Article: End of Wall Street (as they knew it)

[piezoe]

Quote from Eight:

interesting video. I'd say that the downgrade changed lots of things, probably the correlations of instruments. It's very easy to find correlated instruments, some quality time with Excel can do it. Knowing why they are correlated takes a bit more work. Figuring out things when they stop being correlated is yet another problem. LTCM went down the tubes because their correlations came unglued. Maybe some HFT machines were cruising along, breaking even or making a little but waiting for things to decorrelate so they could slaughter the other guys...

Actually LTCM would have been OK had they not been way over leveraged. They were expecting the yield curve to return to its normal relationship between long and short term interest rates, as it eventually did, but they couldn't hang on long enough because they were over leveraged. They apparently didn't know the market can stay irrational longer than they could stay solvent.

 

[489]

Quote from piezoe:

Actually LTCM would have been OK... but they couldn't hang on long enough because they were over leveraged.

Yes, yes. Infinite time and money allow any trading strategy to be successful eventually.

 

[Eight]

That LTCM thingy was classical. They had a strategy that stopped working, they weren't paying attention, they had effectively doubled their leverage when they rebated.. Probably something similar happened to some HFT outfits when the downgrade occurred, no?