A Profitable and Legal Way to Game the Stock Market • Hacker News Board

Re: A Profitable and Legal Way to Game the Stock Market

#31

Post by vasilipupkin » Tue, Jul 07, 2015, 3:01 PM UTC

jerf wrote: post #15

chollida1 wrote: post #3

I expected to see (1995) tagged to the end of this article. I personally know 3 people who run their own money ( Having said that, this isn't exactly easy. You need to know 1) if a stock is going into the index 2) when its going into the index 3) how much the index will buy 4) how much the index buy will affect the price of the stock the first 3 are trivial for some index funds, though most have rules that allow them…

It's a nice, clear example of the anti-inductivity of the market: http://lesswrong.com/lw/yv/markets_are_antiinductive/ The very act of noticing that something is a good strategy, and beginning to trade on it, will over time drain away the utility of the strategy, until it is useless or worse than useless. Tracking indexes is "big", and has some brute simplicity about it, but eventually the market will eliminate that…

You would think so, but this trading strategy is probably about 20 years old. So, "eventually" could take a very long time

Re: A Profitable and Legal Way to Game the Stock Market

#32

Post by tosseraccount » Tue, Jul 07, 2015, 3:05 PM UTC

vasilipupkin wrote: post #31

jerf wrote: post #15

Earlier quoted context omitted.

It's a nice, clear example of the anti-inductivity of the market: http://lesswrong.com/lw/yv/markets_are_antiinductive/ The very act of noticing that something is a good strategy, and beginning to trade on it, will over time drain away the utility of the strategy, until it is useless or worse than useless. Tracking indexes is "big", and has some brute simplicity about it, but eventually the market will eliminate that…

You would think so, but this trading strategy is probably about 20 years old. So, "eventually" could take a very long time

Index Funds have been around for 40 years.

Bogle started the First Index Investment Trust on December 31, 1975. Bogle founded The Vanguard Group in 1974; it is now the largest mutual fund company in the United States as of 2009.

[ source : https://en.wikipedia.org/wiki/Index_fund#Origins ]

Re: A Profitable and Legal Way to Game the Stock Market

#33

Post by joosters » Tue, Jul 07, 2015, 3:16 PM UTC

dsjoerg wrote: post #30

joosters wrote: post #25

So, the writer of this article failed to give any proof other than citing the case of one specific stock (American Airlines). Even then, it failed to give any useful comparison (sure, the stock gained 11% in 4 days, but how did the rest of the market do?) It would take a bit of effort to grab the data for all stocks entering the S&P for the last (say) 5 years, and then compare how these stocks did between the announc…

The source for the $4.3B is given later in the article: "Over a course of a year, front-running -- of stocks going into and coming out of indexes -- costs investors in S&P 500 tracker funds at least 0.2 percentage points, according to research published last year by Winton Capital Management Ltd., a quantitative hedge fund that analyzed data from 1990 to 2011. That’s equal to $4.3 billion in lost income in 2014." Tha…

Oops, I completely missed that, I have no idea how :(

That paper is good, it answers all my questions that the original article left unanswered. My dumb mistake for not reading it properly.

Re: A Profitable and Legal Way to Game the Stock Market

#34

Post by aleyan » Tue, Jul 07, 2015, 3:19 PM UTC

This is well known known effect. S&P rebalances it index through out the year and there are always people trying to predict adds and drops and make some money.

The real diseconomy happens in the Russel indexes. They are rebalanced annually with the methodology for adds/drops announced ahead of time. Various funds that are pegged to Russel are forced to rebalance at this time buying and selling huge baskets in one day. To avoid large stock market movements and capitalize on them traders try to predict the changes to the index and prebuy the rebalance trade. Their actions through the market leading up to the rebalance and agreements to sell the rebalance trade to the Russel pegged funds reduce price swings on the day of the rebalance.

Trading desks that engage in the Russel trade spend the entire year preparing for it, modeling the methodology, acquiring clients for the rebalance trade, and prebuying the trade. Their profit comes from the difference between the closing price (mostly governed by Russel adds/drops) on the day of the trade and the price that they prebought at. Essentially their ability to accurately predict the rebalance add/drops and acquire clients to sell the rebalance trade to. There are desks that make $10s of millions this way on that day. There may be desks that make $100 of millions this way.

PS. I may not have stated it clearly, but funds that are pegged to Russel indexes make agreements with external traders to handle their rebalance trade for them at a fixed bps to the closing price. Traders are able to make money on this because they can take on risk and prebuy the trade; something that the Russel indexed funds can not do.

Re: A Profitable and Legal Way to Game the Stock Market

#35

Post by [deleted] » Tue, Jul 07, 2015, 3:38 PM UTC

tosseraccount wrote: post #32

vasilipupkin wrote: post #31

Earlier quoted context omitted.

You would think so, but this trading strategy is probably about 20 years old. So, "eventually" could take a very long time

Index Funds have been around for 40 years. Bogle started the First Index Investment Trust on December 31, 1975. Bogle founded The Vanguard Group in 1974; it is now the largest mutual fund company in the United States as of 2009. [ source : https://en.wikipedia.org/wiki/Index_fund#Origins ]

[deleted]

Re: A Profitable and Legal Way to Game the Stock Market

#36

Post by zrail » Tue, Jul 07, 2015, 3:52 PM UTC

briHass wrote: post #28

Even in the worst case -- Vanguard doesn't lose anywhere near this premium -- we're talking 20-30 bps, or .25%. It's one of those scenarios where one has to choose what is less bad. Sure, an active manager could play with the index a bit more to help avoid this, but you'd be paying a lot more than .25% for his effort. It might, however, be a good enough reason to side-step this issue and use Total Stock Market (VTSMX…

VTSAX (the Admiral version of VTSMX) is the gold standard in the early retirement community, as far as I can tell. Some of the lowest costs an individual can get, with widest US equity exposure possible.

Re: A Profitable and Legal Way to Game the Stock Market

#37

Post by gaadd33 » Tue, Jul 07, 2015, 3:58 PM UTC

gesman wrote: post #13

Mom-and-pop investors cannot take advantage of this (and many other opportunities) because they have to feed a long chain of middlemen through prohibitively high costs of trading as well as always being on the worst side of bid-ask spreads. And then of course the value and the cost of high quality information delivered to you in a timely manner is a bit different than staring on CNBC screens.

Why can't mom-and-pop investors open an account at a place like Interactive Brokers and trade options on these events? The cost is pretty small per trade (maybe $1-2 for most stock and option trades) and the bid/ask spread isn't that bad if you are talking about an 11% move in a very liquid stock.

Re: A Profitable and Legal Way to Game the Stock Market

#38

Post by joshu » Tue, Jul 07, 2015, 4:12 PM UTC

aleyan wrote: post #34

This is well known known effect. S&P rebalances it index through out the year and there are always people trying to predict adds and drops and make some money. The real diseconomy happens in the Russel indexes. They are rebalanced annually with the methodology for adds/drops announced ahead of time. Various funds that are pegged to Russel are forced to rebalance at this time buying and selling huge baskets in one day…

Russell

Re: A Profitable and Legal Way to Game the Stock Market

#39

Post by ForHackernews » Tue, Jul 07, 2015, 4:13 PM UTC

jerf wrote: post #15

chollida1 wrote: post #3

I expected to see (1995) tagged to the end of this article. I personally know 3 people who run their own money ( Having said that, this isn't exactly easy. You need to know 1) if a stock is going into the index 2) when its going into the index 3) how much the index will buy 4) how much the index buy will affect the price of the stock the first 3 are trivial for some index funds, though most have rules that allow them…

It's a nice, clear example of the anti-inductivity of the market: http://lesswrong.com/lw/yv/markets_are_antiinductive/ The very act of noticing that something is a good strategy, and beginning to trade on it, will over time drain away the utility of the strategy, until it is useless or worse than useless. Tracking indexes is "big", and has some brute simplicity about it, but eventually the market will eliminate that…

> But that won't stop your metaphorical Dad from swearing up and down you need to buy index funds....

The argument isn't that passive index investing is some kind of perfectly optimal investing strategy, it's that it's the most practical strategy for 98% of normal small, individual investors. If you don't have millions of dollars to invest, and you have a real job that prevents you from spending all your time researching investment opportunities, then you are probably better off just buying the market, instead of flailing around paying fees and trade commissions trying to beat the market.

If you believe in the weak form of the Efficient Market Hypothesis, and you are not a professional investor, then you should probably be in index funds.

Re: A Profitable and Legal Way to Game the Stock Market

#40

Post by austin_y » Tue, Jul 07, 2015, 4:15 PM UTC

neals wrote: post #18

josh_fyi wrote: post #2

Is there a "Index Frontrunning" fund which I can invest in? (The fund would automatically frontrun all index changes, and so keep management fees to a minimum.)

I'd be more interested in a "Index Frontrunning Frontrunning" index, actually.

No no no, you're behind the times. Index triple frontrunning is what's hot.