Ernie Chan claims that statistical arbitrage is better than momentum like trend

Nice to read something on this site from someone apparently knowing what he is talking about. I just wonder have you ever come across evidence that firm like DE Shaw or Renaissance ever at all engaged in anything remotely definable as high frequency trading? I have not come across such evidence yet and thus refrain from including them in the hft camp.

cjbuckley4 said:
I'm close enough to fully agreeing with you not to justify a long reply haha. I still think most of my professors are genius, but maybe I lack context there, and I don't want to argue something subjective when we are generally in agreement that trading strategies found in academic papers are either generally terrible or that the good ones are wrapped in NDAs. Also agree that most of the good research is done by people at least heavily involved in industry. Again, I also don't think it's the job of academics to hunt for holy grail strategies either. They should be working on things that are more generally applicable like pricing models or portfolio level methods, so I think it's no surprise that good departments don't publish papers entitled "A Strategy for Trading..."

Pivoting a bit back to the lack of research on HFT, this is a topic I find really frustrating also. HFT is definitely not a lazy man's game, just storing and maintains the data necessary to Backtest strategies that would hardly count as HFT is becoming nearly a full time hobby for me. Also, it's no surprise that the best current HFT practitioners and the OGs of HFT aren't just average academics, they're undeniable geniuses. David E Shaw, Simons, Blair Hull, Malyshev. These are largely top physics and CS people; they wouldn't even have considered writing theses on trading! My point is that HFT is just not something academics seem to care about. It might be too hard, too dependent on specific firms infrastructure to generalize, too far from their areas of expertise; whatever be the case. I've found some decent research on the impact of latency and some informative stuff on order book dynamics, but that's it really. I'd love to share papers later after school here or on PM if you like.
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Sounds good. I'll PM you later today about the research. To my knowledge, and im far from an insider, both firms probably have evolved as the definition of HFT has changed, I would conjecture neither is heavily into automated market making, for example. D.E. Shaw said "it depends on your definition" and claim to not see themselves as an HFT firm, RenTec is notoriously mysterious, but I've seen anecdotal evidence just on the web of them being involved in HFT such as Simons research into high frequency financial signal processing. These are both large multi strategy groups, so you can bet they're going to at least be involved in automated execution though, which is a competitive market in itself. You can also kinda infer from their job postings that they want people with the *nix and C++ competency...that isn't necessarily proof of HFT, but that kind of developer costs money. Again, I have NO inside knowledge on this matter, just telling you what I've gathered...mostly aggregating a few Google results I've seen haha.
 
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Well, in order to have a successful stat arb strategy that reverts back to an established mean on a consistent basis, you are obviously dealing with arbitrage between highly correlated products. And therein lies the rub. It's easy to establish and test these various combinations - the hard part is that it becomes a pure ECN execution speed game in a very crowded arena. While I agree with Mr. Chan's premise on the face of it, in practice this is a super-competitive trading strategy when implemented on a high frequency basis. And my hunch is that the bigger names have access to order flows or a front-running arrangement that smaller firms and independents do not. IMHO, if you tried to do this without the infrastructure and arrangements ($$$) you would be getting hung on legs and getting picked off constantly. Just my opinion.
 
Trader13 said:
Bone, I think you meant to say highly cointegrated products. Correlation isn't a requirement for mean reversion.
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Yes, you are correct and thanks for catching that. You require cointegration to ensure that the divergence will be temporary and the pair will indeed revert back to the mean.
 
volpunter said:
More or less you are correct, at least in most every case. How many of your college professors do you remember to be highly motivated, passionate, and engaged with students? I remember one single one. All others in business school came across as some frustrated individuals who frantically tried to make it to as many conferences and speaking engagement as possible in order to "belong". And most looked jealously at those who started a consultancy on the side. It still was all about money for them. They got paid their 200-400k per year instead of making 10x as much like their fellow alumni working at Wall Street or at law firms. And thats the same with the Krugmans and Roubinis of the world and all other academic "heavy lifters" who would not make a single dime if you asked them to trade short, medium, or long-term (and they are exposed in the exact same way in their investment accounts than your and my grandma). There is ALWAYS a reason someone is selling books and advice rather than just doing what one advises others to do....which leads me back to Ernie Chan ;-)
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I think Ernie Chan is one of the few "real deal" who would write books. Most of the trading books are just trash and try to earn your money by selling you a trash book.
 
GloriaBrown said:
I think Ernie Chan is one of the few "real deal" who would write books. Most of the trading books are just trash and try to earn your money by selling you a trash book.
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What leads you to believe that? I have only read one of his books (Automated Trading, I think is what it was called)... And in no way was I impressed with his insights. None of his narratives went anywhere beyond common sense. Not saying he is a sham, but his books certainly aren't enough to suggest he is successful beyond selling books.
 
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