Tagged: Algorithms

Machinating Your News

For what struck me as a giant one-day life metaphor, I joined 2,500 other clinically insane individuals Sunday on Colorado’s hallowed cycling Triple Bypass (motto: “For Those Who Dare”).

Coursing from Avon to Evergreen over 123 miles and a triune set of towering climbs totaling more than 11,000 feet of elevation gain, the ride seared lungs and legs, testing the flesh with sweeping escarpments and breath-taking descents. Life’s highs and lows, triumphs and travails, rolled up and thrown aboard a road bike. I’ve crossed it off the list. Whew.

And daily deep in the bowels of Gigabit Ethernet connections, machines are performing triple bypass rides through your stock, feasting on economic data en route.

Taking but one example, the Nasdaq announced – fittingly on Friday the 13th – a machine-readable news service called Event-Driven Analytics. Created by RapiData, a firm the Nasdaq acquired this year, news is formatted so “latency-sensitive” traders can process it with algorithms that decide what and when to buy or sell.

Latency is a trading term that describes the pursuit of seamless and blistering speed. Those sensitive to it are like cyclists in a peloton, wheel to wheel at break-neck pace, who can be harmed by the slightest fluctuation. I saw that happen ahead of me Sunday as we raced over Dillon Dam near the Keystone ski resort at nearly 26mph. One rider made the slightest hesitation and the two trailing him collided and were down skidding over the pavement in a fraction of a second. They were okay but skinned, bloody and bruised. (more…)

Algo Rhythm

At Winter Park Sunday scooting off the Panoramic high-speed chair at 12,060 feet and cooking downslope on skis, the trip was anything but algorithmic.

No, skimming from summit to the lift slow zone was uniquely and individually exhilarating. But in equity markets, unique exhilaration more often comes from derivative bets that randomly pop stocks 7-8%. Otherwise, your shares blend with millions of other securities across asset classes mixed and matched in proprietary recipes aimed at unique outcomes from ordinariness.

Last week, we likened the movie Moneyball, about baseball statistics, to how stocks trade today. Let’s go one step further. Your story is unique. You differentiate your performance from your peers. We as individuals want to be valued on our own merits. So we hope our company’s shares are examined discretely.

Institutional and retail investors want the same thing, right? Distinct success stories, diamonds in the rough. Listening to advertisements from big mutual funds, you get the sense that analysts are rooting in the rice paddies of southeast Asia to learn why fiber optics from the Philippines are the next big opportunity for a German manufacturer of diodes. Or whatever. (more…)

Facebook Friends Morgan Stanley

While Florida voted, Morgan Stanley won the Facebook primary.

A unit of Thomson Reuters broke word that the big bank will helm a team of other big banks for what in May could be the biggest IPO, raising perhaps $10 billion.

We don’t care who underwrites the deal. But thinking about Facebook and its banking soldiers of fortune, the giant and the mighty in massive conformity, we thought of the markets.

In the data we track, Morgan Stanley is king of index program-trading executions. For large clients of ours, its volumes surpass those of small exchanges. At the Nasdaq, Morgan Stanley is the top liquidity provider, trumping fraternal behemoths BofA Merrill and Barclays and high-frequency clearing maestro Wedbush. Last June, Global Custodian’s annual ranking of prime brokers – banks bundling securities services for the buyside – slotted Morgan Stanley a close second to Goldman Sachs.

We wrote in September how the same names show up everywhere. The ones running books of derivatives, making markets in Treasuries, trading bonds electronically and correlating seas of equity executions are the same.

Lost in the long shadows of the large was word that technology research boutique Kaufman Brothers closed its doors this week. Ticonderoga Securities shut down earlier is month. Formerly Reynders Gray & Co. on the floor of the NYSE, the firm offered differentiated research, direct-access trading and agency executions. WJB Capital, another boutique, shuttered around January 4 after failing to raise capital and seeing its financing costs rise as high as 25%. (more…)

Algorithms Are Pragmatic Chaos

Despite Denver’s rude throttling by the New England Patriots, I am still bound for Boston to panel at the Wednesday NIRI chapter meeting called “A Day in the Life of a Trade: How Can IROs Know What’s Really Happening?” Hope to see you there!

One of our technology geeks shared a link at TED, the place where nerds of a commonly self-aggrandized feather gather to bloviate about culture. In this one, Kevin Slavin, founder of a game-hatching thought shop bought by Zynga, discusses how algorithms run our world. The guy is a good speaker and knows his imagery. Of algorithms, he says: “We’re writing things that we can no longer read.”

Slavin sets up his piquant point this way. He was on a flight with a Hungarian physicist who’s on Wall Street writing algorithms. The Hungarian used to work for the Soviets using math and physics to find American Stealth aircraft. Apparently, technology dissolves the signature of Stealth planes into a million fragments so they won’t look like planes to radar. The Hungarian wrote equations to find electronic tidbits hiding planes. (more…)

Outrage in the Dark

Observe. Orient. Decide. Act. OODA.

This is how Pipeline Trading describes its predictive analytics for helping buyside customers identify large-block trading opportunities.

For those of you who missed the news that rocked The Street this week, Pipeline, a dark pool, was fined $1 million by the SEC for misleading clients about the nature of its liquidity.

Were you harmed? Check to see if your shares trade at Pipeli—

Oh. You can’t. It’s a dark pool. You don’t know if your shares trade there unless Pipeline’s orders route to your listing exchange.

Of Pipeline, SEC Enforcement Director Robert Khuzami said in a statement: “Investors are entitled to accurate information as to how their trades are executed.”

Pipeline offers a platform where institutional customers like mutual funds can find “natural liquidity,” or real orders from other buysiders. What’s more, Pipeline provides execution algorithms that mimic how high-frequency traders try to project price and volume in order to place profitable trades ahead of moves. If the buyside can beat HFT at its own game, then instead of being victimized, it can also generate alpha – market-beating returns on trades. (more…)

Dividends and Buybacks

Would you rather ride your road bike in the sun or the rain?

What if riding in the sun means peddling across Death Valley in the summer, while the rain is a passing shower in the Italian Dolomites?

Context is essential. Let’s apply the same thinking to decisions about stock-repurchases and dividends. Conventional wisdom has long held that both actions appeal to the kinds of stock buyers who hold securities and count on fundamentals.

No argument there. But ponder the third dimension in the IR chair. The first dimension is your story – what defines and differentiates your investment thesis. The second is targeting the kind of money that likes your story. The third dimension is the state of your equity store.

Your equity is a product, competing with other products, with unique supply and demand constraints. If you suppose that your story is correct for a particular buyer without considering whether the buyer can act on interest in your story, you’re leaving money on the table. So to speak.

For instance, if I want four Keith Urban tickets at Pepsi Center in October for no more than $50 each, I’m already sold on the investment thesis – “Keith Urban puts on a good show.” What if there are only two tickets available at $50? Well, I’m not the right buyer for the investment thesis, then. (more…)

Why IR Pros Need to Love Some Math

Scheduling note: I’m in Miami Friday for a panel discussion on trading realities for the NIRI Senior Roundtable. Hope to see you there!

Today is the anniversary of Pearl Harbor. Near the end of WWII, my great uncle, Jack, was one of 316 sailors from 1,200 aboard the USS Indianapolis to survive its sinking and days in shark-ridden waters in the south pacific. Tough fellows, those guys.

On that happy note, let’s turn to everybody’s favorite topic: math. Click here for an example of math in action, a chart showing the spot market for the US dollar, called the DXY, and the Dow Jones Industrial Average, the past three months. The two juxtapose like the mirror image of a mountain in a still lake on a clear day. Wherever one goes, the other is equally opposite. (more…)

Insider Trading and Rational Investment

Here in Spokane, the landscape is bleak and wintry, the temperature hovering at ten above. Crisp! Before we gather round our well-laid tables (in America at least) Thursday and give thanks, let’s weigh on the scales of investor-relations justice this insider-trading scandal soaking print ink.

The allegation, if you missed the story of the week outside South Korea, Ireland and Cambodia, is that funds are using “channel check” style information to gain an illegal advantage. Federal agents have swept into capital-markets concerns to seize files and persons and stop this pusillanimous peculation.

The last time government contended information misuse, machines took over the trading markets. (more…)

Sorry we’re late this week! We’re in Las Vegas and the Market Structure Map wanted to stay in Vegas, apparently.

Program trading jumped about 10% in the first few trading days of April, compared to March. We define program trades as mathematical execution in more than one stock at a time that follows a market trend. We believe the increase in part reflects improved institutional and retail commitments to various equity index vehicles. But it also shows how “market neutral” trading strategies that continuously buy and sell a wide variety of securities to achieve small profits when netted out have become mainstream.

It shows up in interesting ways. (more…)