Comments on: Algorithmic trading and market-structure tail risks A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: traduceri daneza Mon, 29 Sep 2014 14:01:53 +0000 Couldn? to become created any benefit. Reading this write-up reminds me associated with our aged room companion! He / she generally retained referring to this specific. I am going to onward this short article to your pet. Sure he’ll almost certainly have a very great read. Many thanks for revealing!

By: TFF Fri, 14 Jan 2011 17:18:22 +0000 y2kurtus, you forget… The Big Boys aren’t allowed to lose money. That threatens the system. Only individual investors are allowed to lose money.

By: y2kurtus Fri, 14 Jan 2011 16:23:18 +0000 Fantastic suggestion by DWJ… it would be interesting to see floating margin requirements depending on market action. Think about it, the new Basel reforms incorporate market conditions into determining capital requirements why should brokers not use the same logic.

In my opnion the worst regulatory decision in history was made when some of the most foolish flash crash trades were voided. If you trust your computer enough to send a trade to the “floor” (which I understand is 99.999% virtual now) without a human safeguard than god be with you.

If your computer screams sell PG for $0.05 cents/share than you sir just sold some the worlds largest consumer products company for a nickel. If you can’t live with that outcome than unplug your co-located super speedy trademaster 5000 and pay a couple dozen 25 year olds to sit on a trading desk and do it the new old fashion way.

By: TFF Fri, 14 Jan 2011 15:55:05 +0000 Felix, this whole concept bothers me. Investing is inherently risky. You can hope you will get back more than you invested. You can expect that you will get back more than you invested. But you always know there is a chance you won’t.

Sophisticated investors have all kinds of ways to hedge risk, yet fundamentally that risk remains in the system. This is particularly true when many large investors are using the same strategies (and buying insurance from the same parties). If we pretend that risk has disappeared, we are simply displaying our ignorance. When the markets fall, SOMEBODY will end up losing big time.

As a society, we would be better off limiting the kinds of risk-hedging that we permit. That would discourage investors from loading up on risk in the belief that they can somehow make it disappear with a wave of their magic wands.

Instead we seem to be handing out magic wands that ultimately transfer the risk to the federal government. Which isn’t exactly the same thing as making the risk disappear.

By: TFF Fri, 14 Jan 2011 15:42:42 +0000 dWj, bubbles emerge from a mispricing of risk. When people are convinced that an asset class can’t lose money, it naturally rises to obscene heights.

Now add simple greed to the equation. If you have a sure thing, then why not leverage up and bet the farm? And when you suffer a minor setback, no problem, just sweep it under the table and double down.

Gambler’s ruin?

By: dWj Thu, 13 Jan 2011 20:21:04 +0000 So if rock survives the backtesting, do the hedgies play rock or paper?

I’m also a bit skeptical about the value of this open simulation, insofar as I think the private ones are being developed and tweaked quickly and in different ways, and I’m not sure to what extent a consensus one is going to capture that. It might be of some value, but I hope we don’t put too much faith in what it tells us. (We know how that ends up.)

My answer to skepto, though, is that, if we know there’s a bubble, we do two things:
1) Restrict leverage as much as you can. A bubble fueled by margin loans will crash harder, with more far-reaching effects, than one where the worst thing that can happen to investors is that they lose everything they have. The financial system isn’t threatened by people losing money until it means that everyone who lent money (explicitly or implicitly) to speculators is going bankrupt — and failing to pay on their own obligations. It wouldn’t have been politically popular to require 20% down payments in 2006, but it would have mitigated a lot of problems later.
2) Get a jump on policing fraud more vigilantly. Bubbles seem to cover up sins, and seem to even encourage them. It wouldn’t have been politically popular to go after Enron in 1998 or 1999, but it would have mitigated some problems later.

By: OnTheTimes Thu, 13 Jan 2011 19:45:00 +0000 A simulator of any value would be impossible to build. There are almost 7 billion human variables in the world’s economic system, of which the decision making process of each is impossible to model (how can you predict how they will all respond to a given situation and stimulus?). Then there’s the weather, which always impacts the economy, as do unforeseen natural disasters. And the natural disasters don’t even include politics. And what about new technology? Do you think the financial model builders are able to predict the arrival of new technology, and its impact on businesses? It is unrealistic to assume you could create financial models that ignore these external inputs and still be accurate.

The financial and economic systems are full of positive feedback loops, which are the biggest source of instability. The problem is exacerbated by the instantaneous communications available today, which allow corrections to be implemented faster than systems can react. That is very dangerous from a complex system design perspective. Meaning, you avoid that, at all costs if you want to build something that doesn’t blow up.

Rather than a futile and expensive attempt at creating a stock market simulator, the speed at which transactions are made needs to be controlled to prevent the chaos that is inevitable when automated trading software is combined with virtually instantaneous computing and communications. Sorry, free market cultists, entropy applies to all man-made systems. Some form of regulation is necessary to prevent everything from unraveling.

By: skeptonomist Thu, 13 Jan 2011 18:58:00 +0000 Suppose a simulator were operated for the public good, rather than as a means to get a jump on others. What happens when a bubble is identified and a crash is predicted, without necessarily being specific as to the exact hour? What action will be taken, and by whom? Bubbles are often easily recognizable – for example the housing bubble – but are typically denied by those in authority. It’s hard to attain and keep a position of authority if you act in opposition to those who have and are making big money during a bubble run-up.

By: MRLAMF Thu, 13 Jan 2011 18:05:24 +0000 Thanks Felix—

I was excited when I saw your name on that article in my Wired… But when I read it, it felt truncated—like it got squeezed into the print space. This connects the dots much more.