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I Took The Road More Travelled By... And It Was Swarming With Vicious High Frequency Traffic Jams
Courtesy of Tom Cochrane, we know that life is a highway. But did you know that so is the stock market? BNY's Nicholas Colas explains...
The Low Spark of High Heeled Boys
Summary: Sitting in traffic on busy summer weekends feels a lot like trading the capital markets at the moment. The HOV lane (bonds) seems to be moving, but there are quite a few folks in Ferraris and Bentleys (the smart money?) crawling along, not sure which lane to pick. There is a growing library of academic work on traffic jams and these studies seem oddly applicable to the life of an investor at the moment. As it turns out, traffic jams pop up for reasons other than crashes. Sometimes it is just one or two vehicles that stop short, setting off a cadence of slowdowns behind them. Other times it is a group of tailgating cars that can set off a serious slowdown by stopping short and setting off a chain reaction behind them. And even after a crash is cleared, traffic can stay snarled for a while, as drivers struggle with the stop-start aftermath of a temporary tie up. Any way you cut it, equity markets – and the domestic economy - feel a lot like a clogged freeway. Only time will get the traffic moving again.
If you need any more proof that capital markets are not efficient, visit NY State Route 27 in the Hamptons between now and Labor Day weekend. You will see a slow moving parade of the some of the finest cars in the world, crawling their way to restaurants and nightclubs. The occupants of these Ferraris, Porsches and Lamborghinis will wait for tables, service, food, and drinks before saddling up and slowly driving back to their rental houses along the same clogged one lane highway that connects all the towns of the East End from the Shinnecock Canal to Montauk.
The ironic thing about all this is that these “Masters of the Universe” (if that term still applies) don’t need to be stuck in traffic – there are free flowing back roads that cut through some of the most beautiful landscapes in the Hamptons. There are horse farms, apple and peach orchards, roadside stands with fresh-off-thestalk corn roasted over coals for sale, and the last wide open vistas the area has to offer. But no, Rte 27 is the most straightforward way, and the back roads need a bit of learning before you can avoid getting lost at night on their unlit blacktop. And since most folks just go out for 10- - 15 weeks during the summer they don’t bother to learn them. So they sit still in Watermill or Bridgehampton, letting the hours pass by, occasionally chirping the otherwise dull rumble of their Italian V-12 or turbocharged German flat-6.
Those are the folks you are competing with for incremental information – the people who don’t seem to want to go off the beaten track, even though the alternative path is faster and more pleasant. So despair not – there is still information advantage to be had over the V-12 set.
Learn the back roads.
That little rant aside, the topic of traffic generally and traffic jams specifically have been getting more attention in academic circles in recent years. That makes sense – road congestion got progressively worse in the last decade as commute times rose for workers who moved further and further away from their jobs because escalating property values pushed them away from population centers. And, as it turns out, the study of traffic has some striking similarities to how capital markets behave. Not such a stretch, when you think about it. Humans try to make time maximizing choices while driving – what lane to pick, how fast to drive, how close to get to the car in front, how many times to change lanes. Those choices can affect others driving alongside and either advance or retard the overall flow of traffic.
Of course, the precondition for a traffic tie-up is, well, lots of vehicles on the road, all wanting to go in the same direction. We have that in spades in the capital markets at the moment. Correlations are at record highs across industry sectors as well as asset classes. It is such an overarching problem that it does not have one fixed reason. Low interest rates and easy money are one – these push capital out on the risk spectrum in a very uniform manner, heightening the linkage between previously less correlated assets. Then of course there are macro concerns like taxation, government policy, and a still moribund economy that impact asset classes like bonds (for the good) and stocks (for the not-so-good). So the stage is set for traffic jams. We’ll use that as a euphemism for a market drop, not the stasis that accompanies an actual wall-to-wall collection of cars on the highway.
The catalyst for a traffic jam isn’t always a rubbernecking delay from an accident; it can, and often is, just a spot where everything inexplicably slows down. There is even a name – a “jamiton” – for this kind of disruption. They are caused when one, or a handful, of drivers slows down unexpectedly. This forces everyone behind this cluster to slow down, and before you know it things are flat-out stopped. As it turns out the effect is similar to the shock waves of an explosive detonation. A more full description of the effect is included here, with some color from the MIT scientists that coined the term “jamiton”: http://www.sciencedaily.com/releases/2009/06/090608151550.htm.
Just like in the markets, amateurs have their points of view about what causes traffic jams/market declines. In this non-scientific description, a traffic science “layman” outlines how jams take time to resolve themselves even when the cause – an accident – has been cleared. It is a version of the same crowded lane/sudden slowdown effect outlined above: http://amasci.com/amateur/traffic/traffic1.html. The author calls the jam a “pressure wave,” created by the temporary slowdown of cars in front and the subsequent delay as the whole system just stops as a result.
So what do you do to help avoid jams? Keep your distance from the car or truck in front of you. That gives you time to slow down deliberately, rather than mashing the brakes and causing the cars behind you to stop short and create that “pressure wave/jamiton.” An impassioned appeal from another amateur follows: http://www.skaggmo.com/newsletter3a.htm.
We’ll finish off this note with a few observations about what this stocks-are-like-traffic-jams comparison means to investors and traders. The most important point is that jams – or market drops – seem to happen when everyone wants to go in the same direction (high correlations between asset classes). Jams occur once that stage is set because a relatively small number of participants do something unexpected. They can, in short, have a disproportionately large effect on the entire system. And – worse still - if a lot of people slow down at once, the system grinds to a halt. That feels a lot like what we have right now. Mutual fund outflows from domestic stock funds are effectively the retail investor putting their foot on the brakes – something they have been doing for 15 weeks straight. Combine that with plenty of distracting scenery in the form of lousy economic data and the jam gets worse.
One thing all traffic jam experts seem to agree on: when the chain reaction that starts a jam really kicks in, only time will unwind it. And that seems like the most accurate comparison point to stocks.
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Vicious, bitchez
F the Porches and Ferraris.
and the thousands of workers who make them...
and their loved ones who rely on that income...
I hope you're being sarcastic
yes
Ahh...If only the US could mass produce such quality. Jealous, aren't you?
If you come to a fork in the road, take it.
Dad
I came to a fork in the road and it got stuck in a tire. It created a traffic jam and cost me a Bridgestone RE730.
If you come upon a fork in the road, don't try to eat soup with it.
I came to a fork in the road and it was like deja vu all over again! So I took it.
Time isnt going to unwind shit without structural reform. More like a 1 million car pile up in the fog.
Patience.
http://2.bp.blogspot.com/_aF89xUtaZDI/S1pB1CCZXgI/AAAAAAAAARo/h85YXDxrHc...
HEAVY TRAFFIC
http://williambanzai7.blogspot.com/2010/08/heavy-traffic-jammed.html
- A Banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.
- An Englishman is a person who does things because they have been done before, an American is a person who does things because they haven't been done before.
Mark Twain
I think the pile up is a consequence of timing. Everyone trying to get to the same place at the same time. Bad news = markets go up. Maybe so those sitting on the sidelines will think all is well and enter at the same time. Thinking if market can go up on news like today, then must be safe to enter. Build it and they will come. The more traffic the better.Power in numbers.
Witches Brew
Mark Twain?
HE WAS TALKING ABOUT AMERICANS 100 YEARS AGO!
Now the average American has gained 120 pounds, has turned into a mass media adept and has replaced his almighty God by the television who is now almighty.
An American is a person who does things what he is told to do on the television because whatever comes onto the screen is the truth.
Amercians stoped being pioneers as soon as they invented the remote control.
Sudden Debt
yeah, no pinoneers here in America.
no Apples, no Googles, no Facebook, nobody doing anything innovative at all
Ya apples a great clone computer manufacturer and they do nearly 1 percent of the linux code necessary to run OS/X. Google had a silver spoon stuck up it's ass since the day it was born. Facebook. Isn't that like myspace 2.0.
with such intelligent arguments, I have nothing left to refute you with, but I will try
1. I am not sure what you mean by silver spoon up Google's ass, maybe something a bit more coherent and less cliche and I could debate you
2. Looked at Facebook user numbers lately? not even a comparison to myspace
3. Apple's products are simply the best if you have ever used them
Here's to hoping that you leave our country immediately and/or hurt yourself
Insincerely,
Dr. Brown
Let me guess. You're a psychiatrist.
I'll bet you beat children...
-Winston Chuchill
HFT pop courtesy of SkyNet this afternoon???
SkyNet
Looks like Tetris on a comodore :)
Can you also make the cubes go down faster when you press the down arrow?
That's way too large -- I need to remove that... need some help here.
Also, when you get help for that, tell Tyler what a great job hes doing with ZH..:P
I'm sure he already read your comment. :-)
I really wish I had picked that name before you did...
..and I, your avatar.
Got a blowup of her?
Drag the image over to Irfanview and blow it up to 500 dpi. Not that enticing, just a chick in undies....
OK, it's fixed. Now if you click on the chart you will see a much larger view (not all at once like it was.)
There's a very interesting book out now called Traffic (Why we drive the way we do) by a guy named Tom Vanderbilt.
One of the interesting findings he presented seems applicable to an individual's travels through the world of finance as much as across our highways and biways.
Here in Massachusetts we have these odd little traffic convergences called "rotaries". Two or through roads intersect at one point and rather than a 4 way intersection or some other such configuration, they all approach as lines tangential to a circle of pavement, the rotary. (I apologize for bothering with this but they don't actually exist in many places in the U.S.)
The common sentiment is that rotaries are terrible. They're more difficult to navigate your way through than a conventional 4 way intersection. There was a push, for some years, to eliminate them whenever possible.
But Vanderbilt found something very interesting and counter-intuitive. When rotaries are replaced with 4 way intersections the rate of auto accidents tends to increase.
Another data point leading to the same general thesis was an experiment Vanderbilt says was conducted at a town somewhere in Holland. I don't know how they got the okay to do this but they took out every traffic sign. Street signs were left but every other traffic direction sign was removed.
And the rate of accidents in that town decreased.
It turns out that a safely constructed and aligned road is good. But drivers thinking and paying attention is better. Rotaries are more difficult to drive than a typical 4 way intersection with lights or stop signs and force drivers to pay attention. When they pay attention, things work better.
When people pay attention and think, even if it's more difficult than complacently trusting traffic signals or politicians, things work better.
They are of course prevalent in europe, called roundabouts and they are a good idea when executed properly. The reason they are opposed in the US so much is that you can't navigate the rotary / roundabout if you're yacking on a cell phone or (illegally in Iowa now) texting. There are a few here but executed very poorly.
As a side note, anyone else notice driving behavior has gone down the porcelain fixture?
A few years ago a lot of people started driving with their high beams on, and fuck anyone else traveling in the opposite direction.... that's what I've noticed.
Yes. It's a combination of a lot of things. You have more years of people raised with bizarre concern that they never suffer any injury to their precious self esteems creating a legion of suburban solipsists who barely recognize that other people exist independently of them. Why signal to other people who are only of infinitessimal importance? Why yield the right of way to them?
And, of course, you've got the cell phone. When I first got out of college, just before cell phone use metastized, I used to drive two interstates here in Massachusetts as part of my commute. And the self-organized discipline of it was beautiful. On one, the left lane went 85, the middle lane went 75 and the right lane went 65, period. Now, every third car is some idiot talking or texting on his or her phone and not paying attention, drifting out of lane or slowing down because he's not primarily driving but desperately transmitting messages essential to the survival of the republic like OMG! LOL! and WTF!
Yes, the uninsured, illegal immigrant road rage!!!!
You will be.....
Swindon, England has the magic roundabout. There are about five roundabouts connected to a roundabout. One can drive clockwise or counter-clockwise around this roundabout. A photograph of the layout can ve seen here:
http://www.armin-grewe.com/holiday/wiltshire/swindon-roundabout-press.htm
Driving is shown here:
http://www.youtube.com/watch?v=hyBtPmn9vN8&NR=1
oooh, thanks for those links CONners - somewhat nostalgic for me, having lived in britain, though never made it to the magic roundabout. . . have fond memories of driving the right hand drive vehicle on the left side road, taking a ferry to the continent & having the reverse side roadway, same vehicle. . . makes one a more attentive driver, to be sure! particularly in such cities as paris & rome, where the traffic is anarchy. . . must say tho' - the roundabouts make for smooth traffic flow, for the most part.
Hey, and I always thought this one would be hard to beat -
http://maps.google.com/maps?f=q&source=s_q&hl=en&geocode=&q=Fribourg,+Sw...
that's peanuts for the british!
an experiment Vanderbilt says was conducted at a town somewhere in Holland
Anarchy in the Streetsby Butler Shaffer
The architect of this experiment, the late Hans Monderman, attributed its success to the fact that "it is dangerous, which is exactly what we want." "Unsafe is safe" was the title of a conference held on this practice. Monderman added that this effort "shifts the emphasis away from the Government taking the risk, to the driver being responsible for his or her own risk." Equally significant, drivers now focus more of their attention on other motorists – taking visual cues from one another, informally negotiating for space, turning into an intersection, etc. – instead of mechanistically responding to signs and electronic machines. Monderman stated: "When you don’t know exactly who has right of way, you tend to seek eye contact with other road users. You automatically reduce your speed, you have contact with other people and you take greater care." He added: "The many rules strip us of the most important thing: the ability to be considerate. We’re losing our capacity for socially responsible behavior." In words so applicable to the rest of our politically-structured lives, he declared: "The greater the number of prescriptions, the more people’s sense of personal responsibility dwindles." Monderman expressed the matter more succinctly in saying: "When you treat people like idiots, they’ll behave like idiots."
http://www.lewrockwell.com/shaffer/shaffer213.html
solid piece. tnx.
Getting a driver's license in Europe costs as much, and takes almost as much time, as getting a pilot's license here in the US. You can tell by the skill level of the drivers.
In some US states you can be taught by your parents, take a few manditory classes about not drinking/texting while driving, then try to pass a test. These 16 year-olds spend the next 2 years bouncing off of curbs and other cars until they learn the physics and physiology of driving.
I have personally noticed and commented on exactly the same phenomenon when in the 3rd world. the locals tend to hate this type of situation and yearn for the US's "controlled" traffic environment. But if you really pay attention, you can see how there is organization in the chaos and jams clear MUCH more quickly than they possibly would in the US.
We have idiots around where I live STOPPING for the flashing yellow, but if the light is off due to power outage, just speeding right through it. They don't even have a basic grasp of interpersonal traffic control in them, nor even know the rules of the road. They do shit assbackwards.
It seems the human conscience does a pretty good job of controlling behaviour. We generally do not do things that make us feel badly. Being ashamed of errant behaviour is healthy. Keeps us from doing it again.
Americans' disregard for all codes and laws is apparent and breaking a law does not necessarily result in the perpetrator feeling any shame.
Many laws have supplanted conscience as a regulator. Breaking a law is much easier than defying one's own values.
This is just the old legislating morality debate but the incremental intrusion infuriates me.
Wild liberty develops iron conscience. Want of liberty, by strengthening law and decorum, stupefies conscience.
-- Ralph Waldo Emerson, Politics
http://www.panarchy.org/emerson/politics.1844.html
MA, i found, not big on street light signals. ok with me. they are old and not overhead, stand alone.
roundabouts = dangerous road furniture, during a grand bicycle tour in europe. not so well like by the racers.
Moneyball.
double post
Michael Douglas in one of those cars, about to go apeshit.
No, he is not. Michael Douglas summers in Connecticut. I know because I've drunk beer with him there.
http://www.youtube.com/watch?v=T9ckjELRL6Y&feature=related
What he is really saying is that when you have a lot of traffic (in this case HFT, quants, and other hedgies handling a lot of hot money), it only takes one or two vehicles jamming on the brakes (ie, two hedge funds pulling a couple hundred million out of the larger ETF's) to cause a waterfall crash, which effectively puts everyone behind them underwater and looking to bail out before their leverage kills them. When everyone leaves at the same time, the market will come to a complete stop. As Herknoid described, sort of like a million car pileup.
Colas never actually says so, but his suggestion of taking the back road would seem to imply that the smart ones will get off this hiway to hell and become their own central banker, ie
Gold, Bitches!!
The road to financial security is paved with gold. And it doesn't pass through the Hamptons.
Well it does sortof. But it involves getting your head dunked in icy cold wake the hell up water.
beat the heat, and buy a
The Gulfstream G650and a helicopter. fly privately, none of the elite weathly would ever travel in a car to their vacation destination, i don't think.
There is actually quite a business growing arround HFT. You need a pimped IT system, you need massive amounts of data (which is not for free of course:) )...
Another kind of proposals I regulary get in my mail is these kinds of mail:
Capital available for HF Traders / Trading TeamsI have two clients currently funding start ups and existing teams in this space.
If you are interested in owning your own shop without the headaches, we will provide ALL infrastructure, HR, IT support, administration, back office, etc. as well as co-location,low latency exchange and ECN connectivity, servers, trading systems software, legal setup, prime brokerage, execution and CAPITAL. You just trade! NOT A PROP SHOP You own your company (LLC), track record and intellectual property (proprietary models, etc.). Very generous performance fees paid (similar to Hedge Fund structure).
Also have an investor (FoF) exclusively focused in this space seeking established funds or trading teams to provide trading capital.
For a confidential discussion, email me on
I also get warnings like this (They are not all evil :):
Warning: Don’t do HFT on the Oslo stock exchange!
On my way home from work today, the front page on the news paper Dagens Næringsliv caught my attention. It says "Tiltalt for å ha lurt aksjerobot", which translates to something like "Prosecuted for having fooled shares robot".
According to the paper, the core details are:
So what is this? Socialism on a stock exchange? Poor bot owner, who had a non-optimal sub-performing algorithm that lost them money? Or are the people at Oslo stock exchange just not getting high frequency trading, or not liking it? Or are they loving the high volume that algorithmic trading might bring them so much that they try to protect the big fishes?
This whole thing sounds a bit strange to me.. I guess you can say that the two people being prosecuted here don't fit under the typical HFT definition. But I ask; what's the actual difference between what they have figured out and performed manually, and what you have figured out and made an application/automated strategy perform on your behalf? And for all I know, they might have had automated routines helping them out. Unless there are some key elements left out in the article, the behavior of the Oslo stock exchange is both strange and unpredictable as far as I can tell.
I guess the moral of the story is: If your doing HFT, think again before you bring your money/liquidity to the Oslo stock exchange. That is, unless you're loosing money, because then maybe the Norwegian authorities will fight your "case" for you.
You don't make the great big fishes sharing finger sandwiches with a 1000 other guys. You eat it all.
Roundies bitchez! I get the analogy.
Can't wait for more shit news this week. Watch the market soar!
Well here is more shit news...Obama wants 30 billion in stimulus for COUMMINTY BANKS!
(sorry for shouting)
Don't know about the market soaring, but gold is shining, again.
The Euro Crisis and The Coming Euro Collapse- Pardigm Lost
http://israelfinancialexpert.blogspot.com/2010/08/uri-dadush-on-euro-crisis-and-coming.html
Just ignore those Jewish sites.
They are pissed as hell because Belgium is investigating the accounts of Diamond traders in Switzerland :)
I seems they haven't paid any taxes on diamond trades EVER.
And as diamonds are luxury goods and there is a 21% tax on luxury goods trading they might be in for a ride :)
And in Belgium they had the chance to declare their black money until last year. If there is money on their Swizz accounts, those taxes on it will double!
So: 21% +21% = 42%
(I even propose to confiscate those accounts and put those Jews in jail!)
It looks like the Jews are going to be down-paying a lot of Belgium's debt! HAHAHAHA
But it's their own fold. They blackmailed the Belgium government that if there would ever be a control on their diamond trades, the would leave the country. Looks like that blade cuts on both sides!
And to be honest, those Jews deserve it! I once got my car towed in the Jewish quarter in Antwerp because I WASN'T A JEW! In Antwerp you can only park you car in the Jewish quarter when they approve of it! THOSE IMMIGRANTS GOT ME A TICKET OF 350 EURO FOR PARKING IN MY OWN COUNTRY IN MY OWN CITI!!
I say: BURN MOTHERFUCKERS, BURN!
And stop posting these crybaby stories of those Jews like the ones you posted yesterday!
Isn't the silence deafening when it comes to placing the real blame for the worldwide financial debacle squarely at a few hundred Jews' feet?
Imagine if Sicilian last names were in place of geithner, bernanke, shapiro, gensler, Fuld, Blankfein, greenberg, Summers, Orszag, and on and on and on and on and on....
Indeed.
You will see a slow moving parade of the some of the finest cars in the world, crawling their way to restaurants and nightclubs. The occupants of these Ferraris, Porsches and Lamborghinis will wait for tables, service, food, and drinks before saddling up and slowly driving back to their rental houses along the same clogged one lane highway...
This is not a scientific problem in search of a scientific solution. It's like Dante has imagined a special circle of Hell specifically designed for New Yorkers. Baiting them with everything they love: vanity, ostentation and social preening to trap them with everything they hate: time wasting, under performance and mundane, repetitive tasks.
I knew this has been coming for many years, so:
rule #1: anybody who does not know how to survive without money will die
rule #2: you need food for bartering and bribes
rule #3: you need strong friends, blue-collar friends
rule #4: you need skills (can you make soap? can you sew? do you know 1st aid?)
rule #5: you need tools when the entire power grid goes down
A V 12 FERRARI AIN'T GONNA HELP MUCH
WHOEHAHAHAHAHAHAHA!! PUSSY!!
I bet kids beat you up every time you pass their school right? :)
I bet you memorised the texts of Mad Max 1 and 2 :)
if you know of a back road into Montauk,
I'd really like to know about it.
Its been a few years since I've been that way,
but as I recall, one pretty much has two choices,
the sunrise highway, or the intercoastal waterway.
"Time (life) is a room; not a rope".
--J. Fowles
Speaking of traffic jams:
China's nine-day traffic jam stretches 100km
Mon Aug 23, 9:18 am ET
BEIJING (AFP) – Thousands of vehicles were bogged down Monday in a more than 100-kilometre (62-mile) traffic jam leading to Beijing that has lasted nine days and highlights China's growing road congestion woes.
The Beijing-Tibet expressway slowed to a crawl on August 14 due to a spike in traffic by cargo-bearing heavy trucks heading to the capital, and compounded by road maintenance work that began five days later, the Global Times said.
The state-run newspaper said the jam between Beijing and Jining city had given birth to a mini-economy with local merchants capitalising on the stranded drivers' predicament by selling them water and food at inflated prices.
That stretch of highway linking Beijing with the northern province of Hebei and the Inner Mongolia region has become increasingly prone to massive jams as the capital of more than 20 million people sucks in huge shipments of goods.
BEIJING (AFP) – Thousands of vehicles were bogged down Monday in a more than 100-kilometre (62-mile) traffic jam leading to Beijing
At the head of that traffic jam there's a tank with some guy standing in front of it waving his arms.
Considering how many vehicles there are on the road, and how close vehicles are in proximity to one another, particklelerly on two lane highways, with no barrier in between, I am consistently in awe of the confidence and faith people have in one another's driving. Or the ignorance, if they are not conscious of it.
As I whiz by another at 55 mph or more and realize the other cars or 18 wheelers that are hurtling towards me, are only 2-3-4 feet away from me, I am surprised our death rate isn't a hundred times higher.
But I still get amazed at a plane taking off and staying up in flight.
In the future, computers will eliminate all human errors. -:)
Cars on a highway are particles, and the particle theory of waves explains much of their behavior. Maybe it will explain something about markets too.
Good to know the herd mentality still rules in the Hamptons.
My commute is 15 steps up to an office loft.
Smart man, very smart indeed.
Non-correlated diversification is absolutely essential to an investor not wishing to get stuck in traffic. Investors need to choose a lane, risk management or chase performance. I believe the latter only satisfies short term boom and bust. To get into the long term fast lane you need to move out of correlated investing, get off the main highway. Take the a country back road 20% of the time. Educate yourself and find out what makes sense for you and your goals.
Great Pacific Trading Company
http://www.gptc.com/managed-videos
Managed futures involve risk and are not suitable for everyone. Past performance is not indicative of future results.
The amateur talking about pressure waves is actually talking about shock waves & it is an established concept in Traffic Engineering. Here is some evidence.
http://path.berkeley.edu/~xylu/paper/shockwave_TRB.pdf
Where is that picture taken? That looks like freeking So Cal. I'm so glad I moved out of there.
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