A web-reading bot made millions on the options market • Hacker News Board

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

#51

Post by MichaelCrawford » Sun, Apr 26, 2015, 7:14 AM UTC

lordnacho wrote: post #48

MichaelCrawford wrote: post #47

I once wrote a special-purpose database kernel - not SQL, the database engine itself - for a Bahamian hedge fund. It is because of my experience with that hedge fund that I won't take quantitative investment work anymore. I came to regard it as unethical. I would not be in any way surprised if it were my former clients that pulled this off. There were some smart people there.

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.

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

#52

Post by hueving » Sun, Apr 26, 2015, 7:17 AM UTC

nostrademons wrote: post #34

hueving wrote: post #27

Earlier quoted context omitted.

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 of…

"the deal"... Is still being negotiated Company x has been looking "to acquire" a player in field y for some time and hasn't found any candidates yet.

Keyword analysis by itself is almost completely useless.

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

#53

Post by x0054 » Sun, Apr 26, 2015, 7:22 AM UTC

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.

Well, it's still insider trading if these trades were not disclosed by the people who had inside knowledge and did make these trades.

Also, I wonder if it even has to be all that complicated as some kind of computer program monitors keywords. For all we know, it's just a guy sitting in his living room with with 2 Chrome windows opened, continuously refreshing the Dow Jones Newswire, with the trade all setup and ready to go in the other window.

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

#54

Post by powera » Sun, Apr 26, 2015, 7:23 AM UTC

It seems to me that the obvious conclusion here is that short-term options are underpriced due to the risk of people trading on news before the market-makers find out about it.

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

#55

Post by eruditely » Sun, Apr 26, 2015, 7:23 AM UTC

Seems like this is just integrating over random walks and interpreting as skill

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

#56

Post by hueving » Sun, Apr 26, 2015, 7:23 AM UTC

cperciva wrote: post #50

hueving wrote: post #49

Earlier quoted context omitted.

You missed the point I was making about news releases causing a drop in volatility when it confirms expectations.

As long as news releases usually increase volatility, you're fine.

Right, I would argue that for many companies it doesn't though. Look at how many news articles mention aapl every day and it has no measurable impact on the volatility. You also have to be careful not to get wiped out by macro volatility which tends to move around a lot more than individual stock vols.

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

#57

Post by x0054 » Sun, Apr 26, 2015, 7:25 AM UTC

def_illiterate wrote: post #42

x0054 wrote: post #41

Earlier quoted context omitted.

Automatic trading is an automatic occurrence in deed, and many bots are design to respond to news, tweets, and all kinds of things. That said, if you really think you can write a bot that can do really good in the market, why not just make one. For the sake of argument, just assume that you can confirm a trade in 1-5 seconds, make a bot that just does fake trades, give it $10k in fake currency, and let it play. Come…

I imagine there would be pretty good money in licensing an API. That's probably where the real money is--let the idiots make the trades, and you sell them the software.

Yep, it's like the someone else said in one of the other comments, don't dig for gold, sell buckets and the shovels to those who do. :)

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

#58

Post by lordnacho » Sun, Apr 26, 2015, 7:36 AM UTC

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…

When I worked in options market making, this was the whole reason the firm closed its single stock desk. If you don't have the flow, you are the guy who ends up holding the bag. With single stocks, it's especially hard because costs are high, you have extra operational risk, and you need a sales desk to get you the juicy structured products. My company was an old school ex-floor trading shop. They'd get run over by the banks over and over.

The other side of this can be pretty sweet. You get lots of flow from sales people, who are basically ripping off clients 3-7% on structures. If you have a variety of stocks you can also do some dispersion trading against the index.

One thing to note is you aren't betting on the options expiring worthless. It mostly pure vol spread, just dump everything in a book, hedge the deltas, win if it realises different than implied. Maybe back book some out-of-the-money options so you don't get killed on bleed (Taleb's book Dynamic Hedging explains this).

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

#59

Post by runeks » Sun, Apr 26, 2015, 7:43 AM UTC

'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,’ ” says my friend, referring to the crystal ball of the algorithm bot, “it really feels like they’re just robbing you."'

Robbing who? This is about as far from robbing as I can think of.

1. Someone offers to sell a bunch of options, because he thinks he'll make more money from this than if he didn't sell those options.

2. Someone buys these options because he think he'll make more money than if the didn't buy them.

3. Time reveals the guy who bought the options was right, and he makes money.

This is simple speculation, and has nothing to do with robbing.

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

#60

Post by nostrademons » Sun, Apr 26, 2015, 7:54 AM UTC

hueving wrote: post #52

nostrademons wrote: post #34

Earlier quoted context omitted.

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 of…

"the deal"... Is still being negotiated Company x has been looking "to acquire" a player in field y for some time and hasn't found any candidates yet. Keyword analysis by itself is almost completely useless.

Since when do newspapers write about the lack of something happening? That's sort of anti-news, isn't it? I could potentially see them writing something like that as a throwaway sentence in another article about the company, but the phrasing you've quoted is incredibly awkward and would probably never make it into a real news story.

Also, an algorithm doesn't have to be perfect, it merely has to be right more often than it's wrong. So what if you get a few false positives and a couple of your trades blow up? That's why you're managing a portfolio and not dumping your entire assets into a single trade.