat to Australia in terms of terrorist propaganda (including social media campaigns) and the possible radicalisation of Australian recruits. This presentation evaluates Islamic State as a potential strategic subculture and considers Yale University philosopher Jason Stanley’s guidance in How Propaganda Works (New Haven, CT: Yale University Press, 2015) about how to strengthen democratic nation-states like Australia – and countering violent extremism – through combatting terrorist propaganda.

The Curated Self

Through two key periods between 1999 and 2008, I curated and edited the United States counterculture website Disinformation. University of Melbourne academic and Jacobin Magazine contributing editor Miya Tokumitsu gets the neoliberal dynamics of self-curation right in her New Republic essay:

 

The personalization and creativity connoted by today’s popular understanding of curation also relate to the projection of certain kind of authenticity—one that is publicly visible and determined by consumption. Hence the eager embrace of “curation” within the spheres of social media and retail shopping. These are the arenas in which we can most easily construct microcosms and publicly projected pastiches of our selves, structured entirely by our own preferences.

 

 

The Trader’s Pendulum

Reading The Markets‘ Brenda Jubin has penned a “jaded book reviewers” take on Jody Samuels’ new book The Trader’s Pendulum: The 10 Habits of Highly Successful Traders (Hoboken, NJ: John Wiley & Sons, 2015).

 

A couple of things are going on here to explain Jubin’s concerns. Samuels’ book expands on a highly cited Stocks & Commodities article about trader development. Wiley’s acquisition follows other successful books on trader development by SMB Capital’s Mike Bellafiore and other authors. Samuels’ coaching emphasis on factors like goals, business planning, personality awareness, and measuring performance for new retail traders also mirrors entrepreneurship advice by authors like Eric Ries and Guy Kawasaki.

 

In other words: cultivate deliberate practice (K. Anders Ericsson).

 

I’m thankful Samuels’ book is available on the Wiley Online database. I do wonder though: as an ex-institutional trader what specific advice would Samuels give new and emerging traders on dealing effectively with today’s electronic execution services: algorithmic trading, dark pools, and high-frequency trade firms?

Flow Experiences for Business Development

In early 2014, I spent several months working in the Institute for Sport, Exercise and Active Living at Australia’s Victoria University. I met ISEAL researchers including Professor David Bishop, Professor Damian Farrow, and Professor Glenn McConnell. Their research led me to examine findings on deliberate practice, elite performance, and expertise acquisition.

 

More recently, I’ve begun working with Victoria University researchers on business development activities to develop new research ventures. Helen Hawkes in today’s Australian Financial Review suggests that the best training for such business development are adventure challenges which provide flow experiences (with a nod to Polish-American psychologist Mihaly Csikzentmihalyi). From digital detoxes and goal-setting to mental toughness and resilience Hawkes’ interviewees espouse the kind of immersive experiences that ISEAL researchers — and proprietary traders I have dialogued with — also value.

 

For me, Victoria University’s killer app is how elite performance can be applied beyond competitive sport to other knowledge domains. For an example see Professor Damian Farrow’s co-edited Routledge Handbook of Sport Expertise (New York: Routledge, 2015).

Credit Suisse Crossfinder Dark Pool Negotiations

Zerohedge reports that Credit Suisse are in discussions with the New York Attorney General’s Office and the Securities and Exchange Commission about alleged market manipulation in its Crossfinder dark pool. Some thoughts:

 

1. The NY Attorney General’s Office and the SEC are going to have a wealth of market-based information about CrossFinder that could inform industry research on high frequency trading (HFT) and dark pools arbitrage.

 

2. The academic literature on market microstructure identifies some of the mechanisms that electronic execution services use for HFT / dark pool arbitrage. But the academics don’t really understand how to utilise these mechanisms for alpha generation in the same way that electronic execution services do. The knowledge gap informs the algorithmic trading types that Credit Suisse uses.

 

3. Electronic execution services are now more sophisticated about flow trading. There is little public literature on this apart from hints in Stephanie Hammer’s Architects of Electronic Trading (New York: John Wiley and Sons, 2013) and the IEX discussions in Michael Lewis’s Flash Boys (New York: W.W. Norton and Company, 2014).

 

4. I have seen fill order and midpoint gaming in trades that I have placed. This highlights the value of carefully examining the course of a day’s trades / transaction records and comparing it with what is known about market microstructure (in both academic research and in on-going media coverage).

Speculative Bubbles in DIY Trading Algorithms

WSJ‘s Austen Hufford profiles a group of retail investors who use DIY trading algorithms to try and extract alpha. Some comments:

 

1. Hufford’s interviewees sound very similar to dotcom era day traders at the peak of the 1995-2000 speculative bubble — particularly about their positive expectancy of financial profits.

 

2. The choice of asset class (forex) and markets (S&P500 and Nasdaq Composite) will likely mean that Hufford’s retail traders are picked off by high-frequency traders.

 

3. Hufford’s article has some typical anecdotes on how traders lose money early on in the trade development process and how coding errors can lead to unprofitable trades. On the upside the group of traders now has a daily, actionable routine  to deal with financial markets.

 

4. Aspects emphasised by institutional traders — pre-trade analysis, market microstructure, transaction cost economics, and tax implications — are not considered by Hufford’s retail traders.

 

5. Hufford mentions Interactive Brokers whose own history of algorithmic trading is featured in Scott Patterson’s book Dark Pools. I took part of Tucker Balch’s course but also compared it to other known research such as Andrew W. Lo’s studies. I’ve also looked at Quantopian and Rizm.

 

6. $200,000 in account size for equities / forex depends also on other factors such as leverage, position size, and regularity of trading.

 

7. Computer-driven hedge funds use very sophisticated programming.

 

8. Twitter and academic journal research uses sentiment analysis.

 

9. Hufford’s trading strategy example uses a moving average indicator in technical analysis. This is a basic strategy for retail traders that is now gamed by high-frequency trading algorithms.

 

10. Agile software development practices have insights for how to refactor code.

 

For a comparison of methodology see Alvaro Cartea, Sebastian Jaimungal and Jose Penalva’s Algorithmic and High-Frequency Trading (New York: Cambridge University Press, 2015).

FY2014-15 Report on Personal Research Program

Reflections and ‘lessons learned’ in FY2014-15 on my personal research program:

 

1. I spent much of FY2014-15 dealing with a rapidly changing higher education sector and university environment. The classical strategy of stable environments based on scale advantages no longer exists outside of Group of 8 universities. Two new operational models have instead emerged: a private equity-influenced emphasis on productivity, and a venture capital-influenced approach to revenue generation that uses a J-curve structure. As part of these shifts I learned more about business development, how to negotiate research contracts, and intellectual property.

 

2. I focused my personal research program on a core research area: the study of hedge funds and terrorist organisations as strategic subcultures. My personal research program has two projects: an on-going PhD at Australia’s Monash University, and the black box development of a quantitative trading system to self-finance future research. The PhD builds on the scholarship of Jack Snyder, Alastair Iain Johnston, Colin S. Gray, Ken Booth, David Haglund, Jeffrey Lantis, and others. I found new links with the work of Max Abrahms, David Aronson, Boaz Ganor, Timothy Masters, Lasse Heje Pedersen, and Nate Silver.

 

3. I deepened my approach to research design and methodology. An important part of this was reading books from the Cambridge University Press series Strategies for Social Inquiry; the Columbia University Press series Columbia Studies in Terrorism and Irregular Warfare; the Princeton University Press series Princeton Studies in International History and Politics; the Norton Series on Interpersonal Neurobiology; and the German publisher Springer. I shifted from past work on critical theory to empirical methods.

 

4. I invested in specific resources to understand agent based models, computational social science, machine learning, and stream processing. These areas will enable my personal research program to grow in the future. They have also expanded my academic, industry, and social media networks.

 

5. I had one research publication for the year: a coauthored book chapter with Deakin University’s Ben Eltham in the Jeffrey S. Lantis edited book Strategic Cultures and Security Policies in the Asia-Pacific (Routledge, 2015), which was a reprint of a 2014 article for Contemporary Security Policy journal. I am publishing more slowly yet in higher quality outlets.

 

Some goals for my personal research program in FY2015-16:

 

1. Successfully complete Monash University’s mid-candidature review for my on-going PhD and continue with write-up.

 

2. Engage with causal analysis and process tracing as research methodologies. Continue to do related background reading for post-PhD research on Bayesian statistical inference and computational social science applications in counterterrorism.

 

3. Successfully backtest the following trading strategies: event arbitrage and mean reversion.

Roy Christopher’s Summer Reading List 2015 + Bonus Material

I have some book suggestions in Disinformation alumnus Roy Christopher’s Summer Reading List 2015.

 

The emergent theme in my list this year is: the wealth extraction strategies of oligarchical elites and how to Become them.

 

Here is some bonus material I wrote that you might find useful:

 

Lasse Heje Pedersen Efficiently Inefficient: How Smart Money Invests & Market Prices Are Determined (Princeton University Press, 2015). Lasse Heje Pederson is the John A. Paulson Professor of Finance and Alternative Investments at the New York University Stern School of Business. Perdersen’s “efficiently inefficient” theory of financial markets focuses on active investors who have a comparative advantage. This book examines six economically motivated investment styles and eight hedge fund strategies. It contains one of the best descriptions I have read of how active management works. Pedersen also interviews influential hedge fund managers and investment managers including James Chanos, Cliff Asness, George Soros, Myron Scholes, Ken Griffin, and John A. Paulson. For a history of hedge funds see Sebastian Mallaby’s More Money Than God: Hedge Funds and the Making of a New Elite (Bloomsbury, 2010).

 

Han Smit and Thras Moraitis Playing At Acquisitions: Behavioral Option Games (Princeton University Press, 2015). Han Smit is a Professor in the Faculty of Economics at the Erasmus University Rotterdam. Thras Moraitis was Group Head of Strategy and Corporate Affairs at Xstrata. Playing At Acquisitions offers a synthesis of three business strategy methodologies: behavioural economics, game theory, and real options. An in-depth case study on the company Xstrata is also provided. Smit and Moraitis provide a personal synthesis that will enable you to perceive your own cognitive biases, to understand others, and to make more effective decisions under uncertainty. For a conceptual understanding of business strategy see J.C. Spenders Business Strategy: Managing Uncertainty, Opportunity, and Enterprise (Oxford University Press, 2014).

 

Lauren A Rivera Pedigree: How Elite Students Get Elite Jobs (Princeton University Press, 2015). Lauren Rivera is Associate Professor of Management & Organizations at Northwestern University’s Kellogg School of Management. Pedigreefollows in the footsteps of Vilfredo Pareto and Gaetano Mosca in examining how the processes of elite reproduction and social stratification occur in elite firms who hire students from elite schools into entry-level jobs. Rivera uses interviews and participant observation to discover how employers use a range of filtering mechanisms to reproduce elites in a way that is reminiscent of ancestral heritage and cultural transmission. This book also offers novel insights on the sociological study of contemporary elites and elite circulation. For a micro-study on elites, non-elites and economic stratification see Robert D. Putnam’s Our Kids: The American Dream in Crisis (Simon & Schuster, 2015).

 

Karen Dawisha Putin’s Kleptocracy: Who Owns Russia? (Simon & Schuster, 2014). Karen Dawisha is the Director of the Havighurst Center for Russian and Post-Soviet Studies at Miami University. Putin’s Kleptocracy was originally under contract at Cambridge University Press before potential libel concerns led to Simon & Schuster publishing the book. Dawisha uses archival, internet, interview, and other sources to show how Putin rose to power and how he and a small oligarchical elite succeeded in extracting economic wealth from post-Soviet Russia. Dawisha’s research informed the PBS Frontline documentary Putin’s Way (13th January 2015). Putin’s success at wealth extraction can be compared with Thor Bjorgolfsson’s Billions to Bust – and Back (Profile Books 2014) and Bill Browder’s Red Notice (Simon & Schuster, 2015) in which self-styled ‘adventure capitalists’ and emerging market financiers were not so lucky. On Putin’s use of sociological propaganda to restructure post-Soviet Russia see Peter Pomerantsev’s Nothing Is True And Everything Is Possible (PublicAffairs, 2014) and Jason Stanley’s How Propaganda Works (Princeton University Press, 2015).