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Quote of the Day


Tail Risk: About 5x Worse Than You May Think (paper)

“We examined 50-years of historical S&P 500 Index data and compared the actual tail risk frequency and magnitude to the expectations of a typical investor operating under modern portfolio theory. The difference between the two is surprising, and it suggests that investors have significantly underestimated tail risk frequency and severity”



How Algorithms Shape Our World (video)

Kevin Slavin’s TED talk on high-frequency trading.  He shows how these complex computer programs determine: espionage tactics, stock prices, movie scripts, and architecture. And he warns that we are writing code we can’t understand, with implications we can’t control.



The Microstructure of the Flash Crash (paper)

“The ‘flash crash’ of May 6th 2010 was the second largest point swing (1,010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. For a few minutes, $1 trillion in market value vanished. In this paper, we argue that the ‘flash crash’ is the result of the new dynamics at play in the current market structure…”



Complex Event Processing

“CEP is a new paradigm of computing that allows organizations to quickly respond to data that is continuously changing.  CEP algorithms are structured as sets of event-based rules. These rules monitor items in incoming data streams—termed “events”. Each event represents an update within the system…”



A Public Exit From Goldman Sachs Hits at a Wounded Wall Street

“Wall Street traders come and go all the time, but few have quit with the flair of Greg Smith. The way he resigned from Goldman Sachs, and what he had to say, could reignite a debate over how much Wall Street has changed in the wake of the financial crisis. “

Here’s the original NYT Op-Ed:  Why I Am Leaving Goldman Sachs



A Quick Note

The site has been experiencing large amounts of comment spam in recent weeks, so I’ve been forced to disable comments on posts older than a couple of weeks.

Its an unfortunate step to have to take, but it has greatly reduced the amount of spam I have to deal with and the site is certainly better off without thousands of irrelevant comments embedded with cheerleader porn or Viagra links.  My apologies for the inconvenience (welcome to the Internet!).


System Lab: February 2012 Performance

February saw the market continue its slow trickle up, “climbing-the-wall-of-worry” behavior.  Movement in the gaps and anemic intraday ranges were the order of the day, and unfortunately such an environment doesn’t offer intraday systems many opportunities.  The system’s equity curve saw most days coming in under +/- 0.50% and many offered no trades at all, leaving the system flat (-0.40%) for the month.  Yawn.

It seems this system is not alone, as a fellow algo trader friend of mine joked “Welcome to the $300 club!” after listening to me complain about February’s returns.  His system has been seeing anemic returns as well, yielding him pocket change of plus/minus a few hundred dollars a day (vs the thousands per day he was seeing last Fall).  I guess misery loves company, lol.



A Reality Check for Data Snooping (paper)

Do we really know what we think we know?   White’s famous paper on his “Reality Check” procedure:

“Data Snooping occurs when a given set of data is used more than once for purposes of inference or model selection.  When such data reuse occurs, there is always the possibility that any satisfactory results obtained may simply be due to chance rather than to any merit inherent in the method yielding the results.  Our new procedure, the Reality Check, provides simple and straightforward procedures for testing the null that the best model encountered has no predictive superiority over a given benchmark model…”


A Constant Volatility Framework for Managing Tail Risk (paper)

“During crises, historical correlations between asset classes and their volatility characteristics tend to break down; asset classes which have, in normal times, been uncorrelated, suddenly become correlated and alternative investments, which have been selected based on their ability to generate alpha without beta, suddenly appear to deliver high beta with little alpha...”