Quote from monty21:
An algo is as smart as the person that wrote it. Yes, they are required to do arbitrage or pair trading, but this doesn't ensure profitability.
Look up how quant hedge funds have performed in 2009 thus far. Renaissance is the big one and their main fund has been devastated.
we don't know how simmons is trying to play this game because he is very secretive . .. i've heard him say in his testimony to congress on hedge funds that they're basically trying to be market neutral . . .
you're right, maybe they're not any better in the long run, than anyone else, who is not automated . . .
BUT one thing to take away from the article, i think, is that, like in war if there's information asymmetry - you know more about the enemy than he does about you - you have an advantages.
that's why i'm disturbed by these automated algo maneuvers to gain access to the
order book, to get a snapshot of where things stand, intraday
i mean retail day traders don't have than kind of information. so they know less compared to algos. i don't understand how this order book stuff works, but it must be pretty important, if people get hysterical trying to get access to that information.
i've heard somewhere that about 30% of daily trading volume in the es is automated blackbox. so it's not that you're playing only against the machine. it's just that machines have access to order book information, and their time horizon is milliseconds.
another thing to take away from the article, i think, is visualizations. they are endorsed by a very sophisticated mathematicians, who knows what he's doing. i personally always thought they were a toy, but now i'm thinking they give you some edge, in how to interpret price data. as i said earlier, i think it has some application in pairs trading (finviz maps, markettrac, both FREE), probably.
because you can literally visually see by eyeballing market if stock go away very far, and rest of market not go away, and then have something to think about for a potential pairs trade. of course it should be used in conjunction with various statistical.
but if, on a particular day, a dow jones component stock gains 10%, and the dow gains 1%, this may be a good initial filter to look at the trade: short that stock, long DIA (the dow etf).
the dow has a relatively low volatility (~25%), compared to other things, including its component stocks. so if you go short a high volatility stock, that has just made a 1.5-2.0 daily standard deviation spike, your chances should be, probably, better than average. provided you have looked at the correlations, cointegration stuff, and ratio mean etc.
so i am think this and it is good articles
