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.

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).

Reading Pile

1. Loretta Napoleoni. 2015. The Islamist Phoenix: The Islamic State and the Redrawing of the Middle East. New York: Seven Stories Press. PhD supervisor Luke Howie and I have discussed me including a section on ISIS in my study of terrorist organisations as strategic subcultures. Napoleoni contends that ISIS engages in a new form of nation-building in order to re-establish the Caliphate. One of several quickly written books to emerge as ISIS has gained military power projection in Iraq.

 

2. Richard Seymour. 2014. Against Austerity: How We Can Fix The Crisis They Made. New York: Pluto Press. A left-wing polemic that anticipated current political events in Greece, the Queensland state election, and in Australian federal politics. Seymour describes austerity as neoliberal crisis management, and as an elite strategy to change socio-economic foundations. An angry and insightful analysis of the conditions that might lead to oligarchical collectivism (George Orwell, Nineteen Eighty-Four).

 

3. Luke Howie and Peter Kelly. 2015. ‘Sociologies of Terrorism: Holographic Metaphors for Terrorism Research’, Journal of Sociology, 1-15 (online first). The authors propose a ‘holographic theorising’ framework and ‘holographic social scientific imagination‘ [emphasis original] (p. 2) for how terrorism studies researchers can explore, interrogate, and re-evaluate data. A central challenge the authors identify is that terrorism events ‘develop, shift, and change‘ [emphasis original] (p. 3) whilst interview transcripts and other research data can remain ‘forever frozen in time‘ [emphasis original] (p. 3). The article includes insights from an on-going interview research project, theorist Donna Haraway, and popular media including Star Trek: Voyager, and I, Robot.

Lessons from MacArthur Genius Yitang Zhang

Some lessons from The New Yorker‘s profile of MacArthur Fellow and mathematician Yitang Zhang:

 

1. Immerse yourself in the research literature of your discipline. Zhang spent years reading mathematics journals about alegebraic geometry number theory at the University of Kentucky, and keeping a low profile: he had published only one paper, in 2001.

2. Choose a focal point or meta-question for your research program that will have a significant impact. Zhang focused on ‘bound gaps’ about prime numbers.

3. Organise your life’s tasks in order to pursue your individual research program. Zhang worked at a Subway and in New Hampshire in order to have more time to write and pursue his research program on his own terms.

4. Streamline your publication track record to focus on publications in high-ranked journals. Zhang submitted “Bounded Gaps Between Primes” in late 2012 to Annals of Mathematics after years of work.

5. Understand how the referee process works for journal articles. Zhang benefited from reviewers Henryk Iwaniec (Rutgers) and John Friedlander (University of Toronto) who were critical yet sympathetic to Zhang’s study, and Annals of Mathematics editor Nicholas Katz.

Analysing the Hajime Masutani Interview in Haruki Murakami’s Underground

I spent today analysing the Haruki Murakami Underground interview with former Aum Shinrikyo member Hajume Masutani. Some insights:

 

1. Masutani experienced early alienation from his family, initial career aspirations, and university studies.

 

2. Masutani encountered and joined Aum after seeing an Aum book and visiting a dojo. He spent seven years in Aum including working on animation about Aum’s leader Shoko Asahara which now enjoys an afterlife on YouTube.

 

3. Masutani engaged in cycles of work and meditation but did not really progress in Aum. He became suspicious of Asahara after meeting him. His experiences reflected parallel research that psychiatrist Robert Jay Lifton did on Aum.

 

4. In 1993, Masutani noted that Aum adopted a more proto-militant outlook and a greater emphasis on Tibetan Vajrayana teachings.

 

5. Masutani grew more alienated from Aum after leaving and learning of the 20th March 1995 sarin gas attack on the Tokyo subway system. His views to Murakami were similar to United States cultic scholars like Margaret Thaler Singer.