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A web-reading bot made millions on the options market

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Re: A web-reading bot made millions on the options market

#61

Post by toxicFork »

needhelpplz wrote: post #40
downandout wrote: post #12

"The trade occurred 19 seconds before the tweet, and one second after a headline appeared on the Dow Jones Newswire." I don't understand the mystery here. It would be trivial to write a bot that could interpret a headline and make a trade on it in under a second, and that's without any special high-speed links. With API documentation for a brokerage house, I could write such a bot in probably half a day. Given the as…

Well, if everybody started doing it, won't the returns fall to zero? Sort of like if arbitrage opportunities are present (in this case its a technological one), this would go away. I bet since writing this article the opportunities has pretty much slipped. Now anyone living close to the exchanges will do this.

What if many people are not doing it because they think that many people are already doing it, and actually as a result of this, very few people are doing it?

Re: A web-reading bot made millions on the options market

#62

Post by yaleman »

runeks wrote: post #59

'It also feels pretty far from the theoretical purpose of options trading. Options are meant to provide insurance (a “hedge”) against potential losses in a stock position. Market makers like my friend create the environment in which to buy the insurance. This bot instead treats that market like a roulette wheel—except it knows exactly where the ball will land. “If someone else has what we call the ‘future script,’ ”…

It's only "robbing" when you're losing money instead of making money - which a lot of these crazy made up systems (options, etc) can't help but do most of the time. They're just complaining about evolution :)

Re: A web-reading bot made millions on the options market

#63

Post by nickff »

MichaelCrawford wrote: post #51
lordnacho wrote: post #48

Earlier quoted context omitted.

What was unethical about it? Quantitative investment work can mean a lot of things.

I was enabling an already wealthy man to become even richer, at the expense of unsophisticated investors.

Why would unsophisticated investors lose money? Speaking as an unsophisticated investor, I can confidently say that these rapid trading schemes have not affected my portfolio at all, except perhaps by adding liquidity when I tried to buy or sell equities. Just because this "flash-trading" scheme exists doesn't mean that everyone could or should use it; most unsophisticated investors know enough to stay out of it.

Re: A web-reading bot made millions on the options market

#64

Post by 82xx »

downandout wrote: post #32
xyzzy123 wrote: post #13

Earlier quoted context omitted.

Probably because you've never bet a lot of money on natural language processing before. Backtest and check alpha. cpercival's idea is pretty good though. I'm reminded of: https://xkcd.com/793/

The headline of that news was "Intel in Talks to Buy Altera". You are acting like it would be difficult to write software that would be able to figure out what that means. It's not. These headlines also seem to follow a very specific pattern [1]. So if WSJ has a headline that X is in talks to buy Y, that's pretty much that. Also you could eliminate most of your risk by placing a limit order based upon the last trade…

It would be easy to write software to parse that particular phrasing of that particular relationship ("Company X in Talks to Buy Company Y"), but to catch any arbitrary relationship between two entities in a given domain? That's no longer an easy problem. Not to mention that you'll need to represent that world knowledge coherently in ontologies / knowledge bases and write complex logic around it to make the data actionable.

Re: A web-reading bot made millions on the options market

#65

Post by golergka »

onewaystreet wrote: post #37
Turbo_hedgehog wrote: post #9

My bet is insider trading with someone writing a simple bot to make the trade once they see the trigger words made public.

It's no longer insider trading if the information has been made public. There would be no advantage to doing this either. There are thousands of firms and individuals running keyword based trading bots. You would be competing with all of them.

It is insider trading, if you use the insider information to write a very simple tweet parsing rule instead of having to write a complicated AI algorithm to parse this information before any prior knowledge.

Also, if I understood the article correctly, this trade involved to transactions: first, purchasing the options, and then, purchasing actual stock using those options. And (once again, correct me if I'm wrong), the options themselves were purchased before the information was made public, so this transaction may have been the direct result of insider information.

Re: A web-reading bot made millions on the options market

#66

Post by golergka »

Honest question.

Let's say that I want to experiment with some language processing and bet some dollars on parsing news like these. I have decent general programming skills, and have experimented with parsing stuff, but never touched trading.

Where do I even start?

Re: A web-reading bot made millions on the options market

#67

Post by MichaelCrawford »

nickff wrote: post #63
MichaelCrawford wrote: post #51

Earlier quoted context omitted.

I was enabling an already wealthy man to become even richer, at the expense of unsophisticated investors.

Why would unsophisticated investors lose money? Speaking as an unsophisticated investor, I can confidently say that these rapid trading schemes have not affected my portfolio at all, except perhaps by adding liquidity when I tried to buy or sell equities. Just because this "flash-trading" scheme exists doesn't mean that everyone could or should use it; most unsophisticated investors know enough to stay out of it.

The hedge fund only had one person's money in it. When he made money on a trade, that money had to come from somewhere.

Re: A web-reading bot made millions on the options market

#68

Post by zfghjk »

patio11 wrote: post #7

This touches on several of the Big Issues with being a market maker, shopping large orders, and HFT. Sadly, it's exactly as detailed as you'd expect a Slate article to be. It doesn't matter that it is a bot. The controller of the bot happens to be, in this instance, directional order flow : unlike the overwhelming majority of market volume, he actually has an edge . The options market maker is, unusually for market m…

I like the market making vignette, but in reality the market maker would certainly be hedging his delta as the orders came in, and for a very one-sided options trade like this he would probably be putting on a vega/gamma hedge as well.

For those who don't speak the lingo of options, this means that he'd be hedging his exposure to directional stock price moves (by buying stock as he sold the calls) and also hedging his exposure to the size of stock price moves (volatility) by buying some cheap volatility, say at a different strike or for a different expiry, to cover the expensive volatility that he's just sold.

But like I said, I like the vignette :)

Re: A web-reading bot made millions on the options market

#69

Post by maffydub »

xyzzy123 wrote: post #19
ddeck wrote: post #16

Earlier quoted context omitted.

Agreed. I don't really understand the surprise in article and wince at the "My friend reckons....." style. This is indeed occurring on a daily basis. A number of funds trade automatically based on fully automated analysis of the news wire and other sources. I believe most use in house analytics but there are 3rd party solutions: http://www.ravenpack.com/ I think people outside the industry don't appreciate the depth…

Oh yup, how come they're an analytics provider and not a fund? ;-p

I don't know anything about the provider in question, but funds might integrate multiple data sources (e.g. the described tweet analysis, last financial results, competing companies) - in other words, a lot more than what an analytics provider needs to do.

Maybe the analytics provider wants to focus on doing one thing and (hopefully) doing it well?

Re: A web-reading bot made millions on the options market

#70

Post by nickff »

MichaelCrawford wrote: post #67
nickff wrote: post #63

Earlier quoted context omitted.

Why would unsophisticated investors lose money? Speaking as an unsophisticated investor, I can confidently say that these rapid trading schemes have not affected my portfolio at all, except perhaps by adding liquidity when I tried to buy or sell equities. Just because this "flash-trading" scheme exists doesn't mean that everyone could or should use it; most unsophisticated investors know enough to stay out of it.

The hedge fund only had one person's money in it. When he made money on a trade, that money had to come from somewhere.

One can make money in the stock market without any trading at all; Merton Miller often emphasized that prices could adjust to new information without any trades taking place, if asset holders and potential buyers agreed on the impact of the new information on the asset value. Trades only take place when asset buyers and sellers have differing valuations for the same asset, whether it be for reasons of uncertainty, asymmetric information, or subjective values. You are also assuming that stock trading is like gambling, where the amount of money at the table is not variable over time (except for players coming and going); this is the zero-sum fallacy.
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