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Archive for August 2009

Insightfull Article on High-Frequency Trading

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New York’s Charles Schumer, the third-ranking Senate Democrat, asked the Securities and Exchange Commission on July 24 to ban a practice in which some exchanges hold orders for a split-second before publishing them on competing platforms. Schumer said so-called flash orders are used by “sophisticated high-frequency traders” to get an edge.

This and a few other insights are in this Bloomberg news article here. Gives a good idea what is meant by high-frequency trading today. Including a hint for a front-running opportunity window.  In fact, a very short opportunity window — measured in a split-second …

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Written by A.S.

August 6, 2009 at 5:57 pm

Covestor.com Investment Management Account

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At times I may sound as an amateurish, but very zealous marketing manager for zulutrade.com and sometimes collective2.com. The reason is single-minded belief that system trading is THE most efficient investment method of our time and expectation of exponential growth of this sector of investment management industry.

However, the aforesaid service providers are not the only ones in the industry. Another one is covestor.com. Initially I learned about it from Fred Wilson’s blog. His recent post regarding Covestor is here and particularly describes investment management account.  Covestor is limited to stock investors only, it seems to have more pedigree than the other two services and they themselves do a good work of explaining how it works.

Again, system trading is genius idea and the guys at Covestor have figured out a genius way how to do it. Even if Covestor does not exactly deal with trading systems …

Written by A.S.

August 6, 2009 at 5:44 pm

Zulutrade Adds MetaTrader4 Support

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Somewhat belatedly at the end of June zulutrade.com introduced a feature every industry-standard service should have — support for system development and automated trading platform. Collective2 has support for several such platforms, including TradeStation and MetaTrader. Zulutrade choosed MetaTrader.

To have support for such development/trading platform is a must. By far most system developers use such platforms rather than proprietary code in java, c++ or whatver. Some of the trading algorithms are best traded in fully automated mode as there is no value to be added by manually entering the trades.

MetaTrader4 (MT4) is a good choice. It seems the most popular choice for up-and-coming forex system developers. The platform and qoutes are available free of charge through a variety of brokers by opening free demo accounts. The system code in MT4 is written in a proprietaryMQL4 language (similar to C programming language).

In my opinion, Tradestation is a superior product to MT4. EasyLanguage is easier to master and it leaves more “brain power” to focus on the logic of the trading algorithm itself rather than on how to express it in fairly technical MQL4 (or C) programming language. MQL4 comes hardly with adequate support documentation and leaves a lot to guesswork for those who want to master it. But then, MT4 is a decent competitor to TradeStation, a totally new version — MT5 — is to be available soon and it’s free. Tradestation costs $250 monthly for non-brokerage customers. Generally, the trading system developers have voted and zulutrade.com seems to have made the right choice.

P.S. As a sidenote, Tradestation seems to miss the point by ignoring freemium economy of the internet. It’s their business and they have all the right to run as they want it, but it looks to me that their current marketing strategy is plain inefficient. Small guys, particularly the bright ones, would rather master java, C, C# or MQL4 rather than pay $250/mo for the platform. Big guys hire programmers and don’t need the platform. It leaves them with rather small market segment.

Written by A.S.

August 6, 2009 at 5:19 pm

The Strength of Forex, Ponzi Schemes … or a Brand-New Way to Invest

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People are drawn to forex for the same reasons as they are drawn to Ponzi schemes — they seek high return. However, there is a big difference between Ponzi and forex. All the evidence suggests that it IS possible to obtain outsized returns from forex trading and do it consistently with full transparency and liquidity of a checking account.

There may be a snowballing trend of allocation of funds, particularly retail funds, to forex trading. Basic infrastructure is in place to change the rules of the game completely. Take Zulutrade service — thousands of competing trading system vendors deliver their signals to zulutrade server for independent verification. Zulutrade processes the trades, calculates performance data and displays the results in an easy to understand format. Anybody with as little as $100 may become a customer of somebody who is one of the best-performing traders GLOBALLY … and he/she can do it literally with a few clicks. And he/she can fire any trader with another few clicks 24/7 …

Risk-adjusted returns may be just outstanding, investment fully transparent and very liquid … Probably some years down the road, even the most common people with little or no understanding about forex market will open forex trading accounts. The best-performing trading signal suppliers stand to reap huge benefits. In fact, during the next decade they may become bigger earners than top operators on Wall Street.  Today on zulutrade some of the most popular systems garner about a thousand customers (probably 1/3 of them live accounts) … top traders receive probably $30-40k per month. Given the merits, I can imagine that for some number of customers grows to millions in just a matter of a few years … some of the traders will make hundreds of millions a year.

The big difference from forex and ponzi schemes is that forex is a sustainable way to deliver outsized returns to investors. It’s hard to imagine where are the limits and how far this can go. Forex is by far the biggest markets and as such is can accomodate by far the biggest size of trades without moving the market.

Forex is like no other market. It’s the biggest, very liquid, unregulated, accessible to everybody. My observation is that recently forex market start to look like random walk. There’s really no dominating market maker, fundametal analysis can hardly be applied for trading forex, trends are usually at various lengths punctuated by many false breakout on the way … Almost by any parameter forex is by far the hardest market to trade profitably …  S&P index and oil futures are probably the next most difficult markets, but those do not come close to forex.

Nevertherless, forex seems to attract the most money … For retail investors there are virtually no entry barriers, forex trading story is fairly easy to grasp, there are plenty of promotes of all kind etc. Risk/return ratios are better in other market, like stocks and commodities, but —  just like in the world of physical goods — it is not always the best products what attracts the most customers. The equation seems to be that at the moment forex wins …

My relatives have experience spanning three generations of occasionally investing in what I tag as ponzi schemes … Even against my strong advice not to do so. What’s more, now the third-generation representative is very successful in convincing other people around her to invest in the same scheme … she claims that this month she’ll get “initial investment back” in form of monthly interest payments while the principal amount remains “invested” … The siren call is the high monthly return and a vision of stopping working and live of the monthly interest — just as hers “friend and hers boyfriend are doing — living very comfortably from their investment returns”. Well, she admits that one such “investment” went wrong …

Today I believe I did a good job. I explained that it is a much better proposition to move her money to forex account to be autotraded through zulutrade rather than keep it where it is now. I explained that hers current investment operator in the best case scenario does something what she can do herself through zulutrade or at worst he is a ponzi scheme operator who may disappear with all the money at any moment. She was a very receptive learner and arranges formatilities to open a live trading account.

We set up a demo account and added two trading systems to the account. Retrospectively, such a combination would have delivered about 300% annual return with very low drawdowns. A real life return equal to one half or even one third of the aforesaid hypothetical return would be splendid for her (and, I guess, to everybody) , but the next best thing after the high return prospect is full transparency and control of hers account … particularly, if compared to the current solution of handing the money over to somebody who may turn out to be a snake oil trader rather than a competent forex trader …

Written by A.S.

August 6, 2009 at 4:33 pm

Bots in Financial Markets

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Programming a simple trading algorithm is within reach to any person familiar with use of computer.  Once done, it takes as little amount as $50 from the credit card to start trading the algorithm within 5 minutes in live account even if the person has no previous trading experience.  Globally, billions of people qualifey as computer users and having $50 or more available from credit card or bank account, so … basically, billions of people can easily get involved in computerised trading. It’s easy for an average person to programm his/her computer to trade millions of dollars daily in his/her $10’000 account while the account is out doing something else.

This was not possible 10 years ago. This was not reliable 5 years ago. But, it’s all possible today and this new reality is here to stay. Needless to say, this new development has transformed markets … This new reality is far from what has been described in books. It just evolves and goes on … and will find it’s way into books in the next few years or so.

As always, professional institutions have taken this much further — computers post bids, run complex price analysis algorithms on tick-by-tick basis, solve the “problem of latency” [measured in nanoseconds] … More important of all, the institutions have invented new ways how to profit through use of technology.

There are a few side-effects and Orwellian way is live and kicking again in financial markets. At least temporarily. One side effect is that, effectively, computer analyses supply-demand data and places bid/ask qoute. How far is this from initial NYSE way of market-making where a human decision was involved in each bit of trae information! Why Orwellian? Some still gets pieces of information before everybody else gets it — enter so called “co-location” and “flash qoutes”  …  it’s still a way to go to get to a level playing field.

A few specifics of the new computerized market reality: Joe Saluzzi interview to FT. Or, as John Hempton writes on his blog:

Computers fleece clients by forcing clients to pay more when they buy and to receive less when they sell.

And it is clear this happens. We trade electronically at our fund.We were recently trading in a stock with a large spread. I have changed the numbers so as not to identify the stock – but the ratios are about right. The bid was about 129.50, offer was about 131.50. We did not want to cross the spread – so when we bid for the stock we bid $129.55. Within a second a computer (possibly at our own broker but it makes no difference which broker) bid $129.60 for a few hundred shares. We fiddled for a while changing our bid and watching the bot change theirs. We would have loved to think we were frustrating the computer – but alas it was just a machine – and we were people up late at night.

Welcome to the brand new world of financial trading. Redesigned from top-down. Forget what you red in books, or how you did it 15 years ago, try to find a new angle to gain competitive advantage!

Written by A.S.

August 6, 2009 at 10:38 am

Forex Market Today: 99% Bogus Volume?

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An importer in Europe buying equipment from Japan exchanges euros to Japanese yen — this represents a forex transaction serving a merit of faciliating international trade. But sounds so old school, doesn’t it?  Today forex is probably 99.9% trading for the purpose of trading. To capture trends, to trade patterns, to use as an alternative to casino … whatever, but not to serve real trade transactions.

Accordingly, the forex market should be approached as a subject of mass psychology and algorithmic trading with little relevance to what the underlying instrument represents. By observation, the forex market has got as close to random walk as any other market in history. Will the forex market eventually transform itself, effectively, in casino which depends on constant inflow of new money and where only the house [i.e. broker] makes the money? Recently it doesn’t look a remote possibility. There are a lot of markets which are much more easier to trade [i.e. more profit with less risk] and where random walk is something far from reality.

Written by A.S.

August 6, 2009 at 9:33 am