Automated Trader Magazine Issue 35 Winter 2015
Imagine the chaos and riots in the streets if football rules were changed mid-play in a high stakes international match. Yet, this is exactly what markets are constantly facing as a barrage of regulations comes down on a global industry. Ostensibly, this rule-making is to ensure fair, orderly and efficient markets for all investors – but what does that really mean nowadays?
Our Winter 2015 issue is an ambitious attempt to present a snapshot of the situation, as Automated Trader tries to make sense of some of the most contentious issues with some of the most controversial characters in the debate.
In “Fair Play”, Adam Cox delves into all kinds of market features that have reformists calling foul, in particular raising questions over who can see what data, and when (page 12). And in our regular “First Person” interview (page 28), we talk to vocal market structure reformist and HFT sceptic Sal Arnuk of Themis Trading about navigating in the darkest of pools and shining a light on the conflicts of interest inherent to payment for order flow in the US.
Still, more rule-making isn’t exactly the popular solution. You’ll undoubtedly have heard accusations that regulations are in some cases to blame for causing problems. Peter Barker reports on the advantage dark pools have over traditional stock exchanges, possibly caused by US trading rules (page 33) and why experts think Australia and Canada have the right idea. It seems European regulators could do with learning the lessons of unintended consequences as the double volume cap on dark pools nears.
But there are other dimensions of fairness, like who can actually access and use sophisticated tools to participate in the markets. In our feature “demo-Quant-isation” (page 22), we follow trends that could make nuanced quant models increasingly available to a greater number of market participants, similar to the access to speed in the preceding HFT democratisation wave. And that thinking filters right down to investors. Our regular “Me and My Machine” interview (page 39) features the firm QuantBridge, which has designs to launch their artificial intelligence product in the retail market.
The proliferation of quant strategies comes with risks and we revisit the trouble with backtest overfitting, which an academic paper recently likened to fraudulent charlatanism. In “Fiddling with figures” (page 53). Priyanjana Bengani talks to Vanguard and O’Shaughnessy Asset Management, among other virtuosos, about the worst pitfalls and best practices.
We also cover the emerging market of Brazil, where BM&FBovespa completed a major overhaul of its clearing technology (page 48). Sophie Lewisohn investigates whether this could be the beginning of the end for the national exchange’s monopoly, allowing new playing pieces on the board.
Finally, Peek Ahead (page 68) asks some questions about alternative currencies. Is bitcoin and its underlying technology an investment or a revolution? And is it a good thing that comedian and celebrity activist Russell Brand is promoting financial war reporter Max Keiser’s coin?
- Fair PlayMajor trading venues have historically championed the idea of a level playing field, but critics say the pitch can be decidedly uneven these days. Adam Cox reports on an intensifying debate over whether markets are indeed fair, and what that debate could lead to.
- demo-Quant-isationHFT democratisation was a big buzz-phrase a few years ago, and today high frequency technology is spreading across asset classes and geographies, and from signal generating algos to execution. meanwhile, there's talk that quantitative trading is next in line to be "democratised" and people are wondering whether there are any lessons to learn from the HFT experience. Anna Reitman reports.
- Critical thinkingSal Arnuk started electronic trading some 20 years ago at Instinet, where he met Joe Saluzzi. The pair have since started their own brokerage, Themis Trading, and become big voices in the market structure debate - attracting praise and criticism alike for taking a stance against increasing complexity in the equities markets.
- Orchestral manoeuvres in the darkNew research findings suggest that US trading rules may be providing dark venues a regulatory advantage over traditional stock exchanges by allowing some traders to circumvent time priority. There's also some cynicism over whether the need to hide large block trades is overhyped amid calls for implementation of a "Trade At Rule". Europe, meanwhile, has its own dynamic, with major exchanges like the LSE starting buy side-only order types in its dark pool. Peter Barker reports.
- Alpha in the machineMarco Fasoli started using artificial intelligence and machine learning systems while completing a PhD in natural sciences at Cambridge University. He went on to become a co-founder of Titian Global Investments, applying advanced predictive technologies to financial markets as the firm's managing partner. And he's since acquired another title: co-founder of QuantBridge, a joint venture between Titian and Thayer Brook aiming to become a strategic hub for quant talent. Automated Trader talks to Fasoli about the systems that guide QuantBridge's trading decisions and finds out about his future plans for technology development, which he believes could cause a major shake-up in the retail investor space
- JWG regulatory trading digestAccording to data compiled by the Wall Street Journal, Reuters and The Huffington Post, since 2009, tier one banks have paid at least $128 billion to regulators in the US and Europe. Here at JWG we decided to do our own research into these astronomical figures, and we discovered that this, in fact, only tells part of the story. When we factor in the associated costs connected with these fines, such as legal fees and losses made by firms from the forced sale of assets, the price tag for the industry increases substantially to total well over $260 billion globally in the 2009 to 2014 period
- Brazil: Cleared for take offThe heart of Latin America skipped a beat this year as Brazil, the world's seventh-largest economy, fell into recession. But the financial system that underpins the beleaguered economy is undergoing changes which could help bolster growth. Sophie Lewisohn reports.
- Fiddling with figuresWhen an academic paper equated backtest overfitting with financial charlatanism, there was little surprise from the trading community. Investment managers want to prove profitable trading strategies, but do they ignore the evidence? Priyanjana Bengani reports on the discord as well as industry leaders who are playing the right tune.
- The digital currency (r)evolutionIf bitcoin is the BitTorrent of cryptocurrencies, what's going to be the Spotify?