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31st July 2012: Slow Recruiting

Etsy chief executive officer Chad Dickerson:

 

Recruiting too slowly for key positions can be a liability in a fast-paced industry, but the larger point is that the way you and your company treat people over longer periods of time has more impact on your recruiting efforts than anything else.

 

This is something the higher education sector has to learn. It is a key reason why some young researchers are leaving academia for more lucrative opportunities in the private sector. Initially, they are recruited for 3-to-5 year positions and possibly for long-term research track roles. However, young researchers also now face significant institutional barriers: high entrance requirements for entry-level roles (which include a PhD, teaching experience, and publications’ track record’); a preference for short-term contracts and casual positions; recruitment decisions that are often now driven by cost reduction economics; an incentives system that can block individual efforts; and the lack of a long-term strategy for intellectual capital and property. How you treat academic scholars over their employment period affects the productivity of their research programs. Dickerson is right that slow recruiting can underpin a long-term strategy for human resources management — not necessarily the mindset that many universities have, at the moment.

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31st July 2012: Fixing TheStreet.com

In the late 1990s, I used to discuss magazine redesigns with publisher/editor/journalist Ashley Crawford. I also got to interview designer Roger Black on his creative process. I kept this in mind when Disinformation went through several redesigns whilst I was site editor. Now, Josh Brown, John Standerfer, and Mebane Faber consider how 1990s trader site TheStreet.com could be renewed. Brown focuses on the kind of editorial and content changes that I would discuss with Richard Metzger and Gary Baddeley at Disinformation. Faber notes the growth in financial and trader bloggers who challenge the late 1990s model of a site with editorial and writing staff. Standerfer distinguishes between three types of content developers: Reporters from media outlets; Observers who are like Faber’s bloggers; and Parrots who create ‘noise’ to drive advertising revenues and social media presence. (My preference is to combine the Reporters’ craft with the Observers’ accessible writing.)

 

It’s a good exchange that could apply to a lot of sites.

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31st July 2012: Jonah Lehrer’s Resignation

Imagine author Jonah Lehrer has resigned from The New Yorker  over fabricated Bob Dylan quotes:

 

The discovery of the fabricated quotes came only weeks after Lehrer apologized last month for recycling some of his previous work—sometimes nearly verbatim—in his other work, including articles and blog posts.

 

Lehrer’s publisher has already pulled Imagine‘s print edition from Amazon.com.

 

This is a problem of writing Malcolm Gladwell-style populist books: the ‘rush to publish’ and to get on the consulting and seminar circuit can derail research and fact-checking processes (and, despite positive reviews). This is one reason why I prefer authors like Steve Coll and William D. Cohan who each have a strong research process. A recent example is David Crist’s book The Twilight War on the United States-Iran relationship: Crist did over 300 interviews for the book. Interestingly, Lehrer originally wanted to become a scientist.

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23rd July 2012: Barton Biggs

Money manager Barton Biggs died last week. Biggs worked at EF Hutton, Morgan Stanley, and helped to found several hedge funds. He personified the old Wall Street tradition of research analysts and institutional money managers who were ‘big picture’ thinkers — the forerunners of today’s scenario planners and strategic foresight analysts. Biggs’ memoir Hedgehogging was an enjoyable, insightful entry into the world of hedge funds. I learned from Biggs how hedge fund managers read Barron’s, The Economist, and other publications.

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16th July 2012: High-Frequency Futures

Global financial markets increasingly rely on computers and algorithms.

 

Between 2:42pm and 3:07pm on 6th May 2010, the Dow Jones Industrial Average plunged 998.5 points before recovering. The ‘Flash Crash’ raised United States regulator awareness of how computers and algorithms can affect trading. The US Securities and Exchange Commission blamed high-frequency trading (HFT): millisecond, computer-driven arbitrage used primarily by quantitative hedge funds. The trial of ex-Goldman Sachs programmer Sergey Aleynikov also created media attention on HFT. Today, supercomputers dominate financial market exchanges.

 

Computers and algorithms have a Wall Street prehistory. Michael Goodkin co-founded the Arbitrage Management Company in 1968 to pioneer computer and statistical arbitrage strategies. Goodkin recruited economist and corporate finance experts Harry Markowitz, Myron Scholes and Paul Samuelson as his academic brains trust. Bill Fouse used a Prime mini-computer to develop quantitative tactical asset allocation and index funds. In 1981, Michael Bloomberg founded the company that would sell his now-ubiquitous Bloomberg terminals to Wall Street. Bloomberg LP now has ThomsonReuters and Australia’s IRESS as market data competitors. Artificial intelligence, genetic algorithms, machine learning and neural networks each had speculative bubbles as Wall Street experimented with them and marketed black box systems as client solutions.

 

This experimentation spawned a new generation of academic entrepreneurs.

 

Finance academics like Fischer Black and Emanuel Derman moved to Goldman Sachs and enjoyed the market-driven environment. In the early 1980s, Wall Street hired physicists and created new sub-fields of knowledge: econophysics, computational finance, and financial engineering. In 1991, Doyne Famer, Norman Packard and Jim McGill founded The Prediction Company (acquired in 2005 by UBS) to use complex adaptive systems theory to model financial markets. In 1996, Michael Goodkin co-founded Numerix to use Monte Carlo simulations to test trading strategies.

 

Collectively, their work identified new market anomalies and complex dynamics to trade. Their research anticipated new software. Today, US university programs in financial engineering use software platforms like Alphacet, Deltix and Streambase to develop algorithms for HFT and complex event processing (CEP) systems. Yet these innovations remain unavailable in many Australian university programs with the exception of the Capital Markets CRC.

 

Two former academics offer one compelling vision of how computers and algorithms will reshape Wall Street in the next century. Stony Brook University mathematician Jim Simons formed the quantitative fund Renaissance Technologies and now uses ex-IBM voice synthesis scientists. Stanford supercomputer designer David Shaw founded D.E. Shaw & Company, which employed Jeff Bezos before he founded Amazon.com. Shaw rejects technical analysis (the pattern recognition of price and volume) for Karl Popper’s philosophy of falsifiability and event-based studies.

 

Shaw and Simons’ funds use terabytes of data, daily: a forerunner of the current interest in Big Data research. As academic entrepreneurs, they ended journal publications and government competitive grants. Instead, they used market arbitrage, economies of scope, highly incentivised staff, private scientific knowledge, and walled gardens to protect their funds’ intellectual property.

 

Shaw and Simons have already lived a decade in a different future than most investors and traders.

 

HFT and CEP systems are already changing how Australia’s financial markets operate. The Australian Securities Exchange (ASX) and the new Chi-X Exchange now both have HFT capabilities including direct market access: the exchanges now host the ‘co-located’ low-latency computing systems of market-makers, proprietary trading firms and hedge funds. Algorithmic and HFT trading now accounts for higher trading volumes and volatility in company share prices. HFT is also blamed for greater inter-market correlation such as between the ASX and the Shanghai Composite Index. These trends echo the volatility of commodities and futures markets in the 1970s. More subtly, HFT and CEP systems create knowledge decay: in which new knowledge and faster cycle times makes existing knowledge and investment strategies obsolete. Such innovations are unlikely to diffuse any time soon to retail investors.

 

The 2007-09 global financial crisis has prompted a backlash against Wall Street computers and algorithms. This backlash is similar to the fall of Master of the Universe traders after the 1980s merger wave and the demise of technology firms after the 1995-2000 dotcom bubble. University of Edinburgh’s Donald MacKenzie exemplifies the new academic research programs that are emerging: how sociology, and science and technology studies, might contribute to our understanding of financial markets. Barnard College’s president Debora L. Spar and Columbia Law School’s Timothy Wu caution that regulatory actions can dramatically affect future industry trajectories. A financial world without computers would be a return to mid-1960s trading: back-office processing, brokerage, clearing and settlement delays, and lower trading volumes.

 

In the face of HFT technology Wall Street traders emphasise craft. Arbitrage opportunities, psychology, and risk/money management are still vital for trading success, they contend. HFT has just changed Wall Street in a way closer to Margin Call than to Boiler Room or Wall Street. Interactive Brokers has a more direct future in mind. It ran a new television advertising campaign after the Occupy Wall Street protests in New York’s Zuccotti Park: “Join the 1%.”

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12th July 2012: The Foresight Epidemic

Strategic foresight expert Dr. Jose M. Ramos and colleagues have a new project that combines foresight and social media:

 

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 project will appeal to fans of the film Contagion; the Anthrax album Spreading the Disease; and Richard Preston‘s book The Hot Zone.

 

The Centers for Disease Control and Prevention have been notified of a CDC-5 situation.

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11th July 2012: Star Academics & Research Funding

Superstar economics rules Hollywood and the art world. In academia, it means that a small group of academics are heavily cited, get ‘fast-track’ promotions, and receive competitive research grants. The United Kingdom’s Wellcome Trust has reinforced superstar economics and its ‘winner-takes-all’ dynamic in a recent decision:

 

To the consternation of many, Walport’s charity has abolished all funding for research projects or programmes. Instead this cash now goes to individuals, with far less prescription about what they do with it. “Budgets are often larger for investigators as we want to fund people generously to pursue new directions without restraint,” [Kevin] Moses explains.

 

Wellcome Trust’s decision means significant fallout in academia. Early and mid-career researchers face barriers to research funding. Collaborative research teams are minimised. Publication track records on your curriculum vitae become more important. The decision strengthens individual researchers and their cross-institutional performance ‘portability’ (which leads to the ‘poaching’ of leading researchers and their teams as an answer to the ‘make or buy’ decision). It also cuts the funding that institutions extract from successful grants — thus undermining the strategy of relying on competitive research grant income as a variable cashflow to diversify from student fees and government funding. Wellcome’s decision has parallels with the rise-and-fall of the independent producer in Hollywood, from 1967-75, during the demise and renewal of the Hollywood studio system.

 

Research Funding Limited To Star Academics (The Guardian)

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10th July 2012: Day Trading 401(k)s

Software engineer Vlad Tokarev decided to day trade his retirement account. An LA Times profile documents the mistakes of Tokarev and other investors:

 

Minutes before the market closes every day, Tokarev buys or sells a mutual fund linked to the Standard & Poor’s 500 stock index. His goal is to profit from temporary fluctuations in stock prices, so he buys when stocks are falling and sells when they’re rising.

 

Wrong timing I: US stockmarkets tend to rally in the first hour of trade and the last half hour. Wrong timing II: buying at the end of day exposes the trader to overnight risk and possible market gaps. Wrong instrument I: a low-cost basket of exchange traded funds would be better than a mutual fund. Wrong instrument II: the S&P 500 is volatile and its index composition does not necessarily represent the market or sectors that perform well in current market conditions. Wrong asset allocation and decision biases: Tokarev is 49; wants to retire before 65; so his choice of day trading (availability bias) reflects an attempt to make-up for recent stockmarket losses (recency bias). Wrong risk management I: Tokarev day trades a third of his retirement fund whereas most traders recommend a position sizing of 1-2% of your portfolio on a specific trade. Wrong risk management II: Tokarev tells the LA Times, “”That’s what people usually say about day trading — but I don’t see how it can be dangerous.” This comment illustrates the irrational escalation bias, belief bias, blindspot bias, and the focusing effect. Tokarev also may not have factored in the  trading and execution costs, and capital gains tax implications of his day-trading. Instead, as Reuters’ Felix Salmon discovered, Tokarev appears to have based his trading strategy on a Wiley Finance book (Richard Schmitt‘s 4o1(k) Day Trading which has a bare-bones author-created website).

 

The LA Times article also quotes Wells Fargo customer complaints officer Joe Hansman:

 

Joe Hansman, 29, who handles customer complaints at Wells Fargo, shifts money among two conservative mutual funds in his 401(k) and the banking company’s own stock. He trades 10 to 15 times a month, steering money into Wells Fargo’s stock when he expects it to rally for a few day.

“When I told my wife about it she was really nervous … until I educated her on what it all entails and how poorly [the 401(k)] was performing before that,” Hansman said. “She’s still not 100% behind it but she said, ‘Just don’t lose everything. If you do I’ll divorce you.’ ”

 

In my view, Hansman makes a number of potential mistakes: trading expensive mutual funds instead of cheaper exchange traded funds; a home bias towards an employer in a sector (banking) that underperforms in a deleveraging (instead of using sector rotation); possible over-trading per month with higher transaction and execution costs; stocks that may have correlated returns and market beta exposures; and relying on swing trading without hedging. Handling his wife’s loss aversion and the potential, detrimental risks to his relationship are another matter: better invest in a copy of Diane Vaughan’s book Uncoupling: Turning Points In Intimate Relationships and a relationship therapist, just in case.

 

Neither Tokarev nor Hansman appear to have any background in finance or capital markets. Tokarev has a personal site with 401(k) day trading results.

 

Anxious Investors Day Trading With Retirement (LA Times)

 

Why Americans Won’t Day Trade Their 401K(s) (Felix Salmon)

 

Today in Awful Ideas: Day Trading With Your Retirement Fund (Gawker)

 

401(k) Day Trading (Vlad Tokarev)

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9th July 2012: Octopus

I first heard of the Octopus — a power elite conspiracy — from parapolitical researcher Kenn Thomas of Steamshovel Press who investigated and wrote about Danny Casolaro’s death and the proprietary software PROMIS (see The Octopus). Now, the shadowy cabal — rumoured to have begun with stolen Japanese gold from World War II — has re-emerged in Guy Lawson‘s new book Octopus about the fall of the hedge fund Bayou Group; its founder Samuel Israel III who had US$117 million in debts; and the high-yield debt or junk bond market (see The Predator’s Ball). Israel becomes caught up in the ‘medial’ conspiracy netherworld in pursuit of financiers to revive his hedge fund. A New York Times review and Businessweek excerpt look promising. Evidently, Israel was unfamiliar with Rumors in Financial Markets.