Trader Warns Algos Have "Fooled Us Into Thinking Facts, Details Don't Matter"

"Don't ask me what you should figure out yourself," is the blunt message from former fund manager and FX trader Richard Breslow this morning.

“What do you think?” is a question you hear over and over again in the trading world. At least some people are still asking at a period of time when you are more likely to get, “Do you agree with me or not?” Still, the proper answer should be “Why do you want to know?”

Via Bloomberg,

Context is everything. Are you talking about the next five minutes or six months? Is it a theoretical question about what would happen in a perfect scenario, or are you simply asking to be told what to do? What are you planning to do based on the answer? Traders are becoming less clear about what they’re asking for and too often the respondents are forced to wear so many hats that it’s impossible to know how to use their response.

In an increasingly complex environment we are all becoming generalists when it’s arguable that having a specialty is an underappreciated attribute. In the financial realm it’s easy to see how the last 10 years, in so many ways, contributed to this situation. As have structural changes and economic realities in the industry. Not to mention, to use the term kindly, technological advancements. Computers have fooled us into thinking that facts and details are no longer as important.

Correlation matrices are great things to have. They were far more effective for generating alpha when they weren’t the ubiquitous not-to-be-questioned Holy Grail driving the whole shebang. Traders these days struggle mightily whenever an asset goes its own way.

The first reaction is always that it’s out of whack, or a canary in the coal mine. Sometimes things do just change. And boning up on the situation after the fact is always sub-optimal. As is asserting that yes, something may indeed be going on that we were unprepared for, but the base case is this, too, shall pass. You can only use that excuse so many times in letters to your limited partners.

Passive investing is valuable, big and growing. It isn’t going away. And sometimes funds do indeed have positions because they have no choice. Actually scanning the offering circular is worthwhile. But we’ve gone way overboard by seeing the entire investing universe as behemoth indexes moving their component parts around in lock-step. Ask me where stocks are going and I have a strong opinion. Ask about an individual company’s shares and I haven’t a clue. I wonder how many people with ruble or lira longs saw the carry as “compelling” and jumped in having asked, “What do you think about emerging markets?”

Being right on where the market is going shouldn’t be a burden placed on the shoulders of economists. They should be expected to be smart. And able to lay out the facts clearly. Traders are the ones who should have to figure out what it all translates into. CFTC data is something an economist shouldn’t be concerned with. And traders have a right to expect the economist to know how the numbers, big and small, are trending. It may be an unrealistic economic proposition given current constraints but the lack of distinction of responsibilities isn’t a step in the right direction...


Endgame Napoleon Last of the Mi… Fri, 08/10/2018 - 08:42 Permalink

But the SCOTUS declared corporations to be people—people with far more money to influence the political process than actual people—and these businesses, according to the highest court in the land, have free-speech rights that super-cede the free-speech rights of individual humans. By implication, that applies to the Fourth Amendment privacy rights of individual citizens, too, just due to the power-enhancing nature of money & mechanics. Money—enhanced by the mechanics of high-tech gadgetry—magnifies the rights of some, while diminishing the rights of others. Money does that, anyway, without the technology.

In reply to by Last of the Mi…

JIMSJOE2 Last of the Mi… Fri, 08/10/2018 - 09:20 Permalink

Since 2011 it has not been the algos that have moved the dollar and US equities higher but international capital flows simply parking capital in markets that are safer than their own especially from Europe and now we are just beginning to see capital from emerging markets flow into dollars.

    As I commented before but many still do not get it Armstrong Economics computer models forecast back in 2009 that Europe is beginning to collapse and capital will flow out to dollar based assets. This accelerated in 2011 and is still happening. When the Dow was around 6000 the models forecast that it would hit 22,000 then 23,000 and during the last of Europe collapsing to around 40,000. This is what we have been seeing and it will again continue. The models forecast as we move to the end of 2018 capital will again accelerate out to dollars and the Dow and the shit hits the fan there in around 2020/21. The EU, euro, most banks , many corporations and countries will not survive in their present form. The euro is expected to completely collapse and not survive after 2021.

     Now we are just seeing capital from emerging markets flow into dollars as their currencies weaken due to dollar strength caused by capital flows. London currency traders are now monkey hammering the EUR/USD and GBP/USD causing additional strength. Trillions are currently parked on the sidelines waiting for the Dow to break out of the consolidation phase and move into the markets moving them higher all caused by Europe moving into the last leg of its collapse.

      It surprises me how many so called "traders" always complain when their trades go south. How can you trade successfully and not understand what the long term trend is which is caused by capital flows. Most traders know the trends and their trades are then are in a position of a high probability of success. Without this knowledge you are simply rolling the dice and you might as well go to Vegas. As usual when their trades go south they always blame it on something else like the FED or the PPT or the ESF or the "cartel" suppressing prices. This crap has gotten old and it time for these people man up and simply admit they are wrong and stop blaming others. If not go get a 9 to 5 job!

In reply to by Last of the Mi…

Lmo Mutton roy.angela44 Fri, 08/10/2018 - 08:06 Permalink

Angela you ignorant slut. You have not been paid jack $h!t as federal reserve notes are IOU’s (non-interest bearing debt obligations) and you can not pay a debt with an IOU. 

You are a slave Angela.  And all those d!kkz u sukked u sukked fo free. It does not matter if it is $90 or $9000 hr, it is not money and you have not been “paid”. 

Now go brush your teeth and take a shower u nasty hoar. 

In reply to by roy.angela44

buzzsaw99 Fri, 08/10/2018 - 05:18 Permalink

says nothing.  hey breslow, what does the 30y say to YOU?  don't be shy, spell it out.


i know he thinks the dxy is going higher but i call bullshit because the euro and yen are effectively pegged.  why comment on all this emerging market bullshit as if that has anything to do with it?  also, why use any fundamental reasoning when usd strength is just a pissing contest between trump and the rest of the world?  fundamental analysis is dead.

Dornier27 Fri, 08/10/2018 - 05:38 Permalink

Economists believe in their science but after Long Term Capital Management you might as well get a chimp to throw darts at a page listing every company in the world.

Many small investors would like to throw darts at those running the Fed but thats not legal, yet. 

Let it Go 107cicero Fri, 08/10/2018 - 08:34 Permalink

Investors should be very concerned in that how much wealth escapes the next large economic crisis will set the bar that determines the rate of inflation or deflation in coming years. Pensions, annuities, and even investments in stocks and such all fall into the area of paper promises that are often recorded somewhere far from sight as a digital entry on a computer.

The amount of wealth stored in these intangible areas based on faith have grown at a massive rate during the last several decades and were relatively minor players until recently. Currencies, also known as fiat money, are also just IOUs or paper promises. The article below delves into what might be left standing after the next financial meltdown.

 http://How Much Wealth Will Escape The Next Financial Crisis.html

In reply to by 107cicero

J J Pettigrew Fri, 08/10/2018 - 07:34 Permalink

ALgo sell signal....all at shut offs but must sell signals..

Now what will that look like?

Is the outrage over High Frequency Trading (front running) over? 

Where did that outrage go?


Let it Go Fri, 08/10/2018 - 08:25 Permalink

Timing a market collapse is no easy task. America and much of the world has been washed along on the momentum created by a wave of freshly printed money and low-interest rates but at some point the markets will begin to reflect our hollow economy.

This bull market has gotten long in the tooth and exceeded the average length they normally run, caution would be in order. The article below delves into why it might not be a good time to get overly comfortable.

tunetopper Fri, 08/10/2018 - 09:47 Permalink

There are three primary states of matter: solid, liquid, gas-- yes I know about plasma (a gaseous liquid)

The market has a GRAY matter... that is also known as a healthy skepticism... this is the liquid state.

Algorithms are written in binary languages, ie they use hard math to derive answers which hopefully will produce positive returns.


They use the free-market of a capitalist construct called the bid/ask spread to seek execution of trades.


Now what happens when an algorithm is programmed to continuously lower its bid as it's mathematical construct tells it there is declining liquidity? 


Which stocks will fall hardest fastest and firstest?   those with less liquidity and highest valuations (over-valued).  Who says what a proper "valuation" is.    The computerized algorithim or better yet the programmer.  Jim Simons