22nd December 2011: The Nihonbashi Working

The Nihonbashi Working

2:30-3:30pm, Tuesday 11th October 2011
Tokyo Stock Exchange building and TOPIX computer system area, Nihonbashi, Tokyo: http://www.tse.or.jp/english/

 

Preparation material: Nouriel Roubini and Stephen Milm’s Crisis Economics (on speculative bubbles); Rishi K. Narang’s Inside the Black Box  and Brian Brown’s Chasing The Same Signals (on quantitative trading); Sebastian Mallaby’s More Money Than God (on hedge funds); Joel Hasbrouck’s Empirical Market Microstructure (on market microstructure); Connie Bruck’s The Predators’ Ball (on Drexel Burnham Lambert and Michael Milken’s junk/high yield bonds); and ThomsonReuters’ Datastream and Sirca database services. I took Bruck’s book with me on the subway ride to the TSE.

 

Aims:

(i) Reflection on a personal ‘lost decade’ and prospective plans for self-sufficiency as defined in Uncle Setnakt’s Essential Guide to the LHP
(ii) Consideration of the initial period of the Mammon Project
(iii) Illustrative working to understand the TSE, in particular the TOPIX supercomputer system, and Bloomberg and ThomsonReuters services

Results
:

Nihonbashi’s power lies in the longevity of financial institutions and an evolving trading environment, in which computer algorithms, high frequency trading and machine learning shape financial markets rather than individual investors. Milken had two pivotal insights: (i) how to actively use academic research on junk/high yield bonds for trading opportunities and monopoly market creation; and (ii) how to structure and fund an autonomous organisation (with unethical consequences due to lack of corporate governance controls and effective institutional oversight). Bloomberg and ThomsonReuters illustrate the market-making role of information intermediaries.

 

The late 1980s stock and property bubble, and S&P and Moody’s downgrade of Victorian state government debt in October 1992 influenced my family’s finances, whilst the April 2000 dotcom crash curtailed plans to move to the United States. The ‘Black Swan’ cascade events of March-April 1998 were due to a failure to risk hedge publishing contracts, and to an unawareness of money management techniques. The demise of REVelation and 21C magazines; and the internal battles within The Disinformation Company Ltd, the Australian Foresight Institute at Swinburne University and the Smart Internet Technology CRC were due to different combinations of managerial principal-agent conflicts, moral hazard, exogenous shocks to funding, and a lack of institutional controls to prevent conflicts. Each organisation had some initial success; each also endured significant problems. The personal effect of this was to re-experience over a decade from 1998 to 2007 the rise and fall of several institutions in which I had made a significant time and personal investment. These experiences led to personal post-mortems also on the 1998 collapse of the hedge fund Long-Term Capital Management; the 1990s dotcom bubble; and DARPA’s plans for a terrorism futures market.

 

In the TSE, I resolved to develop a private, low-key, personal vehicle for long-term self-sufficiency, drawing on insights from active management, event-based arbitrage, tick data analysis of market trading and volatility, and money management. The ‘lost decade’ was reframed as an exploratory period required to build the knowledge base for the personal vehicle. The personal vehicle’s agenda then is to consolidate this exploratory period in practice, and build the personal resilience to avoid potential crises that could arise over the next 10-15 years.