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Archive for October 2013

Currensee: premium fee for basic service

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Image Currensee allows investors to mirror trade real trading accounts of traders. As a part of service, they do due diligence on traders before they approve them as eligible for investor accounts (and brand such traders as trade leaders). This is a big difference from other services like Collective2 and Zulutrade which are open to all traders. But then, the choise of which traders to select is up to the investor himself. Regulatory and corporate liability considerations should play a role here. They charge a hedge fund like fee of 2/20 fee (2% management fee and 20% incentive fee). Given the fact that investor selects the traders himself, this is a high fee for the service (additionally, Currensee receives rebates from broker).

Currensee pays the traders 15% of the profits they make for investors, but no share of management fee or broker rebates. This is a near-optimal arrangement as the investor interests are aligned with those of traders and there is no incentive for churning. And this is a one of the best deals out there for traders.

Currensee, now owned by retail forex company Oanda, is one of the safest ways to start copy trading, but it is heavy in terms of fees and for anybody with basic skills in trading algorithm evaluation it is more beneficial to look elsewhere. The reported average return of 11.94% p.a. (as on Sep 30, 2013), not adjusted for fees, is less than impressive for this type of investing.

Written by A.S.

October 29, 2013 at 10:29 pm

Movie about old school trading

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trade.the.documentaryDigged up an old movie Trader – The Documentary about early days of Paul Tudor Jones. The first 40 minutes is a very illustrative example of how trading was done in 80’s (and continued till late 90’s). The movie is a kind of classic trading movie.

In those times the slippage and transaction costs were much higher than today even if adjusted for the “evils” of high frequency trading.

No copyright information. Probably was done as PR movie. Just google this for download: [kickass.to]trader.the.documentary.paul.tudor.jones

Written by A.S.

October 28, 2013 at 6:34 pm

Is high frequency trading creation of evil genius? [updated April 20, 2014]

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HFT“There has been in our culture, in the past decade in particular, a group of reasonably smart people who hired incredibly smart people – mathematicians mostly – to design algorithms that exploit time/space phenomena such as latency to vacuum insane amounts of money out of the economy, for doing absolutely nothing except exploit systemic flaws in the digitised financial world. We’re talking about hundreds of billions of dollars, if not trillions, simply for hiring bright grad students, hurling some cash and some lap dances at them, then hitting the return key and making a billion dollars in a wink of an eye.”

Full article, as published in FT, is here.

Some more accounts on nature of HFT are here and in more detailed way here (particularly, the part from 7:55 to 9:00 about qoute stuffing and the rationale behind qoute stuffing: it is easier to make noise than to make meaning from the noise).

No doubt, the reports in both literary and technical versions have a substantial degree of accuracy. There are investment pools out there. Often closed to outside investors and often generating astronomic returns and, yes, involving bright quants; and different groups often dominating different exchanges/markets/countries.

Is this all evil? Of course, not. First of all, there are markets where this does not work, forex as an example. Then, no need to revisit the shortbacks of open outcry — the total transaction costs, and slippage cost as a separate item, were much higher. The exchange systems improve and, as time passes, HF groups will bring each other beyond the point of profitability.

What will remain is efficient, safe technology allowing for low transaction costs. Anyway, none is going to cut 2/3rds of trading volume, i.e. the share of volume HFT accounts for in many markets.

 

Update on April 20, 2014:

I´ve been blissfully uninformed when I wrote the initial post. Looks like there is a bit of evil in HFT. But just a bit. If it is true that the whole stock exchange system was redesigned by HFT operators to gain priviliged access to market data enabling them to skim majority of market participants (i.e. 99.9+% of them) in a systematic way, I would not say it is all good. However, transaction costs are tens of times lower than they were before trading moved from open outcry pits to servers. In that context, the investors are still better of and the fact that HTFs are skimming us is a minor side effect.

Nevertherless, even this side effect may be a thing of past as it has attracted some attention and is likely to cease. Let’s see if they dig up something in this process. And there is a good literary account how HFT process works:

[watching the same symbol in private account and on Bloomberg terminal]  ¨In his private brokerage account he set out to buy an exchange-traded fund … ¨I hadn´t even hit Execute¨ …  ¨I hadn´t done anything but put in a ticker symbol and a quantity to buy. And the market popped.¨ (Page 67, Flash Boys by Michael Lewis)

 

Written by A.S.

October 27, 2013 at 11:07 am

Managed futures getting obsolete

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Returns of managed futures are at generational low. This is not a cyclical event; it is a structural change. Managed futures are getting obsolete. Technology has reduced transaction costs and data feed costs manifold. Futures, alongside with stocks, forex, ETFs have become accessible to virtually any investor directly. One can trade and execute strategies on electronic platforms bypassing any human contact, like broker or advisor. They can tail-ride traders, investors or signal providers on services like zulutrade.com, collective2.com or covestor.com. More and more investors do this changing markets in the course.

Consequently, the price behavior has become more fragmented. There are no 1970s type trends that can be captured by simple, often including elements of pyramiding, trading strategies (like one I have written about here). Today successful strategies are more specific and with shorter time span. Traded by an insider of any specific industry (biotech, industrial machinery etc.) or some technies in high frequency trading aiming to access signal a few milliseconds faster etc. Due to fragmentation, a single manager (and this includes institutional managers) is too limited in scale and scope to benefit from such more competitive niche strategies. For typical money manager many top-performing niche strategies have too limited market size (say, how US$25 billion Winton Capital Management can profitably capture a top-performing strategy with US$ 50 million capital deployment limit) or too short life span (can a typical hedge fund make a complete strategy overhaul every 3-6 months) or lack of institutional capacity to manage large number of diverse strategies (there is a limit on how many strategies one person can develop and maintain); and this is even before talking about legal restrictions of offering memorandum.

There is little managed futures can offer in terms of cost improvement (everyone can trade cheap on virtually any scale) or access to investment (even a small investor can trade all the spectrum of futures), so managed futures are even in more competitive area than mutual funds or hedge funds. But it is clear that the key drawback comes from the very asset management structures with their inflexibility (due to both legal and organizational issues) in regard to strategies employed, an inflexibility that renders managed futures (and all other mainstream investment vehicles) unsuitable for today’s markets.

Disclaimer: We’re working on development of a web-based service to enable sourcing and dynamic application of trading systems to meet the challenges of the modern marketplace. The traditional business entities like banks, mutual funds and hedge funds are not fit anymore to provide such investment service with consistent profitability to investors.

Written by A.S.

October 2, 2013 at 11:28 am

Posted in managed futures

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