17th June 2013: Esoteric Order of Beelzebub

For the past few months, I have been corresponding with Houston-based EBM/darkwave musician Paul Frederic (Asmodeus X).

 

We share some common interests that were a major part of my life in the 199os, and whilst writing for and editing the Disinformation website: the Gurdjieff Work; the Temple of Set; Spiral Dynamics; Neuro-linguistic Programming; futures studies and strategic foresight (which I studied in a Masters program at Australia’s Swinburne University); and the metaprogramming approaches of John C. Lilly and Robert Anton Wilson. The deep theme running through these different currents, organisations and methods is willed, sovereign, self-change and creative Action in the world.

 

I recently joined the Esoteric Order of Beelzebub: a confederation of independent artist-entrepreneurs (James Altucher), which Frederic made me aware of. The EOB’s mission statements is “leveraging conscious evolution!” Its public imagery draws on diverse sources: astrobiological space imagery; comparative religion and historical daemonology/goetia; libertarian economics; and the contemporary techno-sciences.

 

Many of my EOB contributions will be posted to this personal blog.

16th June 2013: My First Trade

My First Trade
My First Trade (click to enlarge)

 

Foreign Policy‘s Dan Drezner asks: “Hey, remember when Standard & Poor’s downgraded U.S. sovereign debt back in 2011?”

 

I sure do.

 

S&P downgraded US debt on 5th August 2011. I placed my first trade on 8th August 2011: 1041 ASX:LYC @$1.92 ($2003.31 including $15 brokerage fee).

 

(ASX:LYC closed Friday +4.44% @$0.47. I caught the tail end of the 2008-10 speculative bubble in rare earths. Lynas Corporation has since faced project delays in Malaysia; activist lawsuits; headline risk; and regular ‘shorting’ due to convertible bond arbitrageurs and exchange traded funds. I entered the market on a distribution phase — expecting a further rise — and instead faced a markdown, in terms of Richard D. Wyckoff‘s technical analysis methodology.)

 

The next five or so months got very interesting regarding market volatility and contagion effects. I read up again on international political economy. I also learned more about transmission shocks; political risk; hedge fund activism; and share ‘warehousing’. In October 2011, I did some further research whilst on holiday in Tokyo, Japan, including an eventful visit to the Tokyo Stock Exchange.

 

Drezner and I are both political scientists. One book I turned to was Timothy J. Sinclair’s The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness (Ithaca, NY: Cornell University Press, 2005). A gem I discovered by accident in Sinclair’s book was about how Victoria’s conservative Kennett Government used S&P and Moodys ratings downgrades in 1993 to cut $A730 million “from Victoria’s education, health, and other programs” (Sinclair 2005: 103). In 1992, my father had co-founded Victoria’s nursing agency Psychiatric Care Consultants, which responded to the new competitive market environment. So, the S&P and Moodys downgrades had deeper personal and familial significance.

 

These examples illustrate how research can change the researcher.

16th June 2013: ICIJ’s Offshore Tax Havens Database

For the past few months the International Consortium of Investigative Journalists (ICIJ) has been releasing information about offshore tax havens. ICIJ’s database was leaked from two wealth management firms: Portcullis TrustNet (Singapore) and Commonwealth Trust Limited (British Virgin Islands). The ICIJ chose La Nación de Costa Rica to analyse the data which reveals how offshore companies and trusts are used for tax minimisation, tax avoidance, and possible money laundering.

Now, the ICIJ has released the database for public analysis.

 

The ICIJ’s database arrived with perfect timing for me: I was thinking about some PhD-related new chapters. In 2005, I wrote a Masters essay (PDF) on international governance for anti-money laundering initiatives. I was re-reading Nick Kochan’s The Washing Machine: Money, Crime & Terror In The Offshore System (London: Gerald Duckworth & Co., 2006), and eyeing off my copy of Jeffrey Robinson’s The Sink: How Banks, Lawyers and Accountants Finance Terrorism and Crime – And Why Governments Can’t Stop Them (London: Constable & Robinson, 2003).

 

Now, thanks to the ICIJ, I have some data on offshore tax havens to examine.

15th June 2013: HFT, Disruptive Innovation & Theta Arbitrage

23rd July 2009 was perhaps the day that retail investors became aware of high-frequency trading (HFT).

 

That was the day that New York Times journalist Charles Duhigg published an article on HFT and market microstructure changes. Duhigg’s article sparked a public controversy about HFT and changes to United States financial markets.

 

Then on 6th May 2010 came the Flash Crash. HFT was again the villain.

 

For the past few years HFT has inspired both pro and con books from publishers. HFT has changed how some retail investors and portfolio managers at mutual and pension funds view financial markets. Now, Matthew Philips of Bloomberg Businessweek reports that 2009-10 may have been HFT’s high-point in terms of being a profitable strategy.

 

Philips’ findings illustrate several often overlooked aspects of Clayton Christensen‘s Disruptive Innovation Theory. Scott Patterson notes in his book Dark Pools (New York: Crown Business, 2012) that HFT arose due to a combination of entrepreneurial innovation; technological advances in computer processing power; and changes to US Securities and Exchanges Commission regulations. Combined, these advances enabled HFT firms to trade differently to other dotcom era and post-dotcom firms that still used human traders or mechanical trading systems. This trading arbitrage fits Christensen’s Disruptive Innovation Theory as a deductive, explanatory framework.

 

The usually overlooked aspect of Disruptive Innovation Theory is that this entrepreneurial investment and experimentation gave HFT firms a time advantage: theta arbitrage. HFT firms were able to engage for about a decade in predatory trading against mutual and pension funds. HFT also disrupted momentum traders, trend-followers, scalping day traders, statistical arbitrage, and some volatility trading strategies. This disruption of trading strategies led Brian R. Brown to focus on algorithmic and quantitative black boxes in his book Chasing The Same Signals (Hoboken, NJ: John Wiley & Sons, 2010).

 

Paradoxically, by the time Duhigg wrote his New York Times article, HFT had begun to lose its profitability as a trading strategy. Sociologist of finance Donald MacKenzie noted that HFT both required significant capex and opex investment for low-latency, and this entry barrier increased competition fueled ‘winner-takes-all’ and ‘race to the bottom’ competitive dynamics. HFT’s ‘early adopters’ got the theta arbitrage that the late-comers did not have, in a more visible and now hypercompetitive market.  Duhigg’s New York Times article wording and the May 2010 Flash crash also sparked an SEC regulatory debate:

 

  • On the pro side were The Wall Street Journal’s Scott Patterson; author Rishi K. Narang (Inside The Black Box); and industry exponent Edgar Perez (The Speed Traders).
  • On the con side were Haim Bodek of Decimus Capital Markets (The Problem With HFT), and Sal L. Arnuk and Joseph C. Saluzzi of Themis Trading (Broken Markets) which specialises in equities investment for mutual and pension fund clients.
  • The winner from the 2009-12 debate about HFT regulation appears to be Tradeworx‘s Manoj Narang who was both pro HFT yet who also licensed his firm’s systems to the SEC for market surveillance, as a regulatory arbitrage move. The SEC now uses Tradworx’ systems as part of the Market Information Data Analytics System (MIDAS, Philips reports.

 

Philips announced that HFT firms now have new targets: CTAs, momentum traders, swing traders, and news sentiment analytics. That might explain some recent changes I have seen whilst trading the Australian equities market. Christensen’s Disruptive Innovation Theory and theta arbitrage both mean that a trading strategy will be profitable for a time before changes in market microstructure, technology platforms, and transaction and execution costs mean that it is no longer profitable.

15th June 2013: Requiem For Equity Research Analysts?

In 2003, I did Masters essay post-mortems on the 1995-2000 dotcom bubble (PDF) and the 1998 collapse of the hedge fund Long-Term Capital Management (PDF). It was a turning point: then-Professor Richard Slaughter and I had discussed the more subcultural material I had written for Australia’s 21C Magazine and New York’s Disinformation website. The new material was like a requiem for the 1990s stockmarket, and for equity research analysts, in particular.

 

I kept reading about the dotcom era rise-and-fall of sell-side analysts like Jack Grubman, Henry Blodget, and Mary Meeker. I had my first taste of what being an equity research analyst might be like when I worked on the Smart Internet Technology CRC report Smart Internet 2o10 (PDF). We didn’t get any formal training in security analysis but I did some MBA classes in accounting, strategy, and opportunity evaluation. Our research team developed a qualitative screening methodology using expert consensus and thematic criteria. We did client briefings where we were sometimes asked for market views and stock picks. Then, Blodget wrote some Slate columns; came out with The Wall Street Self-Defense Manual (New York: Atlas Books, 2007); reconciled publicly with Eliot Spitzer; and launched Business Insider as a second act.

 

Still, no-one talked about equity research analysts in the same way as they did when Grubman, Blodget, and Meeker were dotcom stars. Securitization and ‘know your customer’ had replaced disintermediation as industry watchwords. Boris Groysberg’s Chasing Stars: The Myth of Talent and the Portability of Performance (New Haven, CT: Yale University Press, 2010) shifted attention from the foreground of dotcom era sell-side stars to the investment research organisation that the equity research analyst was in.

 

Equity research still featured prominently in CFA Institute training. But the dotcom scandals around Grubman and Blodget changed the public image of equity research. Turney Duff‘s excess-driven and somewhat derivative book The Buy Side (New York: Crown Business, 2013) appeared more attractive than examining analyst buy ratings or developing quantitative factor models. The public glamour of analyst-driven sales has diverted attention from the shift over the last decade to Bayesian probability and other structured analytic techniques that came from intelligence analysis. Buy-side analysis still remains secretive compared with sell-side analyst reports, which now get leaked to internet trading sites.

 

There are a bunch of core books around if you still decide to pursue a career as an equity research analyst:

 

  • The CFA-oriented Equity Asset Valuation (Hoboken, NJ: John Wiley & Sons, 2010) gives some of the core skills needed. Jeffrey C. Hooke’s Security Analysis and Business Valuation on Wall Street (Hoboken, NJ: John Wiley & Sons, 2010), and Martin J. Whitman and Fernando Diz’s Modern Security Analysis: Understanding Wall Street Fundamentals (Hoboken, NJ: John Wiley & Sons, 2013) give further details on security analysis and valuation methods that equity research analysts commonly use.
  • Jeremy Bolland’s Writing Securities Research (Hoboken, NJ: John Wiley & Sons, 2010) discusses the securities report as a writing genre, and the research methods involved.
  • James J. Valentine’s Best Practices for Equity Research Analysts (New York: McGraw-Hill, 2010) is the most encompassing and detailed of the career guides available. Gillian D. Elcock’s How To Get A Research Analyst Job (Herts, UK: 2010) covers the buy-side and asset management. Roy Cohen’s The Wall Street Professional’s Survival Guide (New York: FT Press, 2010) gives a coach’s perspective on how to move from buy-side to sell-side roles; how to format a curriculum vitae that is achievement and results-oriented; and how to prepare for interviews.

 

This suggests that in 2008-10, the equity research analyst role underwent a post-dotcom re-evaluation, during the 2007-09 global financial crisis. Or, equally likely, publishers decided enough time had elapsed from the dotcom era scandals to publish some new books for the next generation of financial professionals.

15th June 2013: 10 Books For First Trading System

I’ve spent the past three weeks developing my first trading system: a value-influenced mean reversion strategy that includes causal variables for hedge fund activism and political risk. Here are 10 books I used as part of the development process for my first trading system:

 

1. Jeff Madrick’s Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (Alfred A. Knopf, 2011). Madrick’s overarching history of Wall Street provides detail on central bank, monetary policy, political administration, industry sector, and deal flow variables. It’s also great investigative journalism that gives a deep historical background to what capital and financial markets are really like.

 

2. John Heins & Whitney Tilson’s The Art of Value Investing: How the World’s Best Investors Beat the Market (Hoboken, NJ: John Wiley & Sons, 2013). I started with value investor wisdom for the initial idea development and possible decision rules. Heins & Whitney’s investment newsletter interviews gave me plenty of examples for inductive data coding.

 

3. Anti Ilmanen’s Expected Returns: An Investor’s Guide to Harvesting Market Rewards (Hoboken, NJ: John Wiley & Sons, 2011). Ilmanen was one of the first sources I consulted to understand the historical return drivers of equities as an asset class, and its inter-market relationship with other common asset classes.

 

4. Andrew W. Lo’s Hedge Funds: An Analytic Perspective (rev. ed.) (Princeton, NJ: Princeton University Press, 2011). Hedge fund activism that shapes equities asset prices is a key causal variable for the mean reversion strategy. Lo’s research highlights some hedge fund trading patterns and shows how to draw inferences from databases and market data.

 

5. Keith Fitschen’s Building Reliable Trading Systems: Tradable Strategies That Perform as They Backtest and Meet Your Risk-Reward Goals (Hoboken, NJ: John Wiley & Sons, 2013). I’ve read several books that go back a decade on mechanical, automated and algorithmic trading systems. Fitschen highlights mean reversion and momentum strategies, and the importance of robust backtesting with both in-sample and out-of-sample market data.

 

6. Richard Tortoriello’s Quantitative Strategies for Achieving Alpha (New York: McGraw-Hill, 2009). Tortoriello’s book is essentially a collection of factor models and quantitative screens that uses a Standard & Poor’s rating methodology. Factor models help to isolate the potential alpha of return drivers from the market beta.

 

7. Barry Johnson’s Algorithmic Trading & DMA: An Introduction to Direct Access Trading Strategies (London: 4Myleoma Press, 2010). Johnson covers the importance of market microstructure, early developments in algorithmic and high-frequency trading, and the importance of transaction and execution costs. Several publishers are releasing new books about these topics in the second half of 2013.

 

8. Aaron C. Brown’s Red-Blooded Risk: The Secret History of Wall Street (Hoboken, NJ: John Wiley & Sons, 2012). Brown is a risk manager with AQR Capital Management. One of the many insights I took from this book was the importance of risk ignition in ‘live’ testing of a trading system, and in considering exit signals.

 

9. Ari Kiev’s The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success (Hoboken, NJ: John Wiley & Sons, 2010). The late Ari Kiev was an influential sports performance and trading psychologist who consulted with Steve Cohen’s SAC hedge fund. He has written several best-selling books on trading psychology. This book deals with expectational analysis and variant perception (Michael Steinhardt) which frames the entry signals and filters that a trading system must have.

 

10. John Coates’ The Hour Between Dog And Wolf: Risk-Taking, Gut Feelings, and the Biology of Boom and Bust (London: Fourth Estate, 2012). Coates’ personal research program combines ‘live’ trading experience and neurophysiological studies. Extremely useful information on the human stress response, mental toughness, and risk stressors that can shape ‘live’ trading or the ‘live’ discretionary over-ride of algorithmic trading systems.

 

Hedge fund and trading system architecture is expensive, and beyond the reach of the retail investor. However, investment in the above books (US$345.32 from Amazon.com at the time of original publication) may give a glimpse of what is possible, from initial idea development (value-based mean reversion) to backtesting, ‘live’ trading, and possible algorithm coding. It’s the information you select; the processes you use; and how your alpha return drivers support the trading system that results from research development, backtesting, and ‘live’ trading.

11th June 2013: Picks & Pans

Office Politics: How to Thrive in a World of Lying, Backstabbing and Dirty Tricks by Oliver James (New York: Vermillion, 2013). (TS-3). A winner-takes-all environment, flawed incentives design, and ‘tournaments’ for managerial roles means that proficiency in office politics is often necessary for career prosperity. James first examines four toxic types in professions and organisations: Psychopaths, Machiavels, Narcissists, and Imposters. In-depth advice is given on a range of skills including: acting, astuteness, virtuosity, and handling dirty tricks. Authenticity, insight, mindfulness, playfulness, and fluid, two-way communication are suggested as ways to reframe office politics in a more productive, and perhaps even initiatory, manner. Office Politics is useful reading if you aspire to climb the corporate ladder, and want to avoid the White Magic of organisations, and the of co-workers.

 

The Lone Samurai: The Life of Miyamoto Musashi by William Scott Wilson (Boston and London: Shambhala, 2013). (TS-3). Miyamoto Musashi’s influential Book of Five Rings (Gorin No Sho) discusses sword-fighting skills as one path to self-mastery. Wilson combines a biography of Musashi; an analysis of the development and life circumstances of Musashi’s philosophy; and a consideration of Musashi’s influence on Japanese martial arts, and on global popular culture, such as film portrayals and Wall Street traders. Kenji Tokitsu’s book Miyamoto Musashi: His Life and Writings (Boston and London: Weatherhill, 2012) (TS-4) provides a parallel history of Musashi’s life, documents his pre-Gorin No Sho writings, and examines his School (Hyoho Niten Ichi Ryu), and its relationship to Budo.

 

Balancing the Mind: A Tibetan Buddhist Approach to Refining Attention by B. Allan Wallace (Ithaca, NY: Snow Lion Publications, 2005). (TS-4). Wallace was a monk in Buddhist monasteries in India, and Switzerland, and has translated for H.H., the Dalai Lama. Balancing the Mind is a commentary on ‘Small Exposition of the Stages of Path to Enlightenment’ by the Buddhist Vajrayana monk Tsongkhapa (1357-1419), which outlines an Indo-Tibetan methodology for using introspection (samprajnya) and mindfulness (smrti) to cultivate meditative quiescence (samatha). Wallace discusses parallels with William James’ study of religious experience, Theravada Buddhism, and contemporary neuroscience research. A helpful glossary translates specialist terms in English, Sanskrit, and Tibetan, and an extensive bibliography is included for further research. Gareth Sparham has also translated Tsongkhapa’s ‘An Explanation of Tantric Morality Called “Fruit Clusters of Siddhis”’ available with commentary in Tantric Ethics: An Explanation of the Precepts for Buddhist Vajrayana Practice (Somerville, MA: Wisdom Publications, 2005) (TS-3). Tsongkhapa’s perspective on Root and Gross Downfalls in the Kalacakra System has insights for the periodic crises and shocks that have occurred in initiatory wisdom schools.

 

Omniscience and the Rhetoric of Reason: Santaraksita and Kamalasila on Rationality, Argumentation, & Religious Authority by Sara L. McClintock (Somerville, MA Wisdom Publications, 2010). (TS-4). McClintock is an Assistant Professor of religion at Emory University. She examines in detail the discussion of the Buddha’s omniscience (a “state of infinite, all-encompassing knowledge”) in the Tattvasamgraha (written by the Buddhist monk Santaraksita in the 8th century) and the Panjika commentary (by Santaraksita’s direct disciple, the monk Kamalsila), and its influence on “the metaphysics, epistemology, soteriology, and practical rationality” of Buddhism in Southeast Asia. Santaraksita and Kamalasila’s analysis highlights the pivotal role of a Buddhist “rhetoric of reason” in order to eliminate human ignorance (avidya) that is a barrier to potential omniscience (sarvajna). McClintock provides a glimpse of argumentation in the Indo-Tibetan religious tradition.

 

Secrets of the Blue Cliff Record: Zen Comments by Hakuin and Tenkei translated by Thomas Cleary (Boston, MA: Shambhala, 2000). (TS-3). The Blue Cliff Record is an influential collection of Zen Buddhist teaching stories and koans. Cleary has translated commentaries by Hakuin Ekaku (1685—1768) and Tenkei Denson (1648—1735), reflecting the Rinzai and Soto sects, respectively. For Cleary, the commentaries illuminate how the Blue Cliff Record text is “specially designed to assist in the activation of dormant human potential . . . [that] are intended to foster specific perceptions and insights whose absorption in experience enable the mind to work in a more coherent and comprehensive manner than conventional education can produce.”

 

Theory and Reality: An Introduction to the Philosophy of Science by Peter Godfrey-Smith (Chicago and London: University of Chicago Press, 2003). (TS-3). Godfrey-Smith developed this primer on the philosophy of science from his lectures at Stanford University. He clarifies the foundations of scientific theory-building; the role of logical empiricism and the different types of explanatory inference; the Popper-Kuhn-Lakatos-Feyerabend debates of the 1960s and 1970s; and recent challenges from the sociology of science (Bruno Latour), feminism, natural philosophy, scientific realism, and Bayesian-influenced probability. Godfrey-Smith will help you to understand the difference between deductive and inductive logic; the influence of Kuhn’s theory of scientific revolutions; and the recent work in causal explanations and mechanisms. This is a general book if you have a general interest in logic and the scientific method; and perhaps an introductory book if you are going to work regularly with the natural approach to the objective and subjective universes.

 

Machine Learning: The Art and Science of Algorithms That Make Sense of Data by Peter Flach (New York: Cambridge University Press, 2012). (TS-3). (MAM-3). Flach defines machine learning as “concerned with using the right features to build the right models that achieve the right tasks.” Machine learning uses descriptive, predictive, and probabilistic models to build learning and rules-based analysis of computer data, from your email’s spam filter to search engine algorithms. This book is an introduction to how computer science is using machine learning: it is an accessible introduction to the machine learning field (when compared with other relevant literature); but might be a more specialist text if you are unfamiliar with probability, tree and rule models, and concept learning. Machine learning informs complex decision-making and knowledge discovery in computer science, e-commerce choice selection, search engine optimisation, quantitative hedge funds, and pharmaceuticals research.

 

Relational Knowledge Discovery by M.E. Muller (New York: Cambridge University Press, 2012). (TS-4). (MAM-4). Muller is a Professor of computer science at the University of Applied Sciences, Bonn-Rhein-Sieg. Formal methods for knowledge discovery are the basis for algorithms, rules, and pattern recognition capabilities in artificial intelligence, data mining, and machine learning. Muller defines learning as “acquiring the ability to discriminate between different things.” This book provides a graduate level introduction to data-driven hypothesis testing; set theory; inductive logic; ensemble learning; knowledge representation, and other techniques that underpin algorithms in data mining and machine learning. A primer on how creating/limiting decision pathways might be modelled using information theory.

 

Knowledge Automation: How to Implement Decision Management in Business Processes by Alan N. Fish (New York: John Wiley & Sons, 2012). (TS-3). (MAM-3). Knowledge automation lies at the intersection of decision management (using predictive analytics and business rules for decisions); business process management systems (activity sequences); and service-oriented architecture (loosely-coupled reusable software as a service). These areas provide C-level managers with the capabilities to automate many business functions, and to change the staff and skills profile in contemporary organisations (which can lead to office politics, change management, and restructuring). Fish provides a guide for senior managers, information architects, and business analysts to model business processes; identify and redesign process decisions; and to develop decision services using business rules, algorithms, and predictive analytics. It remains to be seen whether Fish’s vision of decision management will occur, perhaps aided by knowledge discovery and machine learning, or whether it will suffer the fate of early expert systems from the late 1980s and early 1990s.

 

Complex Adaptive Systems: An Introduction to Computational Models of Social Life by John H. Miller and Scott E. Page (Princeton and Oxford: Princeton University Press, 2007). (TS-3). (MAM-3). This primer on complex adaptive systems (CAS) draws on the research expertise of the Santa Fe Institute, Carnegie Mellon University, and the University of Michgan. CAS can emerge from the interaction of individual actors or agents. This book discusses major features and dynamics of CAS including: modelling, emergence, automata, and CAS insights on complex social dynamics such as cities, economies, financial markets, and societal evolution. An accessible introduction to what computational models reveal about collective and mass social dynamics.

 

Investing: The Last Liberal Art (2nd ed.) by Robert G. Hagstrom (New York: Columbia University Press, 2013). (TS-3). (MAM-1). Hagstrom is a value-based investor who is deeply influenced by Charlie Munger (vice-chairman of Warren Buffett’s Berkshire Hathaway); Benjamin Franklin; Edward Thorndike (a student of William James); James Burke (Connections); and John Holland (the Santa Fe Institute). In this book Hagstrom attempts to understand how Munger thinks about investment and acquires ‘worldly wisdom’ via Thorndike’s ‘connectionionist’ model of learning, and the ‘latticework’ of discipline-specific ‘mental models’. Hagstrom examines lessons from eight fields of knowledge: physics, biology, sociology, psychology, philosophy, literature, mathematics, and decision-making. He also includes the St. John’s College reading list of philosophy classics: “How does one achieve worldly wisdom? To state the matter concisely, it is an ongoing process of, first, acquiring significant concepts—the models—from many areas of knowledge and then, second, learning to recognize patterns of similarity among them. The first is a matter of educating yourself; the second is a matter of learning to think and see differently.”

 

The Asylum: Inside The Rise and Ruin of the Global Oil Market by Leah McGrath Goodman (New York: HarperCollins, 2011). (TS-3). (MAM-3). In late 2012 and early 2013 new scandals swept Wall Street and global financial markets. The new scandals involved the manipulation of the London Interbank Overnight Rate for inter-bank lending, and a probable European Union (EU) investigation into the global oil market. Goodman’s reportage provides some historical context for the EU investigation if it proceeds; the founding and evolution of the Nymex oil markets; the transition of pit traders from ‘open outcry’ to computer-driven, high-frequency trading markets; and the battles within the enforcement division of the US-based Commodity Futures Trading Commission. The Asylum also includes pit trader, market-maker, and enforcement division reactions to the high-profile collapses of Enron and Amaranth Advisors which traded the global oil, gas, electricity, and commodities markets with disastrous results. “These scandals don’t surprise me at all,” one trader told me, “of course financial markets are manipulated!”

 

The Pale King by David Foster Wallace (New York: Little, Brown & Company, 2011). (TS-5). In May 2013, the US-based Internal Revenue Service was engulfed in scandal when media outlets revealed that the IRS had targeted right-wing political groups for taxation audits. The IRS scandal would not have surprised readers of David Foster Wallace’s final, unfinished novel, about the initiation of trainee David Foster Wallace in the IRS Regional Examination Center in Peoria, Illinois. Wallace spent nearly a decade researching accounting and taxation audit systems whilst working on the novel, which explores themes of individuality, mindfulness practice as a method to train attention, and the search for human happiness amidst contemporary boredom. The University of Texas’s Harry Ransom Center is expected to house the original drafts and supporting material from The Pale King.

 

An Introduction to Systematic Reviews by David Gough, Sandy Oliver, and James Thomas (London and Thousand Oaks, CA: Sage Publications, 2012). (TS-3). A systematic review is a structured, analytic process, undertaken as part of a research literature review or project, in order to understand or to evaluate a knowledge domain. The results from a systematic review may identify gaps in current knowledge, biases or errors to be addressed, or may be the first step in the synthesis of new knowledge, such as theory-building. This book discusses how to do a systematic review, and the methodological issues that arise during the process, from information management and the selection criteria for relevant studies, to specialist techniques like database analysis and statistical meta-analysis. The authors are affiliated with the Evidence for Policy and Practice Information and Co-ordinating Centre, in the Social Science Research Unit at London’s Institute of Education. The Cochrane Collaboration, an international network involved in the systematic reviews of healthcare, also shaped this book.

1st June 2013: My First Trading System

My First Trading System
My First Trading System

 

In August 2011, I started trading Australian equities after over a decade of watching financial markets as a journalist, website editor, and university-based researcher. I developed a pulse for event arbitrage. In October 2011, I visited the Tokyo Stock Exchange where I vowed “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.”

 

In the past few days this applied research program has metamorphosed into a new phase.

 

I also mapped out how the trading literature has evolved over the past 30 years.

 

I am developing my first trading system: Bayesian, risk-weighted, algorithmic and quantitative trading rules.

 

I’m using the following development process (with the books above and other resources):

 

1. Identify possible Alpha Opportunities, Arbitrage Factors, and Trading Catalysts using a systematic review of hedge fund, risk, and quantitative trading literature. These are Bayesian pre-observed outcomes or inputs.

 

2. Iteratively develop a Trading System with careful attention to probable market exposures, decision-action loops, and transaction/execution costs. Consider what correlations and joint probabilities might arise.

 

3. Code the Trading System as algorithms and quantitative screens. Back-test them in a variety of market conditions. Check the back-test data for potential curve-fitting. Update Bayesian beliefs.

 

4. Do an After Action Review with careful attention to risk/money management lessons.

1st June 2013: Proposal for ISA’s 2014 Annual Convention

The International Studies Association is holding its Annual Convention for 2014 in Toronto, Canada.

 

Below is one proposal I have submitted for consideration by the International Political Economy and International Security sections:

 

Geopolitical Flashpoints, Systemic Risk & Distal-Influenced Spatiality

 

Abstract: Geopolitical flashpoints and systemic risk are now global arbitrage opportunities for hedge funds and political risk firms. Bridgewater (Ray Dalio), AQR Capital Management (Aaron C. Brown), PIMCO (Bill Gross & Mohamed El-Erian), Roubini Global Economics (Nouriel Roubini), and Stratfor (George Friedman & Robert D. Kaplan) have each contributed to media, policy, and practitioner debates about the 2008-10 rare earths bubble, the United States pivot toward Asia, and Iran-Syria-Russia oil speculation. This paper uses develops a Bayesian inference framework which emphasizes distal (far away) and spatial cause-effect relationships, in order to explain how hedge funds and political risk firms as non-state actors can enact global arbitrage and actively influence/shape public debates. I integrate analytical research from the sociology of finance (Donald MacKenzie), international security (Stephen G. Brooks), critical world security (Michael T. Klare & Naomi Klein), intelligence studies (Amy B. Zegart, Robert Jervis, & Gregory Treverton), hedge funds (Andrew Busch & Andrew Lo), and fictional speculation (Richard K. Morgan), to develop a new, inductive theory-building alternative to current explanations that emphasize proximate (near) and temporal causes. This paper advances new understanding about ‘casino capitalism’ (Susan Strange), expert networks, hedge fund activism, and political risk arbitrage.