The rise of the machine learning :
The quantitative investment world plays down the prospect of machines supplanting human fund managers, pointing out that the prospect of full artificial intelligence is still distant, and arguing that human ingenuity still plays a vital role. But the confident swagger of the money management nerds is unmistakable. Already there are quasi-AI trading strategies working their magic in financial markets, and the future belongs to them, they predict.
→ Financial Times
Shit happens on the trading floor :
The $6bn trade was processed by a junior member of the bank’s forex sales team in June while his boss was on holiday, said two people familiar with the matter. Instead of processing a net value, the person processed a gross figure. That meant the trade had “too many zeroes”, said one of the people.
→ Financial Times
Of course, honest traders change their minds all the time and cancel orders as economic conditions change. That’s not illegal. To demonstrate spoofing, prosecutors or regulators must show the trader entered orders he never intended to execute. That’s a high burden of proof in any market. One helpful fact is if most of a trader’s (canceled) orders were on one side (say to buy) when he was mostly actually trading on the other (selling). For instance Sarao allegedly put in huge orders to sell, so that he could buy a few contracts: All his trading was on one side, but most of his orders were on the other. Then he’d switch a little while later. That seems like a bad sign.
→ Traders Magazine
Follow-up on some less successful investment strategies by hedge-funds, to say the least :
The back-tested results for the Spruce Alpha fund may not have taken into account how markets and investors would react given the kind of circumstances that took place in August. The hypothetical results could have underestimated the fact that some E.T.F.s are used as trading instruments that big money managers move quickly in and out of in times of extreme market volatility.
In a disclaimer to its marketing materials, Spruce Alpha also noted some of the unreliability of back-tested returns. The hypothetical results “do not represent the results of actual trading” and “were achieved by means of the retroactive application of a hypothetical model that was designed with the benefit of hindsight and could be adjusted at will until desired or better performance results were achieved,” the disclaimer reads.
→ The New York Times
On computer-driven, automatic trading strategies :
Cobras are revered in Indian culture, but the British Raj took a dimmer view of the poisonous snake. Officials promised a lucrative reward for every dead serpent — a scheme that, according to economic lore, backfired horribly.
Enterprising Indians began breeding cobras to collect the bounty, which forced the colonial government to abandon the plan. The frustrated breeders then released the worthless cobras, worsening the infestation. The story has never been fully confirmed by historians, but was seized on by German economist Horst Siebert, who in 2001 published The Cobra Effect on perverse incentives and unintended consequences. The book turned the anecdote into a potent example of how solutions to a problem can make it worse.
→ The Financial Times