I’ve started to use Twitter’s List feature on my main Twitter account (@alexburns). The lists includes alumni from the classic era where I edited and wrote for the Disinformation website (1998-2008); people who I met whilst in Swinburne University’s Strategic Foresight program (2002-04); and past collaborations and current projects. I’ll continue to add to current and new lists. Enjoy!
In 2003, I was an intern at Swinburne University’s Strategic Foresight program. One of the internal documents I saw were plans for a postgraduate unit on digital continuity challenges and futures. The unit’s material anticipated Rao and Nussbaum’s concerns by a decade. But I’m yet to see Black Mirror in full.
One of my discarded PhD chapter outlines was on the hedge fund SAC Capital and the insider trading case involving former SAC trader Matthew J. Martoma and the firms Elan and Wyeth. I had hypothesised that SAC founder Steve A. Cohen had developed a specific organisational strategic subculture. Recently, I read and analysed Cohen’s legal defence. Now, The New Yorker‘s Patrick Radden Keefe has written a lengthy article on SAC, Cohen, Martoma, and the insider case’s legal outcomes. I reflected on how Cohen developed his edge:
1. Cohen had ignition experiences early on in his career. Keefe and the PBS Frontline ‘To Catch A Trader‘ point to Cohen’s formative trading experiences with the investment bank Gruntal & Company as a likely first encounter with insider trading. Possibly more important to Cohen’s creative psychobiography are his early experiences in learning to perceive fluctuations in stockmarket prices, as told to Jack Schwager. This tape-reading ability has been part of trading education since Jesse Livermore and is echoed in the Market Wizards series interviews that Jack Schwager did with Michael Marcus and Paul Tudor Jones II. Cohen’s early experiences also parallel the role of ignition experiences in the literature on genius and creativity. They also meant that Cohen did not adopt the dominant approaches of fundamental and technical analysis. Instead, he anticipated behavioural finance in looking for catalysts that moved stocks and that led to rational herding and overconfidence behaviours he could trade against.
2. Cohen hired a performance psychologist. Keefe mentions but does not name the late Ari Kiev as the performance psychologist who Cohen hired to mentor his traders. Kiev’s books notably The Mental Strategies of Top Traders (Hoboken, NJ: John Wiley & Sons, 2009) draw on his SAC experiences and detail his personal synthesis of elite sports training, game theory, portfolio management, and leadership frameworks. Kiev foreshadowed other performance psychologists such as Brett N. Steenbarger who have worked with hedge funds. In doing so, Kiev and Steenbarger became de facto strategic foresight practitioners, albeit with a different knowledge base to futures studies.
3. Cohen created a specific organisational strategic culture. Keefe and PBS Frontline‘s narratives focus on SAC’s competitive culture between rival portfolio managers; the inside discussion of “black edge” as material non-public information; how Cohen ran his trading floor; and how Cohen got the best trading ideas from portfolio managers whilst also insulating himself from their information sources. There are observations here worthy of the third generation literature on strategic culture, and how specific organisations have developed ways to hedge risk and volatility. If Keefe had been familiar with the sociology of finance literature then he might have focused on this more. Now that SAC has transformed into Point 72 Asset Management – to manage Cohen’s estimated $9 billion wealth – we may never really know what went on inside SAC, unless there is further operational disclosure in civil cases, or in trader memoirs.
4. Cohen was pro anti-fragile. Keefe tells an anecdote about how Cohen would ask job applicants: “Tell me some of the riskiest things you’ve ever done in your life.” Keefe segues from this into an anecdote about insider trader Richard Lee. But there are several other possible ways to interpret Cohen’s question and why he would pose it to SAC job applicants. Cohen may have wanted to assess how the job applicant conceptualised risk; how they made decisions; and what specific decisions they made when faced by risk. As Kiev identified these are crucial aspects to successful trading. The anecdote also suggests to me that Cohen was pro anti-fragile: options trader and philosopher Nassim Nicholas Taleb’s term for phenomena that become stronger due to volatility exposure. Being pro anti-fragile – and taking considered risks – was in part how Cohen turned an initial $US25 million in the early 1990s into his fortune – as a possible successful example also of the Kelly Criterion risk management strategy.
5. Cohen factored in transaction and execution costs. Keefe alludes in passing to how SAC used dark pools – private exchanges that hedge funds use to trade their positions – in order to exit Martoma’s Elan and Wyeth trades. Kiev’s game theoretic reasoning about catalysts and other market participants provided one rationale that was influential in SAC’s organisational strategic subculture. Awareness of transaction and execution costs – and their impact on a trade’s profitability – provide another rationale. In one of the few public statements by SAC staff, Neil Chriss emphasised the importance of considering transaction and execution costs in his introduction to Robert Kissell and Morton Glantz’s book Optimal Trading Strategies (New York: AMACOM, 2003), pp. viii – x. Chriss suggested there was “an efficient frontier of trading strategies . . . Each strategy has a certain transaction cost and a certain risk” (emphasis original) (p. x). He then stated: “no institutional manager can afford not to understand transaction costs” (emphasis original) (p. x). In doing so Cohen anticipated the impact that dark pools, and algorithmic / high frequency trading have had on contemporary market microstructure.
There is thus far more to Cohen’s hedge fund success with SAC Capital – his sustained edge over two decades – than what the Martoma insider trading case has revealed to-date. Keefe’s New Yorker profile reveals aspects – but more trading knowledge is needed to piece together Cohen’s secrets from public information sources.
I have a new Academic CV and Publications track record (PDF).
The document integrates for the first time my academic research; PhD and Masters studies; Disinformation website work (mainly from my first editorial and writing tenure in 1998-2003); journalism; and subculture research. There are some known gaps in the publications history – notably the Black Box magazine project in 2002, two small REVelation excerpts in 1996-97, and many more Rabelais student journalism articles / reviews from 1994. It’s as near complete a list that I’m likely to get – unless I do further archival work. Many of the Disinformation articles in 1998-2003 are available at Archive.org. Much of the academic research is available from this website or in the specific academic journals.
A personal reflection:
I spent much of my first decade of public writing as a freelance journalist, subcultural researcher, website editor / writer during the end of the dotcom speculative bubble, and then in the Swinburne University Masters program in strategic foresight. This period covered several phases: (1) a 1994-95 period of primarily New Journalism experimentation; (2) a 1996-97 period of immersive subculture research and magazine articles which largely ended in March 1998; (3) a 19998-2003 period of my first Disinformation editorial tenure; and (4) my 2002-04 Masters studies which were largely a reflection cycle on the prior periods and the lessons I had learned. This period transitioned when I joined the Smart Internet Technology CRC research consortium in December 2003.
I spent my second decade as a researcher; pivoted into research management; did Masters and early PhD work on counterterrorism and political science; and then collaborated with others on academic research. This period covered several phases: (1) a 2003-2007 period of Smart Internet Technology CRC research in which I also pivoted out of doing magazine research due to employment contract restrictions; (2) a 2007-09 pivot period of moving into research management and transitioning my academic research career into political science; (3) a 2010-14 period of collaborative research articles; and (4) a 2009-present period of focus on PhD research about pattern languages and strategic culture, and applied research on hedge funds / terrorist organisations as strategic subcultures.
Collectively, I put in 10,000 hours of deliberate practice over the 20-year period in journalism and research. The 1994-95 period of New Journalism was skills acquisition and experimentation. The 1996-97 period of subculture research benefited from close work with several talented magazine editors, and led to new insights during the 2003-07 period at the Smart Internet Technology CRC. This was a period in which I enjoyed a brief publicly visible profile as an editor and writer. The 1998-2003 period at Disinformation led to a renewed focus in 2009 on event arbitrage and understanding hedge fund strategies. I experienced personal crises in 1997 and in 2006-07 over financial and ‘decision to publish’ issues that led to life-changing pivots. The 2002-04 and 2007-09 periods were active reflection cycles on these pivots. In Spiral Dynamics terms, the 20-year timeframe of writing involved several sequences of skills cultivation (Alpha new state), rapid growth (Delta surge), life crisis (Gamma Trap problems), and pivot to new opportunities (alternation of Beta questioning and new Delta surge).
This 20-year writing arc has led to a current personal synthesis: (1) PhD and recent academic publications as a new phase of skills building; (2) applied research as a strategy to address the life circumstances of the 1997 and 2006-07 crises; and (3) this blog as a way to capture and communicate some of these ideas to a public audience. My writing is more focused and often more private. I publish more slowly in academic journals than in past internet and magazine work. I work with a smaller group of collaborators. I have a more sustainable daily routine.
I’m grateful for the past experiences. I’m looking forward to sharing new writings in the future with you.
I’ve followed hedge funds – pooled fund structures that engage in active management often uncorrelated with financial markets – for about a decade.
Almost 12 years ago I wrote a Masters paper on Long-Term Capital Management (PDF) in Swinburne University’s Strategic Foresight program. I read Sebastian Mallaby’s history More Money Than God (PDF) and MIT’s Andrew Lo. Hedge funds appeared to be exemplars of Richard Slaughter‘s Institutes of Foresight thesis. More recently, I have thought of hedge funds as possible examples of meso-level, organisational strategic subcultures.
Today, I re-watched the PBS Frontline documentary ‘To Catch A Trader‘ (2014) and read the white paper (PDF) from SAC founder Steve A. Cohen’s lawyers in the now-notorious Elan and Wyeth insider trading case. Cohen’s portfolio manager Matthew Martoma was convicted of insider trading and sentenced to jail. Cohen’s SAC was fined millions and is now basically a family office.
I’ve had the white paper for over a year but only today got a chance to have a close read of it with an eye on how Cohen’s lawyers describe his trading strategies. I learned to do this when studying strategic foresight methodologies.
Some of my summary notes from the white paper:
- Back of envelope estimate of Steve Cohen’s trading portfolio size in July 2013: $US1,253,000,000.
- Cohen trades over 80 individual securities a day.
- Algorithms, direct market access, and dark pools are routinely used for trade execution.
- The PBS Frontline documentary describes Edge as an informational advantage about market activity.
- The white paper describes the following as Events: (1) corporate access (competitor announcements; adverse developments); (2) market moving (catalysts, technical analysis); (3) analyst convergence (broker-deal reports; ratings such as downgrades); and (4) market rumours (false market).
- SAC portfolio managers develop a Company Investment Thesis. This may involve: (1) trimming positions whilst going into earnings announcements; (2) using option hedges to offset long/short positions using a market neutral strategy; (3) anticipating slippage: incremental shifts in share prices due to the timing of executed trades; and (4) responding to risk reviews of large positions.
- Market price-psychology patterns that Cohen has identified: (1) increases in individual share prices versus S&P 500 declines (deteriorating market) over specific time periods; (2) tests of if positive market reaction is sustainable (possible mean reversion); (3) company news that is ambiguous or less-than-spectacular information that will trigger a decline; and (4) rapid stock appreciation that creates high expectations and the probability of a price decline.
The Steve A. Cohen white paper illustrates how to potentially reverse engineer a hedge fund’s trading strategy – as a strategic foresight example – and to not be a Muppet-like naive retail trader.
I have started a Good Reads book list here. The list is revealing in a cumulative sense about what I have read at different times of my life — and it will be updated in the coming weeks. Starting the list also prompted me to clean out my bookshelves. Major insight: I bought a lot of books during research for the dotcom (1995-2000) and post-September 11 (2001-2011) speculative bubbles. I also bought a lot of books whilst: (a) trying to decide on a PhD topic; (b) browsing Melbourne’s (dwindling) secondhand bookstores from the early 1990s to about 2009; and (c) working on various postgraduate degrees and research projects. I expect to do a similar cull once the PhD is done. Casualties: dotcom era media theory (a former life); September 11 anthologies; partisan books on United States counterterrorism; ’emerging threat’ books that I am never going to read; and pop techno-futures. The half-lives of many of these memes is short. I also seem to have read a lot more business strategy books whilst in Swinburne University’s Strategic Foresight program and whilst at the Smart Internet Technology CRC than I remembered. I’ll be donating other parts of my personal library, such as Masters books on North Korea and genocide, to Melbourne-based university libraries.
Experiments with social media, foresight and you (we hope!). Inspired by the work of a number of projects in the open foresight space, we are attempting to further develop social media foresight methods. We want to experiment at the junction of social media and foresight studies to create an epidemic (or hopefully a pandemic!) of foresight thinking.
The Centers for Disease Control and Prevention have been notified of a CDC-5 situation.
This is the wider context for the challenge of “how can scientific and technological breakthroughs be accelerated to improve the human condition?“. In some ways, progress in Australia is being made in the required transformation of innovation; but in other ways the challenge is not being met. This article provides an outline of Australian trends and related recent developments.
McGrail covers many topics including European Union developments; the National Enabling Technologies Strategy; biotechnology and synthetic biology; and insights from science and technology studies. Some of this work draws on insights from McGrail’s excellent Masters thesis at University of Melbourne on Australia’s nanotechnology industry.
In Driving in the Dark: Ten Propositions About Prediction and National Security, Danzig examines the nature of prediction in national security and offers strategic recommendations for how the U.S. Department of Defense can improve its predictive capabilities while also preparing for predictive failure. Danzig recommends that the Department of Defense adopt new strategies to improve its predictive abilities while also preparing to be unprepared. He suggests narrowing the time between conceptualizing programs and bringing them to realization; building more for the short-term and designing operationally flexible equipment; and valuing diversity and competition. Policymakers will always drive in the dark, but by adopting these recommendations, they may better respond to unpredictable conditions and prepare the United States for unforeseen threats.
The report will interest program managers and strategic foresight analysts.