Quant Trading

Regulators Are Probing RenTec's "Secret Trading Code"

Commodity Futures Trading Commission are probing the "secret trading code" at RenTec run by Democrat, and Hillary Clinton supporter, James Simons and Trump's most influential financial backer, Robert Mercer,

FBI Arrests Former Susquehanna Trader For Stealing HFT Code

An HFT software developer and trader was arrested last Wednesday in New York for attempting to steal quantitative trading code from Susquehanna International Group, a secretive financial firm based in the Philadelphia area that specializes in making markets for options.

Morgan Stanley Lists The Ten Excuses Hedge Funds Give For Bad Performance

The alpha from the HFRI long-short index was close to 14% per annum in the early 1990s, and has been slightly below zero for the past few years. Why is this? We don’t claim to have some systematic rank ordering of reasons for the decay in performance, but here are ten thoughts.

The $12 Trillion Fat Finger: How A "Glitch" Nearly Crashed The Global Financial System - A True Story

... in under a minute, the hateful script had taken offline the entire system in much the same manner as chucking a spanner into a running engine might stop a car. The databases, as always, were flushing their precious data onto many different disks as this happened, so massive, irreversible data corruption occurred. That was it, the biggest computer system in the bank, maybe even the world, was down. And it wasn't coming back up again quickly. At the time this failure occurred there was more than $12 TRILLION of trades at various stages of the settlement process in the system. This represented around 20% of ALL trades on the global stock market.

Guest Post: A Common-Sense View Of The Stock Market

Active traders and professional money managers already know how the U.S. stock market actually works, but Joe and Jane Citizen, whose pensions generally depend on the market in some way, typically do not. This entry is for them. Today's financial markets are endlessly complex, and this complexity implicitly serves to mask the true nature of market operations. Most of this complexity can be boiled away with zero loss of understanding. Indeed, manipulating this complexity is what earns the big bucks on Wall Street, while boiling it away earns the big bucks for commentators and analysts. Thus complexity serves the financial industry extremely well.

  • The first and most important thing to understand about the U.S. stock market is how few humans are actually involved in the decision to buy or sell large blocks of shares.
  • The second important thing to know about the stock market is that central banks and governments intervene as buyers to trigger rallies and put floors under declines.
  • The third thing to know about U.S. stock market is that their operations are opaque, invisible, and hidden from the citizenry and non-Elite human traders.
  • The fourth and last thing to know about U.S. stock markets is that this skimming and intervention have left the markets extremely vulnerable to collapse.

From Chicago To New York And Back In 8.5 Milliseconds

Back in 2009 when the world wasn't filled with HFT 'experts', we deconstructed the topic of High Frequency Trading on a daily basis, and predicted not only the flash crash, not only debacles such as the Knight trading fiasco, not only the death of capital markets as a fund raising vehicle for companies who wish to go public (i.e. the FaceBook IPO fiasco), but much more (all of which has yet to pass before the stock market, as it was once known, is no more). The reason why little if anything can and will be done to fix the persistent threat to capital markets that is HFT is two fold: i) none of the current regulators understand anything about modern market topology, and ii) HFT is so embedded in markets that unrooting it would result in a complete reboot of "fair" stock valuation: imagine what would happen to stock prices if Knight and its "buy everything" algos were no longer present. Mass hysteria as the realization that vacauum tubes are now TBTF. That said it is always amusing to observe as more and more people get in on the scam that is the "equity market", now completely dominated by robots which do nothing but accelerate and perpetuate momentum moves - after all it is all they can do in lieu of being able to read financials, or anticipate events. Remember: it is always the market that makes the news, never the other way around. So it was entertaining and informative to read the latest recap of all events HFT-related as narrated by Wired's Jerry Adler, whose write up "Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading" does an admirable job of showing how not only nothing has changed since those days in 2009 full of warning, but how in fact things are moving ever faster to what will one day be a trading singularity, limited strictly by the speed of light (and maybe even surpassing that). Of all the things in the article, the one we found most curious is that since 2009, the round trip from the biggest quant trading hub in Chicago to the exchange hubs in NY and NJ, has been cut by over 50%, or from over 13 milliseconds to just about 9 milliseconds, courtesy of Microwaves.

Guest Post: Mystery Solved - The Fed Indicts And Absolves Itself

There is no mystery to the “headwinds” that continue to plague and mystify monetary policymakers.  The global economy is not pulled into re-recession by some unseen magical force, conspiring against the good-natured efforts of central bankers.  Instead, the very thing central banks aspire to is the exact poison that alludes their attention.  Conventional economics will continue to believe and empirically “prove” that the theory of the neutrality of money is valid, giving them, in their minds, unrestricted ability to intervene and manipulate over any short-term period (though it is getting harder to argue that these emergency measures are “short-term” nearly five years into their continued existence).  The occurrence of panic in 2008 and the unresolved and unremoved barriers to recovery in the years since, however, fully attest to nonneutrality, an ongoing form of empirical proof that their models will never be able to refute.  And we are all condemned by it.

AXA Rosenberg's Attempt To Conceal Its Quant Glitch Costs $242 Million

So much for quant trading being an innocent program that can never do any harm. After a year ago AXA Rosenberg disclosed that it had kept its clients in the dark about a massive error in the computer code of its "quantitative investment model", today the SEC fined the  one time asset manager of over $70 billion with a record for its kind fine of $242 million. As a reminder the immediate effect of the error when first reported was the major underperformance of the fund compared to its peers: "A number of the funds managed wholly or partly by AXA Rosenberg performed poorly last year." Yet what supposedly did not alert the firm that anything was wrong was that the system was performing in line with other comparable models: ""It wasn't obvious if there were any problems or
any impact from this error on our fund because it followed a similar
trend to other quant managers
," Vanguard spokeswoman Rebecca Katz told
Reuters on Saturday." In other words, it is safe to assume that other AXA peers have or had been operating with comparable system flaws, yet due to the SEC's preoccupation with porn, had never been caught, and as a result investors in such funds may have well been fleeced of millions due to comparable uncaught computer glitches. So much for robotic efficiency, especially when coupled with a human's eagerness to engage in willful securities fraud...

NYSE's Latest Benevolent DMM Getco Slapped With $2 Million Fee For Improper FSA Reports, As SEC Begins To Track HFT Trading

In an ironic twist for one of the biggest liquidity providers in the world, and now a brand spanking new DMM on the NYSE, giant quant trading firm Getco was just slapped in the UK with a $2 million fine for "failing to make accurate reports of transactions." It appears that these may very well have been purposeful transgressions masking some improper underlying trade activity, because as the WSJ reports, "the FSA said the errors were particularly serious because they took place during a period of heightened awareness around transaction reporting because of Mifid's implementation." In addition to Getco, Credit Suisse (which lately has been peddling its own algo product suite) and Instinet have both been fined. In other news, the farce that is the SEC is now threatening to tag HFT firms and keep a very much private and internal track of their trades. HFT algos in turn are shaking in fear in anticipation of their manipulative practices being uncovered by a bunch of transvestite porn aficionados... Not.

JPMorgan Holds A $3 Billion Reserve For Quant Screw Ups

Much has been said on these pages and elsewhere about the dangers embedded within quant groupthink, in which an ever increasing prevalence of fewer performing factors means that more and more speculators (note: not investors) line up on the same side of the trade pushing up offers, only to experience a regime change based on some heretofore unexpected exogenous event which renders existing signal translation models useless, and causes all former buyers to join the sellers. Whether that would result in a bidless market remains to be seen. If October 1987 is any indication, all signs point to yes. Yet in a sign that at least the bigger bankers may be anticipating just such an outcome, the Economist has disclosed that JP Morgan, in addition to reserving for general loan loss provisions on its balance sheet, has now taken a $3 billion reserve against quant error (yes, quants can be wrong... and for a lot of money at that). Just how many other investment banks demonstrate this kind of prudence? Without any specific regulatory guidelines for quant capital provisioning, we have no idea. While the bulge brackets may have joined JPM in a comparable form of "insurance" it is a certainty that the thousands of newly cropped up quant trading firms not only have no such reserves, but should a dramatic market reversal transpire, it is inevitable that wholesale asset dumping will have to take place to cover losses. And this assumes no leverage. Is the market prepared for such a contingency?

Wall Street Journal On The Systemic Threat Posed By Quants

Nearly a year ago, Zero Hedge first brought broad public attention to the nebulous aspects of the dark and dirty underworld of the market, exposing the "second-tier" of privileged market participants, consisting of quant traders, high frequency trading, flash trading, sponsored access, co-location, latency arbitrage, Morgan Stanley's discussed-below PDT operation, and many other topics (check our Glossary for much more). In April, Zero Hedge wrote an open letter to the quant community, pleading for more transparency absent which the eventual result would be "larger, systematic problems at the largest, most sophisticated quant managers." Since April, the impact of market neutral quants has progressively declined, as factors, one after another, have failed, and market neutral indexes are probing multiyear lows (HSKAX). The question of who has stepped in to replace the whales' liquidity provisioning is still unanswered, although the explosion of small, inexperienced 3 man quant shops consisting of a math Ph.D. and two programmers, may be part of the answer. The integration of Goldman within the structure of the NYSE and other exchanges, may be another: at last check, Goldman is still a key component of the NYSE's SLP program, regarding which there is still barely any information, despite promises by NYSE representatives to the contrary (and with Goldman's prop operation potentially terminally crippled, the question of how extensively intertwined prop trading is with liquidity provisioning, will be a major topic going forward). Today, the WSJ's Scott Patterson takes advantage of the recent furor over quants and in extensive article promotes his new book "The Quants" in which "he suggests how this new breed of mathematicians and computer scientists took over much of the financial system—and the damage they inflicted in the 2007 meltdown." We are glad that, after nearly a year of writing about it, the topic of the market systemic threat presented by a small subcommunity of quantitative traders is finally emerging on the mainstream scene.

"Do You Read Zero Hedge?" A Review of Zero Hedge's Most Popular Articles of [All Time|2009]

True, the decade is not really over, but no one called 1930 the "last year of the 20's," and given the reflective mood that seems to grip all of Western society whenever a year ending in "9" draws to a close, well, we thought we'd better embrace the trend now so that when some idiot with a pair of glow-in-the-dark "2010" glasses with holes in the zeros for his eyes tries to convince us to watch Roy Scheider over and over again in a celebratory, all-day, marathon screening of "2010," well, we can say we gave at the blog.

Instead, and in conjunction with your many suggestions, we took the opportunity to go back over Zero Hedge's posts and see what moved you, with an eye towards getting a sense of what Zero Hedge wants to read. The results were quite interesting. We thought readers would find it engaging both as a sort of "year in review" post, and, perhaps, in finding old material missed the first time around (or before the discovery of Zero Hedge).