I once hired a guy for a fund I was partner in. He was a proper old school equity investor. He'd fly around the world to different countries and visit businesses. He'd think about each country's prospects, each industry, and each company. He'd meet withe the CEOs and look them in the eye, and ask them whether his company was gonna make money. I shit you not. He's come back to the office and share his thoughts on why one country was good, why this industry, why this business. It was a different story each time.
Another guy I worked more closely with on a fixed income desk. We'd think about different countries, their bonds, their IR rates, swaptions, etc. There's be some global stories inevitably, but a lot of local ones too and we'd chat about what to do in our trading book.
Then there was quantitative FX trading, another one of my projects. We'd look at things that affect currencies, patterns in the prices, anything you might imagine arrives as a live feed. And we built the infrastructure to trade the regularities that we found. Quite a lot of research and execution infrastructure. But at the end of the day, the computers are doing what? Looking at a variety of information and judging what will happen. Just like my two colleagues.
Fast forward to the last few years. Pretty much every conversation I have with anyone in the investment business talks about one thing: QE and zero rates. There's only one thing that matters for everything now. When interest rates are really low, what happens? Everything is worth buying. Buy houses, buy stocks. Buy them in the developed countries, buy them in EM. Sell options.
What used to be a conversation containing rates as an ingredient has become a conversation only containing rates.
People, and computers which learn what worked for people in the recent past, have gone from a rich market conversation about many things to one about just QE.
It will be interesting to see what happens in the near future. I can't think of a lot of bubbles that were deflated in a controlled manner. And I also expect more differentiation in equity debates. Company does this, industry does that.
> People, and computers which learn what worked for people in the recent past, have gone from a rich market conversation about many things to one about just QE.
So are you saying that in the past N years since QE and 0 rates, the parameters that define which assets/resources to buy/trade have gone from wide-ranging (e.g., "We'd think about different countries, their bonds, their IR rates, swaptions, etc"), to singular (e.g., "...has become a conversation only containing rates.") ?
How does this tie back into the "herd-like behavior" comment? Are you saying that every algo trader is only focusing on rates because that (more so than anything else), is determining where to allocate capital?
>the computers are doing what? Looking at a variety of information and judging what will happen
Probably but not necessarily. That code which is explicitly understood and written explicitly to weigh information to choose outcomes certainly is.
But were complex neural networks are extensively involved, they become a black box. In markets where gains could be maximized by cooperation, those systems that find ways to cooperate with other systems outside their organization will eventually be chosen and become the dominant. Chosen purely from their ability to get better results.
Even if completely isolated, signaling is not impossible. A straight forward technique would be to use transactions to communicate in the same way bridge players do.
So potentially software could outperform humans for at least two reasons: better and faster analysis of data. But also doing things humans are unable.
In my experience as a quant dev for various traders , neural networks are almost never used for trading, or if they are they're very limited in their application.
But many traders will claim their use because they are obtuse and impressive sounding.
One PM once described it as "machine learning in the streets, linear regression in the sheets".
Yes, there is herdlike behaviour. But why?
Here's a little story about my investment career.
I once hired a guy for a fund I was partner in. He was a proper old school equity investor. He'd fly around the world to different countries and visit businesses. He'd think about each country's prospects, each industry, and each company. He'd meet withe the CEOs and look them in the eye, and ask them whether his company was gonna make money. I shit you not. He's come back to the office and share his thoughts on why one country was good, why this industry, why this business. It was a different story each time.
Another guy I worked more closely with on a fixed income desk. We'd think about different countries, their bonds, their IR rates, swaptions, etc. There's be some global stories inevitably, but a lot of local ones too and we'd chat about what to do in our trading book.
Then there was quantitative FX trading, another one of my projects. We'd look at things that affect currencies, patterns in the prices, anything you might imagine arrives as a live feed. And we built the infrastructure to trade the regularities that we found. Quite a lot of research and execution infrastructure. But at the end of the day, the computers are doing what? Looking at a variety of information and judging what will happen. Just like my two colleagues.
Fast forward to the last few years. Pretty much every conversation I have with anyone in the investment business talks about one thing: QE and zero rates. There's only one thing that matters for everything now. When interest rates are really low, what happens? Everything is worth buying. Buy houses, buy stocks. Buy them in the developed countries, buy them in EM. Sell options.
What used to be a conversation containing rates as an ingredient has become a conversation only containing rates.
People, and computers which learn what worked for people in the recent past, have gone from a rich market conversation about many things to one about just QE.
It will be interesting to see what happens in the near future. I can't think of a lot of bubbles that were deflated in a controlled manner. And I also expect more differentiation in equity debates. Company does this, industry does that.