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Sunday, June 3

3rd Jun - Weekender: Trading & Markets

This week’s selection of markets- and trading-oriented articles. Next post the Off-topics

Previously on MoreLiver’s:

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New Circuit Breakers Would Have Halted ‘Flash Crash’MarketBeat / WSJ
New SEC rules kicking in next year would have slowed down the 2010 “flash crash” and halted stocks’ losses on the most tumultuous days of the 2008 financial crisis.

Jamie Dimon and the Fall of NationsEconomix / NYT
Simon Johnson: We had strong institutions for a long time in this country — including effective checks on the power of bankers. Many people remember that history and still hold its image in their mind’s eye as they look at modern Wall Street. It’s time to wake up.

Dim Prospects for Financial Crisis Prosecutions – DealBook / NYT
So it is the same refrain: the likelihood of a prominent criminal case against a corporate or Wall Street executive in the near future looks to be nearly zero at this point.

391 AuctionsThe Aleph Blog
Jason Zweig of the Wall Street Journal has an interesting piece up called Could Computers Protect the Market From Computers?... I’m skeptical that we can stop unusual things from happening resulting from computers trading rapidly by having other computers monitor it. 

Modest Proposals for Financial Reform: Regulation as Grade-GrubbingThe Atlantic
The holy grail of regulation, in my opinion, is to harness the power of private sector competition to provide, and constantly improve on, the regulation's goals.

Global Macro hedge funds hit with investor withdrawalsSober Look
Throughout the second half of 2011, Europe became the bane of macro funds' existence, as managers got constantly whipsawed by the whims of Eurozone politicians and bureaucrats. Investing based on relative value became irrelevant. Market trends (in currencies, commodities, rates, equities, etc.) kept reversing direction (sometimes several times a month), often rendering fundamental economic analysis completely useless.

Greenlight Capital's Q1 Lettermarket folly
David Einhorn Defends Apple, Still Short St. Joe (full doc)

The holdings hedge funds do not want you to know aboutAbnormal Returns
The bottom line is that you have to be a careful consumer of information surrounding hedge fund disclosures. There are number of ways in which hedge fund positions are not captured in 13Fs. You are often not seeing a hedge fund’s entire picture, nor their best ideas.

The Secrets of The World’s Greatest TradersAll About Alpha
I spoke with Jack Schwager who is perhaps best known for his “Market Wizards” book series in which he has interviewed a cross section of the most successful traders and investors in the world.

Funds of hedge funds: Going, going, gone?The Economist
An overdue wave of consolidation is hitting the funds-of-funds industry

"Heads I win, tails you lose."London Banker
(15 years ago) he said that hedge funds were less a new method for investment, than a new method for higher remuneration. The appeal of hedge funds was in the outsize fees rewarding the fund managers rather than any superior returns for investors.

The decline of US shadow banking, chartedalphaville / FT
The US shadow banking appears to have halved since the start of the 2008, at least according to one new estimate — which also reminded us that we still have to come up with a better way to define this very broad sector.

What is shadow banking?Atlanta FED
What definition of shadow banking you prefer probably depends on the questions you are trying to answer. Since the interest in shadow banking today is clearly motivated by the financial crisis and its regulatory aftermath, a definition that focuses on systemically risky institutions has a lot of appeal.

True Out-of-Sample Test of “Best” Technical Trading RulesCXO
In summary, evidence from true out-of-sample tests on the best technical trading rules from 1897-1986 indicates that testing biases are the source of their past outperformance.

Basic Equity Return Statistics CXO
…evidence from simple statistics suggests that investors should not count on the long-run stability of the equity investing environment or on continuity of short-term relationships between past and future returns.

Value at Riskthe construct
International and European banking supervisors are allowing banks to rely on their own internal Value-at-Risk (VaR) models to calculate their capital requirements. However, many observers who do not belong to the inner circle of financial analysts and commentators are puzzled by the concept.

Jackknifing portfolio decision returnsPortfolio Probe
Suppose we make some change to our portfolio.  At a later date we can see if that change was good or bad for the portfolio return.  Say, for instance, that it helped by 16 basis points.  How do we properly account for variability in that 16 basis points?

Dirty Money: There IS Accounting For TastePsy-Fi Blog
The link between emotions and decision making, particularly financial decision making, has been recognized for years.  This is a tricky area because the connection between emotions and rationality is difficult to unpick, which is why making investment decisions while in an emotional state is usually not recommended.

Big, Fat Cognitive Illusion (and all of us are more Greek than we think)behavioral macro
But what I have learned in my experience with sovereign crises over the years is that whatever informational advantage they have is usually more than offset by (1) their difficulty in distinguishing between things that matter and things that don’t; (2) the psychological baggage with respect to their own past, and (3) the often emotionally-charged nature of their perspective.

Book Review: The Billion Dollar MistakeThe Aleph Blog
We learn more from failures than successes.  With failures, it is easy to observe the cause in hindsight and realize that we neglected a key principle in investing.  With successes, the reasons vary, and it is much harder to generalize.

The Wrong Way To Use An Index Tracker The Psy-Fi Blog
people who use index trackers either don’t understand that they’re simple commodities or simply trade them like any other instrument available to private investors: frequently, ineptly and in a manner calculated to abrogate their inbuilt advantages.  Nothing new there, then.

Forgotten facts about the great brokerage titansInvestment News

Ex-mid/back-office support worker: 'I'm a casualty of market conditions'The Guardian
An unemployed operations worker tells Joris Luyendijk about redundancy and feeling intimidated by traders

Can Wall Street strategists be trusted?Macronomics
History clearly suggests that they bring negative value in terms of asset allocation forecasting. Even a casual look at the graphs shows that strategists are massively wrong at extremes

Managing Wall Street's 'Winner Effect'Businessweek
But that doesn’t explain why the firm’s traders and executives doubled down on a position that, in hindsight, looked clearly doomed. What were they thinking? That question, in essence, is what John Coates has devoted his life to answering.

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