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Harry S. Plinkett, Red Letter Media, Mr. Plinkett Review: Titanic, here. Came to my attention in Chinatown that not everyone knows about Mr. Plinkett and Red Letter Media. There are rough parts but you sort of need to know about Plinkett, sorry.
Comptroller of the Currency, OCC’s Quarterly Report on Bank Trading and Derivatives Activities Third Quarter 2012, here. That’s a lot of interest rate swaps executed by four banks w. traders headed for the exits and totally captured by IT groups who aspire to be as competent as the 2011 award winning London Whale/Maxeler/FPGA supercomputer folks. We know the majority of these interest rate swaps are moving to central clearing in March. As I recall, the bid offer spread on a vanilla interest rate swap is a couple thousand USD, leaving quite a bit of room for spread compression. Downsides: you would probably have to carry overnight positions and the initial capitalization to trade will be significant. If there is even a hint of a whiff of a central limit order book for Interest Rate Swaps its gonna be like Agincourt.
The four banks with the most derivatives: hold 93.2% of all derivatives, while the largest 25 banks > 5 yrs
account for nearly 100% of all contracts.
Karen Ann Cullotta, NYT, Libraries See Opening as Bookstores Close, here.
As librarians across the nation struggle with the task of redefining their roles and responsibilities in a digital age, many public libraries are seeing an opportunity to fill the void created by the loss of traditional bookstores. They are increasingly adapting their collections and services based on the demands of library patrons, whom they now call customers.
GeorgeSoros.com, Remarks at the Festival of Economics, Trento Italy, here. nice website.
Taleb, Prolog to his book due out Q4, here. Black Swan was a pretty good read. I expect no less from Antifragile.
MathOverflow’s primary goal is for users to ask and answer research level math questions, the sorts of questions you come across when you’re writing or reading articles or graduate level books. Of course, individual questions don’t have to be worthy of an article, and they don’t have to be about new mathematics. A typical example is, “Can this hypothesis in that theorem be relaxed in this way?”
You answer the question, vote on the merits of the questions, and ask questions while the website logs the activity. Then you get a ranking like in a mmorpg with Tao, Gowers, and Thurston in the population. Like the concept, there should be one for applied FinQuant but I suspect the field is too proprietary and secretive. The Mathoverflow leader board reminds me of the IT Crowd when Jen exclaims delightedly “The elders of the internet know who I am?”, here.
Math Online, here. Comprehensive collection of texts and lecture notes classified by topic.
Noahpinion, Thursday Roundup, here.
Scale of the Universe, here. Cool app with new age background music. Don’t know why HFT doesn’t have a version of this app.
Farnam Street, Taleb’s reading suggestions, here.
Marketplace, ’London Whale’ taking big bets in debt market, here. Sounds like a JPM credit trader sold a bunch of CDX in size so he gets a tag. London Whale? How could that not have a happy ending? “And from that day forward everyone in The City reverently and awesomely called your grandfather “The London Whale,” goodnight sleep tight”?
Low Latency trading is High Frequency trading with Remote Procedure Calls. Fully automated trading strategies in electronic market making, liquidity detection, cross-asset arbitrage, short-term statistical arbitrage, and volatility arbitrage meet unavoidable signal propagation delay and “The End of Geography.” How does one analyze algorithmic trading systems searching for arbitrage between geographically remote markets and exchanges where the interprocess communication latency is large relative to the pre-trade analytics execution time? Given that two markets are connected by the lowest latency network connection available, the focus questions of this survey are:
1. What is the best Low Latency trading system to employ? and
2. Where are the premium Low Latency trading opportunities?
Academic market microstructure studies, commercially successful automated markets, and technology advances in fast switching and long distance signal transmission have recently converged to make Low Latency proprietary trading commercially viable. Academic advances in market microstructure set the stage for profitable High Frequency trading. According to O’Hara, the term market microstructure refers to the study of the process and outcomes of exchanging assets under a specific set of rules. Lo and MacKinlay’s 2001 book A Non-Random Walk Down Wall Street popularized the notion that US Equity prices did not follow a Random Walk. In 1985, Glosten and Milgrom provided a model for the adverse selection cost of trading. Hasbrouck and Saar have surveyed 2007-8 NASDAQ trading tapes to characterize the nature of contemporary Low Latency trading. In 2007, O’Hara published a comprehensive overview, Market Microstructure Theory, surveying market microstructure with particular attention to the role of Bayesian hypothesis testing in developing pre-trade analytics.
Electronic trading has evolved in almost all liquid Equity, FX, and Fixed Income global markets including Cash Equity, Futures, Treasuries, FX, Interest Rate Swaps, and Credit. In Equities, FX, and US Treasury bond markets some electronic platforms have grown to take significant market share, in other markets, not so much. Stoll in Electronic Trading in Stock Markets, surveyed the recent history of Cash Equity trading automation noting that several electronic exchanges have received significant indirect governmental assistance in securing market share on the back of Reg NMS. In 2008, Mizrach and Neely, The Microstructure of the U.S. Treasury Market, surveyed the transition to electronic trading in several Fixed Income markets including secondary Treasury bond trading. High Frequency trading has had solid press coverage over the past year (see London Review of Books, Donald MacKenzie, “How to Make Money In Microseconds”; or CNBC, John Carney ‘Yes, High Frequency Traders will Take Over Swap Trading”) perhaps most notably post the 6 May 10 Flash Crash (see NYT, Graham Bowley, “Lone $4.1 Billion Sale Led to ‘Flash Crash’ in May”).
The Barksdale company, Spread Networks is offering bandwidth on an 825 mile straight-line dark fiber run between Carteret, New Jersey and Chicago South Loop. The fiber reportedly has an end-to-end latency of 13.3 milliseconds (assume round trip) down from the previous best 16.3ms (see Forbes 9Sep10). Considering that physical signal propagation limits with single-mode fiber transmitting at roughly two thirds the speed of light combined with the straight 825 mile path give a theoretical round trip latency of approximately 13.2+ms, a detailed analysis of the expected commercial side effects is warranted.
In High Frequency trading, a profitable proprietary desk strategy is to become a non-contractually obligated and unregulated dealer/market maker. Avoiding regulation means avoiding potentially onerous margin requirements compensating a clearinghouse or exchange for risk. A typical market maker strategy is to simultaneously post bid offer orders to earn spread while adjusting spreads to fit the market. Low Latency trading simply adds arbitrage strategies between geographically remote regions or markets to the High Frequency strategies. Capital constrained Low Latency trading desks run risk-neutral matched books i.e., the corresponding trading systems book assets and liabilities with perfectly equivalent contractual obligations and maturities. Any asset/liability mismatches are insignificant, fleeting/transient, or easily correctable at a macro level post detection. If Low Latency trading desks run matched books the Front-to-Back process and infrastructure costs (i.e., the costs of maintaining inventory, valuation analytics, daily risk and P&L reporting) remain small and hedging costs are minimal. As the trading desk seeks additional revenue opportunities deeper in the Capital Markets, they can trade directional risk strategies including: statistical arbitrage, mean reversion, pairs trading, and trend following (ala Princeton-Newport, Citadel, or Renaissance). These directional strategies require more capital for collateralizing/funding inventory positions and Front-to-Back operations. One exotics Rates trader put it well, in saying when he prints a trade, it has a certain amount of P (profit) in it; the goal for the rest of the year is to realize as much inception P as possible while hedging as cheaply as possible.
We argue that in the absence of potential network latency improvement (i.e., assuming an optimal low latency fiber connection or microwave/wireless), the only remaining way to gain competitive advantage, available to a Low Latency prop desk, is by reducing computational latency.
Brian Kernighan book – amazon link here.
This book explains how today’s computing and communications world operates, from hardware through software to the Internet and the web. It includes enough detail that you can understand how these systems work, no matter what your technical background. The social, political and legal issues that new technology creates are discussed as well, so you can understand the difficult issues we face and appreciate the tradeoffs that have to be made to resolve them. A compact but detailed and thorough explanation of how computers and communications systems work, for non-technical readers who want to better understand the world they live in. A great source for technical readers who want something that will help their friends and family learn about digital systems.
Richard Muller’s idea to trump the * for Dummies series, here.