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Sam Ro, BI, Brilliant Morgan Stanley Strategist Retires And Reminds Everyone He Only Had A Job Because Investors Are Dumb, here. Gerard Minack and asymmetric information.
“Investing is an unusual profession: perhaps the only one where amateurs have a good shot at beating the pros,” said Minack as he opened his note today.
He tackles the long history of how actively managed mutual funds (i.e. funds that try to beat the indexes) almost always underperform the indexes. Here’s a chart from one of the many studies showing the history:
“Amateurs normally stand no chance against professionals,” he writes noting that most of us would be unlikely to play tennis better than Roger Federer or golf better than Tiger Woods.”Investing is different,” he continued. “None of this would matter if achieving index returns was extremely difficult. But an industry’s been built on indexed funds that seem capable of replicating index returns at relatively low cost.”Read more: http://www.businessinsider.com/morgan-stanleys-gerard-minack-retires-2013-5#ixzz2TYDSCz8L
We take cohorts of entering freshmen at the United States Air Force Academy and assign half to peer groups designed to maximize the academic performance of the lowest ability students. Our assignment algorithm uses nonlinear peer effects estimates from the historical pre-treatment data, in which students were randomly assigned to peer groups. We find a negative and significant treatment effect for the students we intended to help. We provide evidence that within our “optimally” designed peer groups, students avoided the peers with whom we intended them to interact and instead formed more homogeneous sub-groups. These results illustrate how policies that manipulate peer groups for a desired social outcome can be confounded by changes in the endogenous patterns of social interactions within the group.
Melanie Rodier, Wall Street & Technology, E-Trading Finally Takes Over Fixed Income, here.
Five years ago, while electronic trading was already the norm in the equities market, old-fashioned phone and voice trading still dominated the fixed income space. But the tidal wave unleashed by the 2008 financial meltdown and the ensuing sweeping Dodd-Frank regulation has accelerated electronic trading in fixed income too. And while not all areas of fixed income are at the same stage of automation, asset classes that have been dragging their feet are finally getting pulled into the electronic era.
FinExtra, Wall Street propeller-heads make way for new generation of data scientists, here. The MC of the Bond Show is searching for graduate talent in Big Data.
Jack Malvey, chief global markets strategist for BNY Mellon Investment Management and a co-author of the report, suggests that the ability of firms to take advantage of the stream of growing data will be constrained by the size of graduate talent pools offering a combination of computer science skills and data modelling.
“As technology makes broader and deeper decisions, financial decision-making accountability may need to move beyond the realm of financial experts to diverse teams that include data scientists,” he suggests.
Brooke Masters, Financial Times, Dual-track Libor replacement lined up, here.
Martin Wheatley, the UK regulator leading efforts to reform the London Interbank Offered Rate, told the Financial Times that a parallel system would provide continuity for holders of $350tn in existing contracts that reference Libor while also paving the way for a new benchmark tied more closely to objective data.
But the idea could set up a conflict with US regulators, who recently called for a “prompt” switch to transaction-based rates. Gary Gensler, chairman of the US Commodity Futures Trading Commission, which spearheaded the Libor probe, told the FT that the existing system was “unsustainable” in the long run because banks were not doing enough unsecured lending to make accurate estimates.
Abramowicz, Weiss & Harper, Bloomberg, Hedge Funds Rush Into Debt Trading With $108 Billion, here.
Hedge funds using debt-trading strategies honed on Wall Street are expanding at a record pace as they profit from risks big banks are no longer taking.
BlueCrest Capital Management LLP doubled its New York staff in the two years through December, while Pine River Capital Management LP increased its global workforce by one-third in 2012. Hedge-fund firms are hiring from companies such as Deutsche Bank AG (DBK), Barclays Plc (BARC) and Bank of America Corp. (BAC) as their credit funds have attracted $108 billion since 2009, data compiled by Chicago-based Hedge Fund Research Inc. show.
Noah Smith, Noahpinion, If you get a PhD, get an Economics PhD, here.
In economics PhD programs, the main risk of failure is not passing your prelim exams. This happens to a substantial fraction of people who get admitted to econ programs (maybe 25% or fewer at Michigan). But if you flunk out, you get a complimentary Master’s degree, which is probably worth the 2 years that you’ll have spent in the program. And after you pass the prelims, there is little risk of not finishing a dissertation; unlike in most fields, you do not have to publish to graduate.
Ben Thompson, stratechery, The Intel Opportunity, here. Swaportunity – the option to switch out of a high margin business for a low margin manufacturing job.
The Commodification of Chip Design
Most chip designers are fabless; they create the design, then hand it off to a foundry. AMD, Nvidia, Qualcomm, MediaTek, Apple – none of them own their own factories. This certainly makes sense: manufacturing semiconductors is perhaps the most capital-intensive industry in the world, and AMD, Qualcomm, et al have been happy to focus on higher margin design work.
Much of that design work, however, has an increasingly commoditized feel to it. After all, nearly all mobile chips are centered on the ARM architecture. For the cost of a license fee, companies, such as Apple, can create their own modifications, and hire a foundry to manufacture the resultant chip. The designs are unique in small ways, but design in mobile will never be dominated by one player the way Intel dominated PCs.
The Rise of Manufacturing
It is manufacturing capability, on the other hand, that is increasingly rare, and thus, increasingly valuable. In fact, today there are only four major foundries: Samsung, GlobalFoundries, Taiwan Semiconductor Manufacturing Company, and Intel. Only four companies have the capacity to build the chips that are in every mobile device today, and in everything tomorrow.
Massive demand, limited suppliers, huge barriers to entry. It’s a good time to be a manufacturing company. It is, potentially, a good time to be Intel. After all, of those four companies, the most advanced, by a significant margin, is Intel. The only problem is that Intel sees themselves as a design company, come hell or high water.
Natalie Wolchover, Simons Foundation, Perpetual Motion Test Could Amend Theory of Time, here. This time crystal breaking the translational symmetry of time has a better chance of making it big in the next year than E Cigarettes.
The Berkeley-led team will attempt to build a time crystal by injecting 100 calcium ions into a small chamber surrounded by electrodes. The electric field generated by the electrodes will corral the ions in a “trap” 100 microns wide, or roughly the width of a human hair. The scientists must precisely calibrate the electrodes to smooth out the field. Because like charges repel, the ions will space themselves evenly around the outer edge of the trap, forming a crystalline ring.
At first, the ions will vibrate in an excited state, but diode lasers like those found in DVD players will be used to gradually scatter away their extra kinetic energy. According to the group’s calculations, the ion ring should settle into its ground state when the ions are laser-cooled to around one-billionth of a degree above absolute zero. Access to this temperature regime had long been obstructed by background heat emanating from trap electrodes, but in September, a breakthrough technique for cleaning surface contaminants off electrodes enabled a 100-fold reduction in ion trap background heat. “That’s exactly the factor we need to bring this experiment into reach,” Häffner said.
Next, the researchers will switch on a static magnetic field in the trap, which their theory says should induce the ions to start rotating (and continue doing so indefinitely). If all goes as planned, the ions will cycle around to their starting point at fixed intervals, forming a regularly repeating lattice in time that breaks temporal symmetry.
To see the ring’s rotation, the scientists will zap one of the ions with a laser, effectively tagging it by putting it into a different electronic state than the other 99 ions. It will stay bright (and reveal its new location) when the others are darkened by a second laser.
If the bright ion is circling the ring at a steady rate, then the scientists will have demonstrated, for the first time, that the translational symmetry of time can be broken. “It will really challenge our understanding,” Li said. “But first we need to prove that it does indeed exist.”
Serge Lang, CUNY Einstein Chair Mathematics Seminar Video, 1986, here. I don’t think I even saw a picture of Lang before this. That is quite a collection of talk videos.
Lisa Pollack, Alphaville, Ring around the clearer, acts like a mirror. Default! default! They all fall down, here. The broker dealer that used to clear your OTC trades had debt issued in the market, it had a default swap spread, now not so much.
It was only two or three years ago that CCPs were still in the political pixiedust phase. Sprinkle a little on the most hyped up over-the-counter derivatives market and one can be seen to be doing something important.
Nevermind that CCPs, acting as counterparties to each side of a given trade, would become the newest Too Big To Fail institutions. Questions around resolution mechanics, should a CCP have a serious wobble, could be sorted out later. Likeyaaaawn….
Welcome to “later”, people!!! Whoot!
Stephen Foley, FT, High Frequency Trading, High-frequency trader face speed limits, here. Cannot imagine how that could go wrong. Pause and reflect for one-thirteenth of the time it takes to bat your eye and you will see that I am right. Treasure.
EBS, one of the two dominant trading platforms in the foreign exchange market, is suggesting scrapping the principle of “first in, first out” trading, which it says gives an unfair advantage to the fastest computers and has led to an arms race of spending on technology.
Instead, under the plan, incoming orders would be batched together and dealt with in a random order.
“Wherever you see high-frequency trading, requiring a delay is a sensible thing to do,” Professor Harris said. “We are talking about delays of one-thirteenth of the time it takes to bat your eye. It hardly slows down the market at all, but it ensures that a smaller trader has a better chance of getting first in line.”
Sam Ro, BI, The Most Lucrative Business At Wall Street’s Biggest Banks, here. G10 Rates aka Interest Rate Derivatives (Swaps) USD9.7M revenue per head.
As you can see in the upper right corner, trading the interest rates of the biggest countries in the world is a major moneymaker.
However, Deutsche Bank warns that it’s also a segment that will get hit hard by regulation.
“We think that G10 Rates (predominantly swaps and swaptions) is the most affected area,” they write. “We expect pre-and-post trade transparency and the shift to electronic venues to markedly reduce what was the largest revenue source for the investment banking industry in 2012.”
Linette Lopez, BI, The Ugliest Businesses On Wall Street Are Going To Get Uglier, here. Make it Til Tuesday.
European securities firms will bear most of the erosion as a tax on financial transactions cuts sales and trading volumes, Deutsche Bank analysts including Matt Spick, wrote in a note to clients today. The next “wave” of regulation on over-the- counter derivatives and clearing may spur smaller competitors to exit the businesses, they said.
There is a small silver lining here for NYC, which is that Deutsche goes on to say the blow to European investment banks will likely have clients heading to the other side of the pond.
So there’s that.
Peter Tchir, BI, The Gold Plunge May Have Been The First Etf-Led Death Spiral, here.
So the “arb” would be to buy the ETF and sell more gold. It is cheaper to own gold outright than via the ETF and the “arb” appears rather large now. This NAV is tricky, not because it is hard to value, but because the volatility is so great – but it is a decent signal.
While in theory buying the ETF and selling gold is risk neutral, we have argued that this act is actually negative. That the “underlying” asset, when relatively illiquid, has a bigger impact on the direction than the ETF. We will send the “ETF death spiral” article along in a separate e-mail, but that is our strong view. That “cheapness” in a down market is bad, as we saw it time and again in CDX indices.Read more: http://www.tfmkts.com/the-t-report-gold-etf-flows-death-spirals-and-fixed-income/#ixzz2QlBBfAeh