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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

#31

Post by jackgavigan »

xyzzy123 wrote: post #2

Interestingly, they don't discuss the possibility that someone just has a radically better UI for acting on market gossip. "“It would be impossible for me to do. By the time you could read the news, process it, and press the ‘buy everything’ button, it would take too long." I'm picturing the context switch between reading a tweet or news article and some rocket ship of a program which gives you enormous power but tak…

What's probably happening is they have a "bot" that does the sentiment analysis, readies the trade, then pops a big message up in front of the trader:

New WSJ Headline: Intel in Talks to Buy Altera

ALTR Stock: Trading within 30-day range

{ALTR 30-day stock graph}

March 2015 Call Options available

..and a live-updating, clickable GUI displaying, in a linear manner (i.e. low risk, small bet at one end; high risk, large bet at the other), the call option market depth at each strike price, annotated with the implied volatility and the % delta to the current stock price.

The trader reads the info, decides how much he wants to bet, then clicks the appropriate spot on the GUI to execute the trade.

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

#32

Post by downandout »

xyzzy123 wrote: post #13
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…

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 prior to the news coming out. The market will either a) confirm that you are one of the first people to understand what has happened by filling your order at a price that doesn't reflect the news, locking in profits, or b) your limit order won't be filled because the price already is already above your limit, in which case you have assumed no risk.

[1] https://www.google.com/#q=site:wsj.com+%22in+talks+to+buy%22

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

#33

Post by catshirt »

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…

let us know how it works out, then. :)

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

#34

Post by nostrademons »

hueving wrote: post #27
cperciva wrote: post #4

Earlier quoted context omitted.

This feels a lot more plausible to me than the idea that someone made sentiment analysis not suck. If you can respond faster than everybody else, you don't need sentiment analysis. Just bet on volatility increasing (aka. buy options on both sides) whenever a news story appears about a company.

There are many times a news story appears about a company that have absolutely no impact on the stock. In fact, the anticipation of a news story that turns out to be nothing note worthy will lead to a drop in volatility and make your trade a losing one. See every time a company announces earnings in line with expectations for example. "x company made 1 billion in profit" could fail to move the stock at all. Betting t…

You could do some very simple keyword analysis to filter that out, though. When words like "the deal", "in talks to buy", "to acquire", etc. appear, it's a pretty good bet that it has something to do with an acquisition, and also a good bet that volatility will spike.

A lot of people here are saying "I wouldn't bet $2.4M on that false positive rate", but that's not how traders think. You only have to be right more often than you're wrong (or alternatively, very right to offset being wrong a lot more often) - "betting" is exactly what they do for a living. It's pretty much the perfect application for statistical machine learning - users never see how bad your algorithms are, and so it doesn't matter if the quality is worse than a human as long as the speed is better.

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

#35

Post by nostrademons »

jackgavigan wrote: post #31
xyzzy123 wrote: post #2

Interestingly, they don't discuss the possibility that someone just has a radically better UI for acting on market gossip. "“It would be impossible for me to do. By the time you could read the news, process it, and press the ‘buy everything’ button, it would take too long." I'm picturing the context switch between reading a tweet or news article and some rocket ship of a program which gives you enormous power but tak…

What's probably happening is they have a "bot" that does the sentiment analysis, readies the trade, then pops a big message up in front of the trader: New WSJ Headline: Intel in Talks to Buy Altera ALTR Stock: Trading within 30-day range {ALTR 30-day stock graph} March 2015 Call Options available ..and a live-updating, clickable GUI displaying, in a linear manner (i.e. low risk, small bet at one end; high risk, large…

There's no way that there's a human in the loop. You're talking one second from the newswire hitting the Internet to a trade being executed on the exchange.

More likely, the human prepares a list of scenarios of the form of "If a news story with these keywords appears, it will affect the valuation of this company in this way, perhaps plugging these numbers from the article into some model." News story hits the wire, the program reads it and applies some simple text mining, it compares the current market prices with the expected valuation, and it sends an order to the exchange to execute the trade.

Way back in 2006, I worked at a financial software startup where one of our products (the only one that made money, actually) did exactly this. The company is defunct now - it had a bit too little focus for a small shop of a dozen or so people, and its other products weren't all that succesful - but that was one of the things that actually worked.

If you're trading manually on time-sensitive information these days, you are an idiot. Back in 2006 it was something like 80% of trades on the market are automated bots; the only people who still put a human in the loop are the rubes.

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

#36

Post by [deleted] »

catshirt wrote: post #33
downandout wrote: post #32

Earlier quoted context omitted.

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…

let us know how it works out, then. :)

[deleted]

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

#37

Post by onewaystreet »

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.

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

#38

Post by rustyconover »

patio11 wrote: post #14
Tsggdjbs wrote: post #11

Earlier quoted context omitted.

If the type of trading discussed in the article becomes more common, would market makers stop making markets for these deep out of the money options? Presumably this would be bad for those attempting to use the options as a hedge.

They aren't allowed to stop making markets, at least in the options market. (This is not true of market makers generally. You or I could, if we had a lot of money, start making markets in any stock we desired to, just by getting a brokerage account and sending the right orders to the exchange. A market maker is a participant like any other and may not be a formal role.) What would probably happen is tweaking their ri…

They could make the spread wider after the first 500 contracts go off in a certain interval. Even the in the S&P outcry pit in Chicago sometimes the bid/ask spread goes wide or even no bid when things move too far or too fast for comfort. Next time a jobs number comes out or other financial data point look at the spread right before the number is released. These marker makers are survivors, if they're nervous about inventory risk they shrink size and you get thinner markets (bid/ask sizes) or wider spreads. Of course, if the options market shows something very out of sync with the underlying that is a signal that something is up or there is a market force that hasn't yet caused the underlying to move. Because an American option can be exercised anytime before expiration both options and the underlying stay pretty closely aligned with each other using the theoretical pricing model of each market maker.

I'm sure this trader has programmers working on this problem and putting in some type of limiting such that he doesn't sell off 3000 contracts in one go for a very cheap option close to expiration. 3000 contracts is nothing in SPY options but for a single name stock (not an ETF) it can be considered a sizable trade compared to the open interest.

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

#39

Post by robzyb »

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 might not be insider trading in a legal sense, but in a moral sense it kinda is.

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

#40

Post by needhelpplz »

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.

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