Tuesday, 30 December 2014

Polls (not so) apart

11:55 Posted by The Thalesians (@thalesians) No comments

In a recent blog post, I discussed the notion of consensus expectations following on from my own views for 2015 which I published for Thalesians subscribers (and given it's Christmas, I've given it away for free download). There are many ways to measure market consensus (or the world the market wants to paraphrase the above picture). Notably we can examine Bloomberg forecasts of various sell side firms. However, very often we might wish to ask what market expectations in a more nuanced way, which are difficult to capture via forecasts. We might also argue that a poll of sell side strategists, might reveal different results to one which includes asset managers and traders, which might be more reflective of market positioning.

As a result, I thought I would  conduct a market survey on Twitter about market expectations for 2015. Despite, posting it over the Christmas holidays, I collected 28 responses, so thanks to everyone who participated! Whilst, I have already tweeted the results, I thought it was worthwhile to collate all the responses in a single article, with a few of my own comments. All respondents were anonymous.

1. Which is your favourite asset class in 2015? The clear answer is that respondents are not keen on bonds for 2015. However, the proportion of respondents who preferred cash seemed to be a lot larger than I would have expected. Admittedly, perhaps the lack of alternatives might have skewed the results.


2. What do you think is most likely to happen in 2015? No surprises here, with higher USD being seen as the most likely event selected from the list. Interestingly, higher USD outstripped higher UST 10Y yields in terms of votes, perhaps reflecting the failure of UST 10Y yields to move higher in 2014. One crucial point I'd like to add, is of course, from an FX perspective, it is the rate differential which is the most important, not purely the move in UST yields. Furthermore, in developed markets, currencies tend to be more sensitive to the front end (eg. 2Y) more than the back end of the yield curve.


3. When do you think the Fed will hike? Whilst the largest number of respondents felt that Jun 2015, would likely be the first Fed hike, a near similar proportion felt 2016 would see the first Fed hike. In the past, the market has been expecting Fed hikes sooner, maybe this time really is different, especially given the pick up in US data?


4. When do you think ECB will introduce full blown QE? Most feel that Jan 2015 is the most likely time when the ECB will start full blown QE, with lower numbers expecting Mar or Apr 2015. The proportion of respondents expecting no full blown QE were perhaps higher than I was expecting.


So in summary, the survey suggests investors are bullish equities, cautiously so given the proportion who prefer cash. Elsewhere, there is an expectation that the Fed will hike, whilst the ECB will ease further, which largely tallies with the long USD view expressed in the survey.

If you found the survey useful, let me know, as I'm thinking whether to make this a more regular project (perhaps once a month or every quarter, if there is sufficient interest). Any suggestions for future macro based questions are very welcome. At that is left is for me, to wish you best of luck for 2015. Luck is more precious than skill in these markets!

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of consensus in markets (mixed in with a bit of ancient history). You can order the book on Amazon. Also read my thoughts in 2015, in my Thalesians quant note here (given it's Christmas, I'm giving it out for free!)

Friday, 26 December 2014

Imagine

00:15 Posted by The Thalesians (@thalesians) No comments

The days between Christmas and the impending new year seem like days in limbo. The current year is withering away by the hour too quickly to amount to anything, whilst the new year is still somewhat of an intangible mirage. Whilst these days might be occupied by the tail end of left overs and frenzied shopping, they seem made for contemplation.

Whilst I might be advocating the idea of idle contemplation, I have to say I fail abysmally at this. My fingers must always be continually typing, my eyes reading something written on a page, my ears continually listening. Even now, the clock has swept past midnight, and my brain is whirring in and out of Twitter, like a child trying to avert sleep. Indeed, Twitter is perhaps the most indefatigable enemy of deep contemplation, a persistent stream of consciousness interlaced between your own thoughts. Contemplation by definition, is the absence of all these things I mention, simply the time to think, unhindered by distractions and pauses. It takes effort to think and to think only. Imagine.

Invariably, thoughts spring forth concerning the year that has passed, and plans form for the year which follows. It is of course somewhat of an artificial edifice, the turn of the year. Indeed, there are other forms of year. The tax year in the UK starts in April, whilst in Japan, April also has a symbolic meaning as the beginning of a year. Whether or not it is an artificial creation, the ending of one year into the next, nevertheless provides an ideal way to break up the various phases of our life.

So what should the next year hold, given I have advocated that this is an ideal time to ask this question? Ignoring markets for once and thinking more abstractly, what will you do next year? These two questions are subtly different. What will happen, influences what we do and how we are impacted by events. We cannot control everything in our path, but it is our choice, which path we lead.

We can sit idly by, allowing events to subsume us or we can do act in a decisive manner. A trader sitting in the market, with positions which are at odds with the price action can berate the market for being wrong. That trader might well end up being right, but at that moment in time the market is right. Moaning is of course simpler than taking a step back and understanding events.

Let this be the time for contemplation for the following year and a time to reflect on the past year. A mistake is the worst sort of mistake, if we are intent on repeating it. Whether or not next year proves to be your year, a modicum of contemplation might just help. I have no idea what 2015 will bring. However, that won't stop me from doing that one thing humans do best, thinking. So whilst the fireworks shower the skies, the year advances by one, the sound of Auld Lang Syne whispers to me, I'll be contemplating for what lies ahead, whatever it might be. Imagine.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you!

Saturday, 20 December 2014

Consensus-ing agreement in FX markets in 2015

10:37 Posted by The Thalesians (@thalesians) No comments

Why is Manhattan real estate so expensive? The simplest explanation is that a lot of people want to live there. There seems to be a consensus that Manhattan is a great place to live. At the same time, supply is relatively constrained. Yes, developers are continually building higher, providing more apartments, but many of these are to the upper end of the market.

Despite being such a desirable place to live, it might not be the right place for everyone. Perversely, the fact that it is so sought after and hence relatively crowded, results in a scarcity of certain amenities that we can find elsewhere. Want a garden? Central Park is likely the closest thing you'll get. Want a house? You'll likely have to share it. Want some quiet? Again, try Central Park and not the streets heaving with traffic, punctuated by the sound of car horns.

Depending on your viewpoint, these compromises are either too much to make, or for someone like me who has lived in a city for twenty years, entirely reasonable. We could also argue that the fact that Manhattan is crowded, is the reason people want to live there, and which makes it so lively. So often the word crowded has negative connotations, that the benefits seem to be forgotten. Whilst real estate is an asset class, when it comes to your own house or apartment, a primary concern is to live in it (whilst hopefully benefiting from rising house prices). When it comes to financial markets more broadly and investing, the idea of consensus and a crowded market can be more nuanced.

If we think of the market today, particularly in FX, the consensus for market moves is deafening. Despite reading numerous bank views in the media, talking to many contacts in the industry, scanning Bloomberg and Twitter on a repeated basis, it's been incredibly difficult to find anyone who is bearish USD in 2015 (think I only managed to count one so far). The consensus is overwhelmingly bullish USD, and this is made even clearer by the forecasts from the various sell side banks available on Bloomberg, which as a group see EUR/USD lower and USD/JPY higher. I also agree with them, although I think we're closer to the end of this USD bullish move than the beginning.

After all the rationale behind the view is fairly simple: the Fed likely to hike, the ECB likely to embark on full blown QE and the BoJ engaged in QEn (where n might end up being a large number, if I'm being really facetious). If you'd like to read my fuller thoughts on 2015 please download my latest Thalesians quant paper (free to download given it's Christmas!)

Does this necessarily mean that USD will actually strengthen? Of course, if we look into the past, the market has been bearish EUR/USD for a while. In 2014, the consensus view finally worked. For over a year before it evenutally fell, EUR/USD seemed to be driven more by peripheral spreads tightening following Draghi's promise to do "whatever it takes", rather than more traditional drivers such as monetary policy expectations. As a result EUR/USD had remained stubbornly bid. Even though in 2014, forecasters saw the move in EUR/USD, they failed to see the move lower in UST 10Y yields, I suppose you can't have it all!

So should I be afraid of being with the consensus? Furthermore, will the fact that the consensus is so strong for a bullish USD view cause a crowding of positions and a potential for painful unwinds? I have no easy answers, only to say that these are questions every investor should be asking. All I would say, is being on the side of consensus is always "safer". Even if you get it wrong, many others will be in the same group. If you are against consensus, it is far more difficult to rationalise a loss to your boss! Also, we could argue that simply fighting the consensus and the broader market narrative, simply for the sake of it is questionable. (Of course, if we think the market narrative might change and use that as a reason for going against the consensus that is an entirely different matter!)

Best of luck for 2015. Whilst luck is key for trading, it cannot be bought by skill!

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of consensus in markets (mixed in with a bit of ancient history). You can order the book on Amazon. Also read my thoughts in 2015, in my Thalesians quant note here (given it's Christmas, I'm giving it out for free!)

Sunday, 7 December 2014

Tip of the ice-burger

19:16 Posted by The Thalesians (@thalesians) No comments

Minetta Tavern. New York. Black Label Burger. Everything about this burger suggests it has a certain quality lacking from most other burgers. The meat is tender, from a sirloin steak, without any of the unpleasant stringiness that might afflict other burgers. It appears that many people agree, judging by the difficult in finding a table here. Yet, at $28, perhaps this burger defies the whole logic of a burger: a relatively inexpensive meal, which is also thoroughly satisfying. With such a high price, any diner is expecting something thoroughly phenomenal, but still, $28 for any burger seems to be expensive.

If we instead focus on price, we might be cajoled into having a Whopper from Burger King. Whilst, it will satisfy my hunger, the meat is of somewhat lesser quality than the black label burger. Then, we need to address the controversial issue of "accessorising" a burger. For some the notion of lettuce and tomato, sullies the whole experience (well, you never make friends with salad?), whilst for me, it breaks up the richness of the beef patty. We haven't even begun to mention the types of cheese or how onions in a burger should be prepared. It also depends on what type of mood you are in. At times, I might be in a MeatLiqor mood, a fashionable burger joint in London. The burgers are fantastic, but the music always seems to loud, and the decor is perhaps not quite what I would term as decorous. Maybe burger sliders are the answer, mini tapas style burgers, offering diners the possibility of sampling several different flavours on a single plate?

At other times, I might eschew the greasiness of beef burger, in favour of a chicken burger (I know this might seem shocking). If there is one thing I find tough to cut out of my diet, it is the humble burger. I tried for one week, and it simply made my fondness for them increase. Or could the chain burger of places by Shake Shack be sufficient to satisfy most diners?

It brings us to the question, which I am asked regularly by friends, who are aware of my love of burgers. What is the best burger? This is a question which I confess has no real answer. Trying to use Google gives approximately 43 million responses. I like burgers, but perhaps not quite enough to sample 43 million burgers, to answer this question. Furthermore, my answer is unlikely to be as other judges. There are also so many degrees of freedom in this question. Does it refer to classic burgers or cheeseburgers etc?

So how do we solve this problem? You could argue it is a somewhat trivial problem and not worth answering (unless you are a burger aficionado, a self confessed burgermeister!). However, it does illustrate a problem which faces everyone, whether in markets or in any form of decision making. We have to make decisions in absence of imperfect information. Markets in particular produce too much information to deal with. The notion that traders can adequately absorb every single piece of relevant news article, whilst somehow dispensing with all the "noise" seems optimistic. Yet, despite this, traders still need to make their best judgement when it comes to putting on positions. For quants, creating systematic trading models, they might have the ability to process more information and use advanced techniques such as news processing. Even in this case, there is a limit to how much information they can aggregate. It is also often the case, that simplicity underpins the best trading strategies. Excessive complexity can often render a trading strategy less robust when it comes to running it out-of-sample.

The best we can do is to find a solution. It might not be optimal, but might be good enough for our purposes. Spend too much time deciding which burger to eat, and you might become hungry. In the meantime, I might start writing a bit more about burgers (and probably eating a bit less of them). If you're interested in reading more about burgers let me know (or if indeed you don't!)

Feeling hungry after reading this? If you are in London this Wednesday evening (10th Dec), come to our Thalesians Christmas dinner, a 3 course meal at La Tasca, a tapas restaurant in Canary Wharf. The dinner will be preceded by a talk on Deedle, a time series library for .NET. Get dinner tickets and details here - a great way to celebrate Christmas and be part of the Thalesians community.

Sunday, 30 November 2014

What's the best way to trade?

20:03 Posted by The Thalesians (@thalesians) No comments

Boston is to America what Cambridge and Oxford are to Britain. Indeed, the neighbouring town to Boston, Cambridge is named after its English predecessor and has within it both Harvard and MIT. Boston also served as one of the hot beds of the American revolution, being the home of the Boston Tea Party. However, I must confess that my knowledge of American history, is somewhat sketchy, although I'm endeavouring to improve. Indeed, if you have any suggestions on history books to read about America, I would love to hear from you!

Walking along the streets of Boston, it seems easier to become immersed in history than perhaps in other large American cities. Whilst skyscrapers occasionally dot the landscape in Boston, there are regular reminders of the past, such as the historic houses of Beacon Hill or Quincy Market, which today is thronged by tourists eager for lobster roll.

I took many photos on my recent visit to Boston, which was perhaps too short, including the graffiti at the top of this article. The graffiti suggests it is "not art". Whilst the point is somewhat simple, it made me think. What precisely qualifies as art and what doesn't? I am sure that artists have grappled over the ages with this question. Personal taste clearly plays a role, as well as so many other metrics, such as originality. For someone who is versed in mathematics, a well written proof can in itself seems artistic (although perhaps artists amongst you might disagree?)

When it comes to trading, we might attempt to ask a similar question: what precisely makes a trading good strategy? Is there a best way to trade? Moreover, what makes a trading strategy good enough for me to run? There might be commonalities which govern "good trading" such as not leveraging up more than you can afford. Yet, as soon as we get to specifics, here again, the answer to the question is related to the person making it.

Each investor has their own criteria for what would make a successful investment and the capital available to them differs hugely. Some investors have a long time horizon and are less leveraged. Hence, investments in more illiquid assets are more feasible for them. Some might prefer a more discretionary style, whilst others could be more comfortable with systematic strategies. When I'm trading my own capital, I am much more sensitive to drawdowns, in particular because I employ a modicum of leverage. As a result, I prefer high frequency strategies in liquid instruments, which typically have higher risk adjusted returns. They can of course have drawdowns, when a strategy becomes crowded out, and part of my job is to identify where these points could occur (somewhat difficult, but I am willing to give it a try).

I am also running fairly small amounts of capital on my personal account compared to when I was in bank. Everything is relative, when it comes to risk taking. Thus, the fact that these types of higher frequency strategies have lower market capacity are less of a concern. For a hedge fund running billions of dollars, there would be capacity issues. Indeed, in that scenario, the solution would be to come up with a large array of different high frequency strategies. The cost here is not so much purely the cost of capital, but also the cost of time. Even once we have identified the frequency or the assets we would like to trade, there are a massive number of other choices which we have. By the time, we have actually chosen a trading strategy which we believe is suitable for our investment style, we have discounted countless other ones.

What seems clear is that other investors faced with the same question, could have chosen totally different strategies, once they have jumped through all the hoops necessary to come up with a trade. Hence, whatever we have chosen to trade has been tailored for us. Whatever constitutes the best way to trade is merely the best for you, rather than for everyone else.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can order the book on Amazon.

Friday, 14 November 2014

New York Style of Trading

15:26 Posted by The Thalesians (@thalesians) No comments

Martin Amis is a master of the English language. I remember reading one of his books (or maybe it was Hitchens quoting Amis, somehow after reading so many books, they all seem to coalesce into one another). The whole discussion in the book was an attempt to describe Las Vegas using a single word. I'll leave you in suspense to guess that word, although I'm sure you can think of some obvious suggestions! Whilst I've never been to Las Vegas, I have been to another beacon of very different version of Americanness, New York. Indeed, I am currently writing these words ensconced in Starbucks in this wonderful city, with the sound of country music whispering past, sung by someone is distinctively not Taylor Swift.

When it comes to New York, an attempt to classify this great city in one word will always fail. Simply walking down the street invites try brain to pick out a multitude of words: skyscrapers, street carts, surprise. Every neighbourhood has a different character. Contrast the low rise buildings of Greenwich to the high rise millionaire towers of midtown snooping a peek at the stars. Burger joints sit amongst Michelin starred restaurants, each delivering their take on what is New York cuisine.

Each word is somewhat unique in its ability to describe a certain facet of the New York experience.

The same is true of a good trader. It is very difficult to find single factor in isolation which can explain why the approach of a trader should be successful. Instead, it is an amalgamation of many factors which can at some level explain the profitability of successful traders. There are several obvious points, such as the ability to risk manage these views effectively, being able to cut losses, and allow profitable trades grow and accrue larger returns.

However, perhaps the most important attribute of a successful trader is what they don't do. This might seem contradictory. The ability to recognise when not to trade is perhaps just as important as knowing when to trade. Sometimes markets are simply not amenable to your style of trading. Despite this market participants might feel that they nevertheless need to trade despite the lack of opportunities. The result is overtrading.

The FX market has been a prime example of this. For much of the past year, markets were simply not producing sufficient trading opportunities because of a lack of trends. Obviously in recent months, the USD rally has spurred many trading opportunities. This has been reflected in the recent pick up in returns from trend followers (in particular in September). It feels as though the good times of strong returns are slowly returning to FX investors, although this has somewhat been tempered by the controversy around 4pm FX.

In hindsight, things are clearer, in terms of knowing when it was right to get involved in the market and when it wasn't. However if something really isn't working with your strategy or trade, perhaps blaming the market is unhelpful. Simply trading for the sake of it, might seem to fulfil your role as a trader (as in person who trades). Yet, from a returns perspective it is suboptimal.

Instead, patience is one facet of trading and waiting for the right opportunity. Trade when you want to, not when you need to.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can order the book on Amazon.




Friday, 7 November 2014

Learning Rhapsody

10:59 Posted by The Thalesians (@thalesians) No comments

I see a little silhouetto of a man
Scaramouch, scaramouch will you do the fandango
Thunderbolt and lightning - very very frightening me
Gallileo, Gallileo,
Gallileo, Gallileo,
Gallileo Figaro – magnifico

Song lyrics, they always seem faintly odd, when written down on a page. In a sense, it’s akin to watching a lion in a zoo, wondering around his cage, aimlessly thinking of better days in the wild. Indeed, take a look at the lyrics above. Recognising their origin is far easier with a melody, which is after all, the way we usually interpret lyrics. The melody itself acts as a memory aid for the lyrics themselves. Melody somehow seems simpler to remember, forming a base on which to build the words. Whilst I love music, I am incapable of producing it. I managed to screech my way to playing the violin as a child, but I suspect for anyone listening, the sound I produced in this manner, was perhaps more noise than music. Yet, despite being a repeatedly failed musician, music is still one of things that I enjoy.

For me at least, the lesson of music, is that music is an interaction of so many things. Clearly, there’s the melody, the rhythm, the lyrics. There’s the infectiousness of live music, singing along to your favourite band or singer (such as Souad Massi, pictured above), in a crowd of others doing the same,

In finance, we don’t really sing along to price action in the same way. However, like music, markets are an interaction of many factors. Is there a secret to trading and a way to understand the markets? Sorry, to dampen your joy, but there is unfortunately no secret sauce to trading!

Perhaps the one “secret”, is not even a market based trading strategy. It is simply that you learn from others more than you learn from yourself or a book (although, I would hope my book is somewhat informative). Whilst hard work and reading are of course important to understand markets, they cannot replace real life communication with others. I have been particularly lucky in my career to learn from many market practitioners such as traders in banks. Had I not had this luck, I suspect my knowledge of markets would be far narrower.

Now working in the Thalesians, I'm now away from a massive trading desk in a bank. I no longer have continual interaction with traders. Hence, I've found it even more important to meet market practitioners and hear their thoughts in person. One result has been that I have started to attend and also speak at more financial market conferences. Whilst I do enjoy presenting my research, chatting to market practitioners at events has been incredibly useful.

Indeed, there's always something I should have added to a presentation, which someone in the audience has spotted. At the same time, I would hope that in every presentation I make, there's at least one very usable theme for the audience to take away. In the past, I've found that hearing just a single point has given me enough ideas to go away and build or improve a trading strategy. It even be one sentence, which someone says, which is sufficient to spark an idea.

However, sometimes perhaps a single talk isn't quite enough to articulate a subject. I'm also going to start doing workshops, to provide a bit more of an interactive way to present my research work. The first Thalesians led workshop will be held at the new AlphaScope conference in Geneva in February 2015. I shall be leading the workshop alongside Paul Bilokon, Director in MET (Market Electronic Trading) at DB and my fellow founder of the Thalesians. The idea will be to cover a large amount of my research work on systematic trading, in cash and vol markets, in particular in the subject of Big Data. Paul, will be covering his area of expertise which is electronic trading. I will also be attending the rest of the conference, to hear ideas from the world of systematic trading from other practitioners. So watch this space, if you're interested in systematic trading…

In the meantime, I'll stop reading lyrics and start listening to them.

For further details of the AlphaScope conference can be found here. To learn more about the Thalesians workshop at AlphaScope click here.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can order the book on Amazon.

Sunday, 2 November 2014

Write once, read many

00:25 Posted by The Thalesians (@thalesians) 1 comment

Youth vanishes from the stage first, supposedly to reappear in a later act, as wisdom. As each generation drifts into the past, its wisdom and experience seeps into the fabric of collective memory, weaving what will be called history. Just as the present is debated vigorously among its many actors, so is the past. The interpretation of the past changes over its immediate aftermath and over the ages. History is not so much a chronological list of events. It is more the understanding of how these events relate and why they occurred, which forms the basis of history. Indeed, Herodotus, the father of history, emphasises these points in the introduction of his epic work, the Histories:

This is the Showing forth of the Inquiry of Herodotus of Halicarnassus, to the end that neither the deeds of men may be forgotten by lapse of time, nor the works great and marvelous, which have been produced some by Hellenes and some by Barbarians, may lose their renown; and especially that the causes may be remembered for which these waged war with one another. (Herodotus & Macaulay/trans, The History of Herodotus, 1890)

No matter how hard we might try, events still obey the rule of write once, read many. We cannot undo an event, once it has been "written", despite our continual reinterpretation and "reading" of it. We can of course conjecture about whether a different path, would have altered history.

Finance is of course no different, when it comes to mapping the present with the past. There is a constant need for reflection of the past, perhaps even more so in finance, where traders profit from seeking the future. For specific cases, we have masses of data, which can aid us in the process of interpreting the past. For example when it comes to systematic trading strategies, backtesting can enable us to understand how a model would have performed in the past. Of course, it can be fraught with difficulty, notably the scourge of data-mining, which involves traders "fitting" a model excessively on historical data. The result is often an over-fitted model, which fails to capture the dynamics in the future.

There are more complex scenarios, where alternative paths for the path are somewhat more difficult to model. We recently saw the end of quantitative easing by the Fed, which fits under this category. The policy has had both its detractors and supporters. For supporters, we know how QE has played out in the short term. Would policymakers have liked more growth? Of course, we all would have liked that. However, for detractors, we shall never know quite the world would have turned out without the Fed's policy of QE. Yes, Fed QE has not been perfect. Markets may have been indulged for too long on this fix of morphine. Indeed, will the main memory of QE be S&P500 at 2,000?

Yet, reaching back to the days of the Lehman crisis, those were not normal days, neither for policymakers nor for markets. Policymakers responded with the experiment of quantitative easing, which seemed to stabilize the complete and utter confusion over the most severe part of the crisis. Perhaps, we have been made complacent these days, by comparatively stable markets. Indeed, in recent weeks, when VIX, Wall Street's fear gauge, jumped a few points, or S&P500 dropped a hundred points, it was as though pandemonium had spread through markets. By Lehman standards, it literally nothing and by the end of October this year, it seemed as though markets had recovered.

The past is not an exercise in perfection, after all it is humans who write it. Writing a different past, does not always mean a better present. If only we could write many....?

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can order the book on Amazon.

Saturday, 18 October 2014

The Brevity of Modernity

14:33 Posted by The Thalesians (@thalesians) No comments

Coffee whispers to my sense of smell, whirring through my consciousness, as I sit here in an American coffee shop. Above me, sitting aloft are skyscrapers their crests emblazoned with the names of American banks, a corner of London more Empire State than Wren. My fingers tap on my keyboard has slowed, no longer are words magically appearing on the screen seeking my eyes’ attention. Whilst headphones are perched in my ears, music pulsating through them, I hear little. I ignore the continual beeping of new Twitter messages, the flickering of pop ups signalling new e-mails, the stream of customers entering the coffee shop.

I am thinking, seeking to find a path through my thoughts to a cohesive narrative to write here. The wonder of thinking is that clear separation between you and the rest of the world, a time to indulge in the unknown. Thinking occurs when you allow the stimulation of the outside to dull, for a time, to allow the wonder of ideas to develop from within you. It is what I love about reading, seemingly abstract shapes on a page, creating words to catalyse my thoughts over time, rather than the gratification of images instantly flooding into my mind, a stream so rich, it can sometimes smother my thoughts. What spurs thought is not so much a flow of information, but the time spent digesting that information flow later.

Yet, how often do we think at length today? The modern world seems to favour brevity. Information seems to grow exponentially, each year that passes in this, the Internet Age, hastening the attraction of brevity. The length of this article is governed by how much time, you, the reader will give me, the writer. Our attention span can seem little more than one hundred and forty characters at a time. The notion of spending time investigating anything at length seems to have lost out. It seems passé, a relic of days past. Books are to be absorbed upon the screens of a device which needs batteries, but only in small chunks, rather than on the wonders of paper, a medium which lasts for a lifetime.

I might seem like a Luddite, expressing these sentiments, indeed perhaps somewhat hypocritical, since new technology is something I embrace. I love using Twitter and have for nearly a decade worked in financial markets, my eyes for hours each day, continually seeking out the words emerging from my news feed and price flashing up or down, analysing this vast trove of data systematically. Decades ago, I would have been staring at a solitary ticker tape of prices, rather than multiple screens, using programming languages with exotic names like Java and Python. My point is not so much that we should abandon modern technology, which has spurred this move to brevity.

Instead, I ask why can't the one hundred and forty characters of the tweet and brevity of news wire headlines, sit alongside books: the novels of Fitzgerald and Dickens, the non-fiction of Hitchens and Taleb, in our society. We need not choose between brevity and length. From tweets, we learn from the thoughts of many people, in brief snapshots, which coalesce to provide a sample of the world at a single point in time. By contrast books give us an opportunity to delve into the thoughts of others at length. However, this opportunity is only afforded to us if we are willing to exchange our time.

The same is true of markets, the incessant media coverage of high frequency trading seems to neglect the fact that it is possible to profit from longer term trading, where we might take a significant length of time to come to a trading decision. If anything, for some investors sticking to longer term trading can be a better approach, than being sucked into intraday trading and potentially the spectre of over-trading. Often with higher frequency trading, more care needs to be taken to ensure the noise of short term price action is not confused with a signal that market dynamics are changing. It can be done, but needs focus.

It's not a question of modernity or a Luddite appetite for the past. It's simply an acknowledgement that modernity should not usurp the idea that sometimes, we simply need to spend time thinking, wondering and reading, to allow us to escape (as the photo above implores us), as well as browsing. The question is this: what will you read next, a tweet or a book or perhaps both?

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of learning from the past (mixed in with a bit of ancient history). You can pre-order the book on Amazon.

Sunday, 12 October 2014

The small in Big Data

17:02 Posted by The Thalesians (@thalesians) No comments

Waltzing along the Thames from the Tower Bridge to Westminster, in amongst the plethora of skyscrapers struggling to reach the gods and tourists snapping photos, there lies the White Tower, its stone weathered by a thousand years of rain and wind, battering the British landscape in all seasons. The history of a nation lies there carved into the stone of Caen.

Generations have passed. Ages have passed since its construction. This island nation fell at Hastings, a nation forced to kneel at the sword of William the Conqueror from across the Channel, the man who built the White Tower. In the royal court, the foreign sound of French replaced that of English, the language of the Anglo-Saxons. As this green and pleasant land beckoned before him, the question for William was simple. What was this land which I have conquered?

William sent out his men throughout the land, to seek answers (and taxes), by conducting a survey of the nation’s wealth, recording the holdings of landowners, in nearly 13,500 places across the kingdom. The result was the Domesday Book which was completed in 1086, a truly epic work for its time. Indeed, for medieval times, the amount of data collected was truly astonished. Perhaps this was an example of medieval Big Data?

Leaping across a millennium to today, the term Big Data is as ubiquitous as it appears to be misunderstood. The term has seemingly captured an almost ethereal quality. Despite, the regularity with which the term appears, it seems to be rarely defined in the popular press. Essentially, Big Data refers to massive data sets.

The sheer quantity of data makes it computationally very difficult to analyse. Yet, beneath this veneer of complexity, the supposed promise of Big Data is that we can find simple and wonderfully intuitive results and relationship between the data, which can be visualised in novel ways. Big Data is only useful if we can make it “small” data that we can interpret. The web has given rise to masses of Big Data. Simply think of Google and Facebook and the reams of data which their servers trawl through every second. As oil was the way to profit from the twentieth century, is data the basis of alchemy in the twenty-first century?

Clearly, for the aforementioned institutions, data has proved to be valuable (we, the consumers, have freely given it to them in our droves). However, does simply throwing more data at a problem help create solutions? The difficulty is that more data can often mean more noise.

A model with more variables does not mean a better model, in the same way that having more lights on a motorcycle might not improve it (see photograph above). Financial markets are plagued by noise. Every minute newswires buzz with more stories, some crucial for markets, whilst others can be discarded as noise. Human traders have (always) used news to trade markets and have continually needed to make these decisions. We can apply a similar approach to trade markets by examining large amounts of news data (maybe we should call this Big News).

Whilst Big Data is not a panacea, through diligence it can improve our understanding of financial markets. In a sense it is like baking a cookie. We can see Big Data as a set of complicated ingredients, which only taste good once baked. Indeed, I have written about this topic in an earlier blog article, where I demonstrated how Big Data can be used directly for trading. I showed how RavenPack news data can be used to create trading filters for reducing the drawdowns associated with carry trades in the currency markets. The method I employed relied upon relatively straightforward concepts, notably understanding how news volume is related to market volatility and also the impact of the labour market on risk sentiment. Whatever approach we choose to Big Data, a modicum of old fashioned trading intuition needs to be there to start us on our way.

The key is to filter the signal from the noise, as Nate Silver might say, so we can find the small in Big Data.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, also has some colour on lateral thinking to a trading idea and much more (mixed in with a bit of ancient history). You can pre-order the book on Amazon.

Sunday, 5 October 2014

When an idea gets currency

18:54 Posted by The Thalesians (@thalesians) No comments

Anguish had ensued for months, with declining volatility seeming to compound the misery of the market, killing any potential trend. Traders in currency markets were being rebuffed by a currency that did not wish to rise. It had been the consensus year ahead trade at the beginning of 2014. The moves for much of the year seemed to “prove” that the consensus was wrong. Finally, over the summer, the dollar showed the market some love, rallying over 7% against the euro and against nearly every other currency in recent weeks. Perhaps consensus was actually right about the elements (see above) being here for a dollar rally?

The narrative which has been at the heart of the market’s desire to see a stronger dollar is fairly clear. I recently went to a talk by Mark Cudmore at a currency conference, TradeTech FX, in London. He has been in the currency markets for a decade. I have known him for nearly that whole period and I am always keen to here his thoughts on the market. His presentation was based on the premise that the market follows narratives, which can often overshadow other factors. In my experience, this becomes more evident, each year you follow the markets! Trying to point to fundamentals, whilst another set of narratives is in play and a dominant trend is sweeping markets, can be a painful experience even if the narrative eventually pivots to your viewpoint. There are countless examples not purely confined to currency markets. In the dotcom crash, investors who went short, hoping to profit from a fall in overvalued tech stocks, were eventually proved right. However, any investors who went short too early, would have been forced to close out their trades before they became profitable.

In currency markets at present, the market narrative is of a central bank considering when to hike, the Fed, whilst another is in easing mode, the ECB. Indeed, this has been prominent in most market research that I've read and in the media. This is the classic divergence play, which has so often been central to currency markets and has helped to trigger the rally in the dollar. It is the type of trade, which has been lost in the muddied waters of the past few years, where central banks seemed to be engaged in a race between one another for the bottom in yields. Much of the post-crisis period has seen markets driven more by shifts in risk sentiment than anything else. This contrasts to monetary policy expectations which are linked to expectations around growth and inflation. If we look at unemployment rates in the US and the Eurozone, we can see an illustration of why there should be some monetary policy divergence, in particular once the buffer of Fed QE has been eroded. I could show you numerous other plots to illustrate the same point. (Of course, there has been this divergence for years, but the market narrative was somewhat different!)

Figure – US vs. Eurozone unemployment

Indeed, the ECB has been easing policy, cutting deposit rates to negative territory and committing to purchase ABS. The potential for further moves, notably through the purchase of sovereign bonds remains a possibility. The Fed are still conducting asset purchases, admittedly in smaller sizes, and this will finally end in October. Of course the market is pricing in higher short end Fed rates and the Fed “dots” are also pointing to hikes. The “dots” are representative of individual Fed governors’ forecasts of future rate policy at various Fed meetings.

Figure – Fed dots and market pricing – In case you didn’t know markets expects the Fed to hike soon

UST 2Y yields have also risen, as we approach the end of Fed QE, which are traditionally the most important part of the curve for developed currency markets (by contrast to UST 10Y yields, which are markedly lower on the year). However, despite all these moves in the UST yield curve, the answer to whether the Fed have hiked is clearly “no”. Hence, the dollar is rallying partially on an expectation that hikes will happen soon. Whilst, I find it difficult to disagree with the view and I am (like the rest of the rest of the market) forever enamoured with a trend, we need to consider several factors.

Positioning in short EUR/USD trades is at an extreme, if we look at public sources such as the CFTC’s speculative net positioning data. Hence, this suggests that many market participants are already in heavily long USD. I know some of you will bemoan that I use this data, given that it is largely dominated by CTAs (those funds which predominately trade trend following strategies) and it is also quite lagged. However, in my analysis, I have found that it is generally best to go with the “flow” in CFTC positioning data. Hence, at extremes, it is generally profitable to follow it, but to be weary once it starts to pull back and traders begin the process of liquidating their positions. In particular, there is crossover point, where existing shorts can feel enough pain from a liquidation to force a squeeze which can be self-perpetuating. It also does begin to concern me when forecasts are rapidly being cut by many banks in succession, something that is happening to EUR/USD.

Figure – EUR/USD CFTC speculative positioning – is very short


On a broader point, price action often gets ahead of itself. One example, cited during Mark’s talk, was the rally in USD/JPY which began when in November 2012 and accelerated following the election of Abe in that December. In a Draghi-esque “whatever it takes” manner, Abe pledged to restart the Japanese economy with "three arrows" of fiscal stimulus, monetary easing and structural reforms (via FT/Wikipedia). The market’s love of Abenomics was perhaps even deeper than what we are currently witnessing for the dollar. USD/JPY rapidly rallied from around 80 to 95 from November to April, just before the BoJ’s historic meeting when they announced a massive program of QE. I have fairly vivid memories of that time, which felt somewhat electric from my viewpoint, working at the time of the currency desk of Nomura, a Japanese investment bank.

Figure – USD/JPY rally since 2012 and mentions of Abenomics in Bloomberg News

Since that historic BoJ meeting in April 2013, USD/JPY has managed to rally to 110. However, this second part of the journey higher has been fairly disjointed. In other words, the yen was weakening during a period where there were expectations of significant monetary policy easing by the BoJ, rather than actual easing. Does this sound familiar, a currency moving ahead of a central bank actually changing their policy? Furthermore, the most recent rally since August has come at a time of broad based dollar. Perhaps more of a dollar narrative playing out than a yen one at present?

As Mark remarked (I give no excuse for that pun) and what is so often said in the market, don’t fight the narrative. At the same time, we need to consider whether the market is getting ahead of itself. When will the motivation to take profits for market participants be stronger than following the narrative on the dollar? When the Fed does actually hike, will the market have already been exhausted by a rallying dollar? A great story only translates into profitable trades when the rest of the market also listens.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, also has some colour on this generalised topic (mixed in with a bit of ancient history). You can pre-order the book on Amazon.

Friday, 26 September 2014

If you start(up) me up

11:25 Posted by The Thalesians (@thalesians) No comments



Music began with the heartbeat. Every one of us has rhythm, every moment of our lives, that heart beating, whilst time cascades on, a visitor whose sojourn among us is briefer than any of us would like. And so, as our heart beats on, through the music, we hear our heart whispering thoughts and dreams of change.

Our mind seeks to ignore. Our mind seeks to keep our life on track, along some journey it believes is pre-defined. Keep going, keep going and that goal will be reached, it mutters. Yet, what if that goal is illusory, simply some manifestation of what others desire? It is so easy to fall in love with time, simply watching it drift away. So obsessed we become, that the notion of change falls away out of view, some strange distraction from watching the seconds hand of our life's clock, tick, tick, tick away. But sometimes life needs change, it needs risk, it needs the cajoling comfort of certainties to dissolve away.

Change as a concept can feel hostile. It is the force, which seeks to break apart. The force which alters the course of our present journey. I have always had an odd relationship with change. When it comes, I adapt and seek to make it work. Yet before it arrives, it is sometimes fear which envelopes me and I seek to avoid it. The most difficult part of change I find is to embrace it, when my journey has been relatively comfortable. Why alter the path, when everything seems to be going well?

I faced this quandary just over a year ago. My life seemed comfortable. I had a job which I enjoyed, working at a large investment bank in the currency markets. I wrote for clients deciphering the quantitative side of market. I also had exposure to the bank's P&L developing systematic trading models traded by the desk, a crucial link to understanding markets. The process of learning in financial markets is so much clearer, when you feel some feedback of P&L. You cannot backtest pain, you can only feel it. I still loved (and do love) markets, as I am sure do many of you reading this. I felt and still feel that I am too young to throw away the thrill of the markets. However, I felt that after a decade in banking, I could apply my knowledge in a more independent capacity. That required that crazy little thing called "change", that concept which I had failed to grapple with before.

I had co-founded the Thalesians several years before, with several friends, primarily to do finance seminars alongside my full time job in banking. In essence, it was much more of an educational venture than a company. However, could I develop it into a fully-fledged start-up, specialising in research and consulting in systematic trading, if I went full time? Usually, I would shy away from change, unless it greeted me first. This would be one of rare occasions, when I would seek out change from its place resting in the future.

A year ago, I did it. I resigned. The first time I had willingly left a job. My sojourn at Lehman Brothers has ended rather more abruptly after the bankruptcy. Once I started working full time at the Thalesians, suddenly, I had to decide what to do, it was no longer a question of . I researched. I sold. I wrote (a book).

In this past year, I have realised that “change” can actually be good, although the journey can be an arduous affair. The experience also highlighted what I was successful and somewhat less successful at in my previous jobs. Sometimes, the environment of the trading floor can be intoxicating. It is the ideal environment to absorb markets. However, such absorption can be too successful in a somewhat blinding way. After a year, though I feel that the fruits of my work have slowly begun to show, most notably through a partnership between the Thalesians and RavenPack, a news data vendor.

Furthermore, the past year has made me realise that being able to “change” as a concept is central to financial markets. The most difficult aspect of trading is not so much having a view. Rather, it is having the ability to see that the view is now wrong and needs change. There is a subtle line between being right and being stubborn. It is when these two concepts are able to balance one another that a trader becomes successful. This applies both to systematic and discretionary traders, who become too wedded to an approach of trading the market or to a particular position. Being the doom-sayer forever in markets, might well bring fame, yet it is unlikely to bring profitable trades in the long run (I admit that phrase is the most loaded of terms in the financial lexicon).  Moreover, it is perhaps one of the most difficult decisions to make in markets deciding when the time is right to abandon a strategy.

Change can be good. Fear can be good. Yet, always siding with fear against change, is a mistake. I’m glad for once, I gave change a chance. Change doesn’t mean having to do a start-up, although for me it has. It simply means an ability to change the unknown to the known. I leave with you a few words from the Rolling Stones, who seemingly have a knack of enveloping a somewhat complex sentiment in relatively simple lyrics. Somewhat paraphrasing them, if you start and you’ll never stop, but first you must start.

If you start me up
If you start me up I'll never stop
If you start me up
If you start me up I'll never stop
I've been running hot

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, also has some colour on this topic (mixed in with a bit of ancient history). You can pre-order the book on Amazon.

Friday, 19 September 2014

Lehman Brother can you spare a yard?

23:39 Posted by The Thalesians (@thalesians) No comments

It has been six years ago this week, when I could say that green was our colour. It wasn’t a bright green, but a dark, somewhat dignified green, like the shade which adorned British racing cars for much of the twentieth century. It was the green of the leaves of Californian redwoods, standing in the way of the winds for thousands of years. It was the green of the grass, rising up from the rich soils of the prairies of the Midwest and the cotton fields of the Deep South. It permeated all around, carefully threading its way through the carpets, upon the upholstery of the chairs, up the walls of marble meticulously veined with streaks of white, on the booklet covering my business cards.  Maybe green was our colour, because our competitors were envious that we were so good or at least that’s the impression you would have listening to our management.

I never found out for certain, but most likely I suspect green was our colour as a nod to the fabled greenback, the American dollar. Those crisp green banknotes were partially composed of cotton, that commodity we traded over one hundred and fifty years ago. Each one of them emanated from a printing press in Washington DC, telling a story of the American Dream, of great Presidents, from Washington to Lincoln, who built the American nation, through independence and the pain of Civil War, freeing the nation of slavery. They were Uncle Sam's gift to the world: the object of our desire, our raison d'etre and our purpose was to accumulate as much of them as possible. Lose a million of them in a day, then luck could be the only blame for us, but gain fifty million of them in a year, then genius beckoned, along with adulation. You were the rock star whose audience was the trading desk. Together, we could make millions, no billions or as we called billions in the financial market slang: yards. Whilst billions and millions sounded similar, saying yard was unambiguously different and made the amount of money somehow more real. Supposedly the term yard was derived from the French for billion, milliard. Throughout the boom years, like our competitors, we ran through “yards” and “yards” of profits, the alchemists of the early twenty-first century, but we had seemingly found a way to make gold, unlike our predecessors.

Our leader was the man, the man with millions to his name, who signed his e-mails to us with simply, Dick, scrawled in his own hand, his signature forgoing the use of his surname Fuld. He didn't need two names: he was like a rock star, needing simply his first name to make him recognizable, like Elvis. But he was our Elvis, the man who'd been with us since the time when Elvis himself was the cream of Las Vegas and man had first walked on the moon, in 1969. When he eventually left the building, so had we. He was the man who clearly told my graduate class, that one of his proudest moments was overriding his whole board, to bring back smart dress, after a brief experiment with business causal. For him, appearance was paramount: the fine silk ties on our necks, the slick suits carefully tailored, the polished black leather Italian shoes. This carefully crafted image was perhaps designed to set us apart from the rest of Wall Street. We were Goldman's number one rival, or at least that was the notion which was cultivated by management. We were supposedly as good as them, but with a green tint, although our undoing ultimately proved this not to be the case.

As well as explaining his sartorial preferences for us, he also told us that we survived the crisis of 1998, the Russian default, which nearly destroyed us. We overcame the tragedy of 9/11, clocking up one hundred and fifty years of service. We strove to regain our independence from American Express, gaining it in 1994, when we were spun off back into an independent company. In amongst all this, there was always chatter on Wall Street, even in the bull years, that we were too small, that we would ultimately lose our independence once again.

I started working there, my first real job out of university, in the summer of 2005. In less than a month: I had received news that I had attained a first class honours degree from Imperial College whilst on holiday in Boston; heard that my hometown London had been awarded the Olympics on return; been in London during the terror of the bomb attacks, before finally starting on July 14th, which was coincidentally Iraqi Independence Day (and also coincidentally Bastille Day for the French). I’m British and of Iraqi origin, the birth country of my father and mother. Maybe it was a sign that my life was changing on such an auspicious day, in the same way that Iraq had changed that same day in 1958. So the rigours of work began, that July 14th, sweeping away the academic freedom and dreams of university. There were first a couple of weeks of training, a time also for posturing amongst the graduates, to secure a role on the most popular trading desk and also to get to know our fellow graduates, some of whom became good friends.

In our graduate intake, the Holy Grail, the place where we all wanted to work, was the collaterised debt obligations desk or as it was known more succinctly the CDO desk, which had apparently discovered a mystical way of printing greenbacks. I even bought a book all about these new-fangled credit derivatives, hoping it would help me gain the edge. I never ended up reading that rather expensive book. I never even managed to get past the first stage of the interview process: I was never destined to be a hotshot CDO trader. I was disappointed. I continued my rotations around other such fashionable desks, such as the equity derivatives desk. It was always the derivatives desks, which were of interest to our class, for they were the ones making the most money. In the end, I secured a job at the comparatively staid foreign exchange desk, doing research. It was not the most fashionable of areas, dealing mostly with one of the most vanilla of products, foreign exchange spot, simply buying one currency and selling another. In the process, I had turned down a role as a trader on the fund derivatives desk, a role which sounded attractive, having the fabled derivatives postfix. 

However, I had little inkling of what it precisely involved, which looking back on it, explains my reticence in joining that desk. By contrast foreign exchange was more tangible, it was something familiar, at least to anyone who has traveled abroad at some point. After all, even I knew what dollars, pounds and euros were and I had even handled them in my hands. The currency markets had been trading as they do today since the early 1970s, when the dollar was allowed to float by Nixon. The role of currency changers had been around in some form, for many years, as long as man has traveled. So maybe if a market had been around for that long, it served as sufficient proof that it would last throughout my career.

In return for the early 6.30am starts every weekday, waking up in dark in the winter and leaving similarly shrouded in darkness, I was rewarded with those greenbacks. Once a year, I would be called to Jim's office, for a chat, where I would be handed a paper. On it would be my salary, which I already knew, and next to it my discretionary bonus, the figure I had been waiting for, all in dollars, but kindly converted into sterling at some aforementioned exchange rate. I always preferred to read the figure in dollars, because numerically it was always bigger, somehow making me feel I had been paid more. As Jim, my boss, would read the number, in his relatively soft American accent, he would ask what I thought of the figure. I usually didn’t say much, but as the years passed, I would voice more of an opinion during these chats with Jim, which was widely nicknamed the “comp discussion”. Contrary to popular believe, not everyone was paid millions there, although internal documents made available to the public later by the Los Angeles Times, showed that more people than I expected were paid such amounts. Obviously, as a junior I never was one of this group.

The (somewhat less than serious) plan was for my career to evolve towards an apex which was meant to occur around the time of my thirtieth birthday, a time by which I would be able to retire and enjoy my life, swimming in a cascading waterfall of riches, a life that was a fairy tale of joy, enveloped in the love of a beautiful woman, preferably with long deep satin hair, a face like that of Shakira, a smile able wipe anyway any woes, who presumably would not be with me purely for my planned riches, whilst in the background the sounds of laughter would seem omnipresent. 

Today, a few years later, my hairline has receded considerably, somewhat prematurely I feel necessary to add, through a myriad of stress and genetics, although it’s impossible to decipher which of them is more responsible. I’m often told that the lack of hair is a result of an excess of testosterone (ladies, surely that’s an attractive trait, if you can ignore the shiny glow of my balding head beneath lights?). At times, I’ve shaved my hair to create an even feel to my head, which some (overestimate) have deemed as attractive, although admittedly it does give me the look of the famous EastEnders character Phil Mitchell, giving my usual smiley face an edge of seriousness. Grey hairs have also begun to seize their moment to shine in amongst the sea of those black hairs, which have successfully battled against baldness. 

In this state, with my status still very much un-retired, if such a word exists, I have started working full time at the Thalesians, a company I co-founded, still largely doing foreign exchange research, without a terrifyingly seductive woman at my side with a ring encrusted with diamonds grasping her finger, it is difficult to say that my tongue in cheek plan ever succeeded. But maybe that’s not the point, whether or not my plan came to fruition. The point is simply to have a plan or an idea, whether or not it succeeds. Without a plan or some hazy image of a destination in your mind, you are a traveler without a map and accordingly your progress is hampered. In any case, even if my plan did not succeed and years have toiled to whisk away my twenties, I’m still broadly happy, a result most likely to my close-knit family, I’m more knowledgeable than I was those years ago, I’m still yearning to learn, I can call upon close friends both in the good and more importantly in the bad times, so surely these are all things that I should be thankful for?

As the years passed working there, my interest in foreign exchange markets grew, learning mostly from my senior colleagues at Lehman in my team, such as Jim and Alexei, who as the name might suggest, was Russian, and also colleagues on the trading desk. True, reading books can give you insights into the markets, but are a poor second compared to working with willing mentors, whose years of experience are so evident. No one needs to teach you at work. No one needs to share his or her time. But some do and I was lucky to have somehow found myself working with people who did (and also did at Nomura, where I worked for several years after Lehman). For that I shall always be grateful. 

Our research team grew under the thoughtful leadership of Jim and the foreign exchange desk increased its profits in the years that I was there, ironically reaching record levels at the time of our demise in 2008, moving from a peripheral player to one of the major currency dealers. In spite of the success of our desk, in the summer of 2007, we could see problems within the company as a whole. I remember distinctly during that time, we had a meeting, more commonly known as a town hall. Town halls were essentially large-scale presentations, where traditionally, we were told how successful our company was by someone senior, roughly once a month. He (for the speaker was nearly always male) would stand in front of a screen of illuminated PowerPoint, with charts peppered with our trademark green colour, relating to profits, which always seemed to be composed of rising lines.

This town hall was different. The specter of the subprime crash had reared its head and the markets had begun to take note. There was chatter that we would suffer, given we were the ones with massive exposure to the US property market. We were reassured, that we could survive a year, without tapping markets for funding. That proved correct, although not in the way we would like it to be. The company declared bankruptcy just over a year later in the middle of September 2008, so in a way our presenter was right.

In the end, our company collapsed, when we failed to persuade the US Treasury to spare us a couple of “yards”, to bail us out. I do not wish to enter into the debate of whether this decision not to bail us out was right or wrong, even though many other institutions were bailed out during the financial crisis. It has now happened. It is far more important to acknowledge, that our institution failed because of the actions of some of those people who worked there, rather than complaining that we were not bailed out.

The cause of our failure was excessive leverage, a deliberately fancy way, of saying our company borrowed too much to gain exposure to a US property market which collapsed.  Strangely, the experience of our failure, although shocking, didn’t seem to hurt me, most likely, because of other issues at home, which illustrated what really is important in life: the loss of a job, a salary, a few company stocks weren't those important facets of life. I also managed to find a job relatively quickly afterwards, another important reason for me to avoid complaining. 

I remember my last day there at the end of September 2008. On the address system, a loud message was delivered to the members of the fixed income division, which included the foreign exchange desk, to assemble in the auditorium. We knew what was coming, given the company had already filed for bankruptcy two weeks earlier and there hadn’t been any agreement for the purchase of our division by another company. Upon arrival, in the auditorium, the bankruptcy receivers announced that we were fired and we should vacate the building by the end of the working day. I wondered how many times the team of receivers had delivered this news to employees of a bankrupt institution. For them, it was a regular occurrence I presumed, a necessary consequence of working in the field of bankruptcy. For us, that was it, a clear change in our lives, rather than some purely administrative process. We all left the building, carrying white plastic bags or boxes, filled with the detritus of years of employment there, including peculiarly, in my case, an emergency evacuation kit, emblazoned in that green colour. I still have it somewhere, some place; a memory stored in a dusty box, in a cupboard, its contents decaying with the passing of time. It was as though taking it was somehow compensating me for what had happened.

One strange side effect of the bankruptcy was that I started to go to the gym regularly, rather than halfheartedly. This seems to suggest that if you want to lose weight, work for a company, which will want to go bankrupt, although as mentioned earlier, you might also lose your hair at the same time.
The bankruptcy did also have another effect, apart from conditioning my weight and what can be optimistically termed as toning my muscles via a sojourn at the gym. I remember whilst working there, people outside the banking industry never knew the name of my company. But after the bankruptcy they did. After all, we were the biggest bankruptcy of all time, which tipped the world into financial crisis, which has lurched ever since, becoming superseded by the Eurozone crisis. But clearly, whatever, weird positives I draw from the bankruptcy, they were massively outweighed by the negative impact of the whole episode on the market and more importantly the subsequent follow through into the wider economy, on people who had nothing to do with Wall Street.

On a personal level, I made many friends there, who to this day are some of my best friends and as such I don’t regret choosing to work there. I shall always look back fondly on my time working there, as a Brother, one of the Lehman Brothers, even if it ended in a way I had never wanted. 
A mistake is only a mistake, if you regret making it, otherwise it’s called an experience. Has my plan changed now? Yes, now the plan is to create the perfect burger, they taste better than greenbacks.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, also has some colour on this topic (mixed in with a bit of ancient history).

Friday, 12 September 2014

Great Scot! Vol over the Scotland vote

14:33 Posted by The Thalesians (@thalesians) 1 comment

For much of the summer the market had largely been looking at the Scotland referendum as a relatively low risk event. Common wisdom was that the vote would likely be "no". What binds is more than what separates? Perhaps another factor was simply that it was just too far away for the market, as evidenced by the relative lack of media coverage outside of Scotland until recently.


However, market expectations clearly changed with the YouGov poll in last week's Sunday Times (7th Sep), which showed the "yes" vote in the lead. The immediate market reaction was to dump GBP and buy GBP vol as soon as markets open on the Sunday evening (see chart which illustrates the different reaction of GBP/USD implied to Scotland news to EUR/USD implied). Since then GBP has managed to recover to some extent, helped by some new polls which suggested "no" was in the lead. This leads us to the question of how precisely can we quantify the market risks of such a scheduled event? One way we can do this is by looking at implied volatility as a measure of the market's expectations around the future risk of any asset. Implied volatility is after all a function of not just the general volatility environment but also the expectations of realised volatility around future scheduled events.

Typically, before scheduled events, vol market makers will mark add-on weights for these events. For the US employment report this amounts to around 3-4 vol points on an overnight EUR/USD. The precise figure obviously depends on the market demand around dates and the general importance attached to the event by the market. Generally speaking, if say the US employment report has been a non-event the last few times, the market might not be as keen to bid up vol around an event. The converse can also occur. Given the impact of the scheduled event will be unknown, the market's event implied vol add-on associated it will obviously be an estimate.

As a result, implied volatility over such events generally tend to exhibit a large risk premium. In other words, implied vol tends to be higher over these events then realised volatility.More broadly, implied vol tends to be higher than realised volatility, but the presence of scheduled events can widen this difference (see Thalesians - What's in an event - Understanding FX implied vol event add-ons - 03 Nov 2013). We could argue that because the scheduling is known, market participants might overemphasis hedging its risk over these dates. (You won't get fired for paying up vol over payrolls, but you might be fired that one time realised explodes!)

We can attempt to monetise risk premium via gamma trading (see What's gamma trading - 22 Jul) from the short side (see Thalesians - Gamma, gamma, gamma - Explaining gamma trading in FX markets - 14 Apr 2014). We must be very careful how we do this, given that the returns from such a strategy can be skewed. We also need to consider all sorts of trading issues, such as delta hedging, when we run such a strategy. A failure to do could result in much deeper drawdowns on those occasions when realised volatility really does outperform implied.

In the case of Scottish referendum, unlike the US employment report, there are very few comparable precedents. We can for example look to UK general elections. However, the nature of this referendum and general elections. One of the closest similar events is the Quebec referendum in 1995. Admittedly, even the Quebec vote was very different and clearly a sample of 1 is not enough to make a proper statistical comparison.


The difficulty in pricing the event means that traders will demand a much higher event vol add-on than for an "ordinary" event. Even if the probability might appear "low" of a "yes" vote, the tail risk is clearly something that traders needs to be compensated for. Complicating matters is also the way that poll results have become "vol" events, which traders should mark in their vol calendars (if you're a vol trader and you don't do this, someone else will and you'll be left holding the bag!). To some extent, this can also help us, giving us more "similar" events to extrapolate from. We could also examine realised volatility over the release of various polls, to give us a hint about how price action could behave (with the caveat that a poll is not as important as the actual referendum).

Whichever way you look at it, pricing vol over the referendum date and even leading up to it, is extremely challenging, given the lack of past comparisons, but we can at least try!

To read more about this topic please see the below work I've done on systematic gamma trading and quantifying the value of events in vol terms. My book Trading Thalesians also has some colour on this topic (mixed in with a bit of ancient history).

Thalesians - Gamma, gamma, gamma - Explaining gamma trading in FX markets - 14 Apr 2014 (available for Thalesians clients only)
Thalesians - What's in an event - Understanding FX implied vol event add-ons - 03 Nov 2013 (available for Thalesians clients only)

Friday, 5 September 2014

I heard the news (analytics data) today

11:09 Posted by The Thalesians (@thalesians) No comments

It's perhaps a clichéd question to ask what is your favourite Beatles song? Ask most people and they'll reel off one of the well known tracks. Surely, "Yesterday" is one of these. Perhaps "Ticket To Ride" with that infectious guitar riff. Perhaps "Hey Jude", the piano chords waltzing in the background underneath Paul McCartney's vocals. However, one of my favourites is "In my life". It's a wonderfully simple track, only 2 minutes 27 seconds long, a track which most of you are unlikely to have heard.

I'm listening to it, whilst my fingers pulse the various keys on this keyboard, John Lennon's voice coming from the right of me, harmonies from Paul McCartney and George Harrison, punctuated by Ringo Starr drumming through my left speaker.Another Beatles track also seems to linger in my memory, namely "A day in the life", which has several contrasting sections. It begins with the line:

I read the news today, oh boy

It's perhaps a line which can resonate with everyone who follows markets. We hear news, we react. That's what we do in markets, we read the news and sometimes our reaction is simply "oh boy". The problem is that these days there is so much information from markets. Not only do we observe market data in its droves, but news data seems to multiply endlessly.

Before, maybe it was just newswires. Now the web is awash with blogs and other market moving commentary. Then we have Twitter too. It is impossible for a human to look at every bit of news and interpret it. The news gathering process becomes a matter of prioritizing what is "important" and what is "irrelevant" news. Sometimes however, news can slip beneath the your radar, only to suddenly tip the price action later. At other times, price action reacts almost immediately such as after payrolls data. The signal seems subsumed by masses of noise and can often be interpreted in so many different ways. Take for example the picture above, which I took a few months ago in a Budapest gallery. What I see in it, could be very different to what you observe. The same is true of markets. However, there is also a crucial difference in markets, there is only one "correct" interpretation, that of the price action!

So what can we do in this challenge to interpret news to extract that signal from in amongst so much noise? One solution is increasingly to look at news analytics. Data vendors essentially parse the news and then output summaries of news articles/blog posts in an easier to process format that can be read in a systematic fashion. One of the most well known is RavenPack, who have recently sponsored some of my Thalesians research, specifically to investigate how news analytics data can be used to trade markets. I found that news data could be used as a filter for FX carry (see results below - and ask me for a copy of the paper if you are interested, I am also offering a free subscription for shortened versions of Thalesians quant notes). Obviously, there are many other uses, but this is just a single example.


Compared with other data sources, news analytics is a relatively new area. Even amongst those who are aware of the idea, a lot of people can be dismissive. To some extent, this is good news if you want to trade off it! If a data source is relatively underutilised, strategies based on it, are unlikely to be as crowded. Furthermore, if it takes time to develop an algorithm to extract alpha from a data source, it also reduces the likelihood of crowding around a signal. Having spent a considerable amount of time analysing news analytics for trading purposes, it also seems apparent that there are numerous ways of trading on the data. Again a good point for reducing crowding around a specific strategy.

So next time you think you haven't got enough time to read the news, consider using news analytics. The last thing you want to be doing is reading the news, only to realise you've missed something and mutter "oh boy!".

To read more about ideas about using RavenPack news analytics data see my Thalesians quant paper listed below. My book Trading Thalesians also has some colour on reading through the noise when trading (mixed in with a bit of ancient history). Pre-order on Amazon UK here and Amazon US here.

Thalesians - Carry the news trade - Filtering FX carry using RavenPack news analytics - 2 Sep 2014 (Ask me for subscriber details! Shortened versions of my papers are available for free. Given this is a sponsored paper the full version is available free on request!)

Sunday, 31 August 2014

You can't always get what you want in FX

15:53 Posted by The Thalesians (@thalesians) No comments

Mick Jagger and Keith Richards once wrote "you can't always get what you want". They later noted "but if you try sometime you find, you get what you need". I am too young to remember this song being released, although, perhaps for some of you reading, the year in question, 1969, represented the springtime of your life. I was instead a child in the era of Lionel Richie and his "Can't Slow Down" album. I came across an original vinyl version of it quite randomly several months ago outside an Amsterdam record store (see above). The reason why I bring up the Rolling Stones and Lionel Richie, which are perhaps the most unlikely musical combination you could ever conjecture, is that their lyrics might (just) help to describe currency markets recently.

Following currency markets for nearly a decade, I cannot remember a more despondent time amongst market participants. To paraphrase the Rolling Stones somewhat, currency traders have failed to get either what they want or need in terms of returns. Volatility has been so sapped from currency markets, that, for a time over the summer, EUR/USD and USD/JPY short dated vols were on a 4% handle, an indication of the severe lack of activity or interest in the market. Is it true that currency markets just "can't slow down" any more to use the words of Lionel Richie? In retrospect, the plethora of media articles earlier this summer on the lack of volatility was perhaps an indication that we had reached a low. Why should currency volatility matter for traders? Generally, currency market makers are more profitable when volatility (& volume) levels are higher. In terms of the buy side, broad based indices for currency funds show it has been a tough time for them as a group too. If we take for example the HFRX Currency Fund index, it is close to flat on the year as of end of July.

It has not simply been a lack of volatility that has adversely affected the currency markets. The furore over the 4pm FX fix has rumbled on for a year. Indeed, the first inklings of the subsequent controversy were sown in August 2013, by a Bloomberg article and it is now a focus of regulators. For those of you interested in reading more on the 4pm FX fix story, I have written an earlier blog article on the subject and some of my research on the topic was featured in the Wall Street Journal. A lot of the debate around the 4pm FX fix has revolved around the notion that currency markets are supposedly "rigged". The way I view it is that markets are never easy places to make money. You need to do a lot of work in order to be profitable. Even then, it is remains frighteningly difficult to be consistent in your profitability. This is something strikingly different to being "rigged". If you fail to spend the time and effort required, markets will appear even more unfavourable.

However, despite what might appears to be the glum message of the post so far, for currency traders there does seem to be some light ahead. In Mohamed El Erian's recent article (see FT: Rising risk of currency market volatility 26 Aug 2014), he noted that the conditions for a pick up in currency market volatility are here. Indeed, we have already seen some pick up in EUR/USD implied volatility in the second half of August. There have also been the return of trends within the market, notably seen in the decline in EUR/USD in recent weeks. Positioning data suggests a large amount of net short speculative positioning in EUR/USD, indicating that this is likely helping to buoy currency traders returns.

El Erian notes that the beginnings of monetary policy divergence, a factor which is crucial for driving currency markets, is likely to push up currency volatility. A pick up in volatility, is unlikely to be helpful for high beta trades (like currency carry trades). Indeed, for example in equities markets typically high levels of vol tend to be coincident with weaker equities markets.

However, rising currency volatility is likely to aid trend followers. Macro traders examining relative interest rates amongst currencies are also likely to welcome divergences in monetary policy, after a period of extraordinarily low rates. We also note that, from a seasonal viewpoint, historically currency volatility tends to pick up through the autumn as well (see Thalesians: Seas-onal the day - Understanding seasonality in market volatility - 2 May 2014).

Whilst, opportunities have been far between in currency markets for much of this year, it does appear that times are changing, if this pick up in currency volatility is sustained and we see a continued divergence in monetary policy. So whilst currency traders might not have got they wanted for most of 2014, perhaps it is time that they'll get what they need. The time is surely coming for some dancing on the ceiling...

To read more about vol seasonality, see my Thalesians quant paper listed below. My book Trading Thalesians also has some colour on market volatility (mixed in with a bit of ancient history). Pre-order on Amazon UK here and Amazon US here.

Thalesians - Seas-onal the day - Understanding seasonality in market volatility - 2 May 2014 (Available for Thalesians clients only. Ask me for subscriber details! Shortened versions are available for free)