Geeks trump alpha males on Wall Street • Hacker News Board

Re: Geeks trump alpha males on Wall Street

#11

Post by nsoonhui » Thu, Dec 03, 2009, 4:16 AM UTC

jakarta wrote: post #10

Interestingly enough, Goldman Sachs is reporting that quant strategies may be becoming overcrowded, yielding negligible returns: http://www.reuters.com/article/rbssFinancialServicesAndRealE... I do believe there is some truth to this, a couple years ago during the "quant bloodbath" we saw a major down swing across almost every quant fund, because they were all employing generally the same strategy. At the same time,…

>Traditional value strategies will probably continue to be just as good and beat the market over the long term.

I don't think so; the most you can do on average is to match the market return unless you have insider information which is clearly illegal. This is because so many has tried the traditional value strategies that the law of large numbers set in.

Re: Geeks trump alpha males on Wall Street

#12

Post by pwnstigator » Thu, Dec 03, 2009, 4:18 AM UTC

jsm386 wrote: post #9

A bit off topic, but I find what the 'geeks' are producing to be the most interesting part of this article. When the next financial mega-crisis erupts (note - financial , not economic - that part comes next), perhaps this will be the reason: John Malitzis, vice president of market surveillance at the New York Stock Exchange's oversight body, told a conference in September that he has seen examples, both in U.S. marke…

I don't think there's more risk of "algos gone wild" than there is of manipulation and malevolence, as there has been forever.

Software bugs combined with human error are a source of danger though, such as in the infamous Japanese trading disaster (someone transposed the size-- 1-- and price-- ~600000 yen-- on a short-sell of an IPO, effectively giving away more shares than existed). The fail was not so much that the clerk put in a bad order, but that the exchange software wouldn't let the firm cancel it, leaving them to eat $225m in losses.

Re: Geeks trump alpha males on Wall Street

#13

Post by pwnstigator » Thu, Dec 03, 2009, 4:22 AM UTC

redcap wrote: post #2

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society? Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market? I'm not being snarky, would just like to know. Another slightly different topic: the trend during the Bush boom years is that the so-called 's…

The trader self-justification spiel is that traders provide liquidity; they tighten the spread, so you get a better price if you trade on the market.

However, the actual effect of arbitrage is to make things that are already reasonably liquid much moreso, which means that the benefit to buy-and-hold investors is low. Illiquid stocks are avoided by arbitrageurs (too risky). So the net benefit to society is nonzero, but minuscule. Plus, rich people are the biggest beneficiaries, which makes it even less appealing.

Trading isn't something you do to make the world a better place. On the other hand, it's one of the few high-paying finance jobs that doesn't make the world a worse place.

Re: Geeks trump alpha males on Wall Street

#14

Post by jakarta » Thu, Dec 03, 2009, 4:27 AM UTC

nsoonhui wrote: post #11

jakarta wrote: post #10

Interestingly enough, Goldman Sachs is reporting that quant strategies may be becoming overcrowded, yielding negligible returns: http://www.reuters.com/article/rbssFinancialServicesAndRealE... I do believe there is some truth to this, a couple years ago during the "quant bloodbath" we saw a major down swing across almost every quant fund, because they were all employing generally the same strategy. At the same time,…

>Traditional value strategies will probably continue to be just as good and beat the market over the long term. I don't think so; the most you can do on average is to match the market return unless you have insider information which is clearly illegal. This is because so many has tried the traditional value strategies that the law of large numbers set in.

It's pretty well documented that value investing in general will beat the market over the long term.

See: The Super Investors of Graham and Doddsville http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-an...

How the Small Investor Beats the Market by Greenblatt, Pzena, Newberg (Journal of Portfolio Management, 1981)

More recently, James Montier has released research at Societe Generale reflecting the fact that Graham and Dodd-style investments also beat market averages.

The problem that arises nsoonhui is that most investors lack the emotional discipline which is necessary to invest in these types of companies, because of the psychological biases (people have a hard time embracing contrarianism, they usually cannot stomach the occasional stretches where value under performs the rest of the market, i.e.: dot com bubble). This is precisely why the law of large numbers has NOT set in. Many investors will pick up value investing and then drop it once it under performs. So, inefficiencies in markets continue to persist.

Re: Geeks trump alpha males on Wall Street

#15

Post by chrischen » Thu, Dec 03, 2009, 4:32 AM UTC

pmorici wrote: post #5

redcap wrote: post #2

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society? Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market? I'm not being snarky, would just like to know. Another slightly different topic: the trend during the Bush boom years is that the so-called 's…

I think that's a little high horse. Most "internet" companies don't bring us any new blow out technology or societal benefit. Twitter for example is basically just a way for narcissist to talk about themselves. Not that there is anything wrong with that but to claim an Internet company is a better way to contribute to the greater good than is stock trading is just silly.

He said "probably." And I for one agree that starting an internet company is "probably" better than what these people are doing.

Re: Geeks trump alpha males on Wall Street

#16

Post by dasil003 » Thu, Dec 03, 2009, 4:46 AM UTC

leelin wrote: post #7

redcap wrote: post #2

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society? Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market? I'm not being snarky, would just like to know. Another slightly different topic: the trend during the Bush boom years is that the so-called 's…

I won't defend all of finance / trading, but maybe this analogy will satisfy you. Think of sports tickets. There is massive inefficiency in the primary market, meaning tickets you buy directly from the arena or on TicketMaster. One inefficiency comes from all the season ticket holders who skip the majority of the games and only go to the ones they actually want to see. We can fix this inefficiency on a secondary mark…

I don't think they're evil unless the taxpayers happen to be bankrolling their downside.

Re: Geeks trump alpha males on Wall Street

#17

Post by cameldrv » Thu, Dec 03, 2009, 4:59 AM UTC

pwnstigator wrote: post #13

redcap wrote: post #2

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society? Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market? I'm not being snarky, would just like to know. Another slightly different topic: the trend during the Bush boom years is that the so-called 's…

The trader self-justification spiel is that traders provide liquidity; they tighten the spread, so you get a better price if you trade on the market. However, the actual effect of arbitrage is to make things that are already reasonably liquid much moreso, which means that the benefit to buy-and-hold investors is low. Illiquid stocks are avoided by arbitrageurs (too risky). So the net benefit to society is nonzero, bu…

That depends. Their profit comes from somewhere, and it's everyone else's trades. The average investor is giving the HF traders a few pennies on each trade.

Re: Geeks trump alpha males on Wall Street

#18

Post by nostrademons » Thu, Dec 03, 2009, 5:00 AM UTC

jakarta wrote: post #14

nsoonhui wrote: post #11

Earlier quoted context omitted.

>Traditional value strategies will probably continue to be just as good and beat the market over the long term. I don't think so; the most you can do on average is to match the market return unless you have insider information which is clearly illegal. This is because so many has tried the traditional value strategies that the law of large numbers set in.

It's pretty well documented that value investing in general will beat the market over the long term. See: The Super Investors of Graham and Doddsville http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-an... How the Small Investor Beats the Market by Greenblatt, Pzena, Newberg (Journal of Portfolio Management, 1981) More recently, James Montier has released research at Societe Generale reflecting the fact that…

Take a look at the publication dates of those articles. 1981 and 1984. Right after the "U.S. is going to hell and stocks will never be a good investment" years of the 1970s, and right before the "If I put my money in a good mutual fund and leave it there, I'm guaranteed to make money!" years of the late 1980s and 1990s.

Any investment strategy becomes less useful when large numbers of people pile into it. They bid up the assets that the strategy dictates they buy, which raises prices and lowers returns. I ran some cross-market analyses of stocks in 2006 when I was working at a financial software startup. I found that basically everything was overvalued: there were no values to be had in the stock market at that time.

A true contrarian right now would hold cash, in the form of physical U.S. dollars. What's the one asset class that everyone is certain will decline? Cash. However, there're fairly good reasons why everyone thinks this, so even now the picture's pretty muddled.

Re: Geeks trump alpha males on Wall Street

#19

Post by charlesju » Thu, Dec 03, 2009, 5:02 AM UTC

jakarta wrote: post #14

nsoonhui wrote: post #11

Earlier quoted context omitted.

>Traditional value strategies will probably continue to be just as good and beat the market over the long term. I don't think so; the most you can do on average is to match the market return unless you have insider information which is clearly illegal. This is because so many has tried the traditional value strategies that the law of large numbers set in.

It's pretty well documented that value investing in general will beat the market over the long term. See: The Super Investors of Graham and Doddsville http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-an... How the Small Investor Beats the Market by Greenblatt, Pzena, Newberg (Journal of Portfolio Management, 1981) More recently, James Montier has released research at Societe Generale reflecting the fact that…

The average mutual fund will not beat the market.

Re: Geeks trump alpha males on Wall Street

#20

Post by Tangurena » Thu, Dec 03, 2009, 5:15 AM UTC

leelin wrote: post #7

redcap wrote: post #2

Sure they're making money particularly from being smart, but would someone be able to explain to me how making money from money contributes to something worthwhile to society? Is it just that they're being that much quicker in smoothing out prices of stuff on the stock market? I'm not being snarky, would just like to know. Another slightly different topic: the trend during the Bush boom years is that the so-called 's…

I won't defend all of finance / trading, but maybe this analogy will satisfy you. Think of sports tickets. There is massive inefficiency in the primary market, meaning tickets you buy directly from the arena or on TicketMaster. One inefficiency comes from all the season ticket holders who skip the majority of the games and only go to the ones they actually want to see. We can fix this inefficiency on a secondary mark…

If this were the only way that scalpers operated, then I would agree that they'd be a social good. Instead, there are a number of scalpers who wait in line, knowing full well that they're not going to the game/show and they'll sell the tickets to someone who wasn't fast enough to get in line. This sort of thing happened in Dubai, where some folks would buy shares in some real estate venture, and then flip it to someone further back in line.