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algorithmic trading, asset allocation, automated trading system, backtesting, Black Swan, Brownian motion, business continuity plan, compound rate of return, Edward Thorp, Elliott wave, endowment effect, fixed income, general-purpose programming language, index fund, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, quantitative hedge fund, quantitative trading / quantitative ﬁnance, random walk, Ray Kurzweil, Renaissance Technologies, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs
P1: JYS c05 JWBK321-Chan September 24, 2008 13:55 Execution Systems Printer: Yet to come 89 TESTING YOUR SYSTEM BY PAPER TRADING After you have built your automated trading system, it is a good idea to test it in a paper trading account, if your brokerage provides one. Paper trading has a number of benefits; chief among them is that this is practically the only way to see if your ATS software has bugs without losing a lot of real money. Often, the moment you start paper trading you will realize that there is a glaring look-ahead bias in your strategy—there may just be no way you could have obtained some crucial piece of data before you enter an order! If this happens, it is “back to the drawing board.” You should be able run your ATS, execute paper trades, and then compare the paper trades and profit and loss (P&L) with the theoretical ones generated by your backtest program using the latest data.
If your trading strategy depends on data or news prior to the market open that cannot be more than 35 minutes old, then you need to either figure out a different execution environment or modify your P1: JYS c05 JWBK321-Chan September 24, 2008 13:55 Printer: Yet to come 90 QUANTITATIVE TRADING strategy. It is hard to figure out all these timing issues until paper trading is conducted.) If you are able to run a paper trading system for a month or longer, you may even be able to discover data-snooping bias, since paper trading is a true out-of-sample test. However, traders usually pay less and less attention to the performance of a paper trading system as time goes on, since there are always more pressing issues (such as the real trading programs that are being run). This inattention causes the paper trading system to perform poorly because of neglect and errors in operation. So data-snooping bias can usually be discovered only when you have actually started trading the system with a small amount of capital.
The ultimate out-of-sample testing is familiar to many traders, and it is called paper trading. Running the model on actual unseen data is the most reliable way to test it (short of actually trading it). Paper trading not only allows you to perform a truly honest outof-sample test; it often allows you to discover look-ahead errors in your programs, as well as making you aware of various operational issues. I will discuss paper trading in Chapter 5. If the strategy that you are testing comes from a published source, and you are just conducting a backtest to verify that the results are correct, then the entire period between the time of publication and the time that you tested the strategy is a genuine out-ofsample period. As long as you do not optimize the parameters of the published model on the out-of-sample period, this period is as good as paper trading the strategy.
additive manufacturing, Atul Gawande, backtesting, Benoit Mandelbrot, buy low sell high, Checklist Manifesto, computerized trading, deliberate practice, diversification, Elliott wave, endowment effect, loss aversion, mandelbrot fractal, margin call, offshore financial centre, paper trading, Ponzi scheme, price stability, psychological pricing, quantitative easing, random walk, risk tolerance, short selling, South Sea Bubble, systematic trading, The Wisdom of Crowds, transaction costs, transfer pricing, traveling salesman, tulip mania, zero-sum game
Be sure to keep good records, and if your real-money results continue positive, start increasing the size of your trades. Do it in steps, all the way up to your normal trade size. Paper Trading Paper trading means recording your buy and sell decisions and tracking them like real trades, but with no money at risk. Beginners may start out paper trading, but most people turn to it after getting beat up by the markets. Some even alternate between real and paper trades and can't understand why they seem to make money on paper but lose whenever they put on a real trade. There are three reasons. First, people are less emotional with paper trades, and good decisions are easier to make with no money at risk. Second, in paper trades, you always get perfect fills, unlike real trading. Third and most important, good trades often look murky when you consider them.
An impulsive person who trades for entertainment will not be able to paper trade that way because it requires real work. You may open an account with one of several websites set up for paper trading. Enter your orders, check whether they have been triggered, and write down those “fills.” Enter all paper trades in your spreadsheet and your trading diary. If you have the willpower to repeat this process daily for several months, then you have the discipline for successful real trading. Still, there is no substitute for trading real money because even small amounts rev up emotions more than any paper trade. You'll learn much more from even small real trades than from months of paper trading. In recent years, I've had a front row seat watching traders progress from paper trading to profitable real-money trading. In SpikeTrade.com, we reduce fees for members who contribute picks, creating an incentive to do homework.
Third and most important, good trades often look murky when you consider them. The easy-looking ones are more likely to lead to problems. A nervous beginner jumps into obvious-looking trades and loses money, but paper trades the more challenging ones. It goes without saying that hopping between real and paper trades is sheer nonsense. You either do the one or the other. Psychology plays a huge role in how your trades turn out, and that's where paper trading fails to deliver. Pretend-trading with no money at risk is like sailing on a pond—it does little to prepare you for real sailing on a stormy sea. There is only one good reason to paper trade—to test your discipline as well as your system. If you can download your data at the end of each day, do your homework, write down your orders for the day ahead, watch the opening and record your entries, then track your market each day, adjusting your profit targets and stops—if you can do all of this for several months in a row, recording your actions, without skipping a day—then you have the discipline to trade real money.
Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets by Tim Bourquin, Nicholas Mango
algorithmic trading, automated trading system, backtesting, commodity trading advisor, Credit Default Swap, Elliott wave, fixed income, Long Term Capital Management, paper trading, pattern recognition, prediction markets, risk tolerance, Small Order Execution System, statistical arbitrage, The Wisdom of Crowds, transaction costs, zero-sum game
Before making this a career, it’s important to realize that there are tons of lessons you have to learn before you can be successful, and there really are very few shortcuts when learning to trade the markets. The best thing to do is practice. Open a paper trading account, size up the market to find good trades, then take and work through those trades. If you can’t make money in a paper trading account, you won’t be able to do it with a real account, either—no doubt about it. Bourquin: And along those same lines, even if you are able to make money in a paper trading account, that’s no guarantee that you’ll make money in a real account, right? Baiynd: Exactly. There is a different feel when trading with real money, as well as the added psychological stress, and that’s the real kicker. Bourquin: Some people say paper trading isn’t worthwhile, because it doesn’t indicate that you’ll be successful when trading with real money. Yet, there’s a lot of education to be gained there, and you really have to do it.
Disregard them, and your path to success will be much longer and the value of your trading account will be much smaller. I Index A Average directional index (ADX) Average true range (ATR) B Baiynd, Anne-Marie course offered daily and weekly time frames double-top action Elliott wave Fibonacci future market longer-term investment market internal mathematician moving average multiple time frames new trader paper trading paper trading account real money trading recruiting role retail trading Simple moving average (SMA) stochastic momentum indicator SUCCESS Magazine seminar, technical trading support and resistance swing trade technical analysis technical indicator technical trader trading day Berger, Serge Advance/Decline (A/D) line Apple Bloomberg terminal currency futures daily chart day-in and day-out economic data in equities equities, equity options, and futures extreme candles favorable intraday financial analyst full gap gap trades half gap liquidity injections longer-term positions macro view mean-reversion trade mind off the markets momentum oscillator opening gap positions reversal candle S&P 500 E-mini futures seasonal factors slow stochastics swing positions swing trade technical analysis technical tools time frame trade duration trade futures trading environment trading methodology trading opportunity trend reversal US equity indices watch list Booker, Rob Brandt, Peter algorithmic trading bid/offer spreads candlestick charts chart trader classical charting definition patterns principles closing price charts commodities floor trader cookie cutter approach corn spread corn trader currency futures Diary of a Professional Commodity Trader electronic trading entry point futures trader head-and-shoulders patterns high bar charts intraday charts longer-term time frames longer-term trades long-term charts margin-to-capital ratio margin-to-equity ratio market signaling niche—money management pit trading positions risk management Russell trade scale out short-term charts standard stop-loss swing trader Technical Analysis of Stock Trends trend line volume/open interest profile weekly chart C, D California Institute of Technology Carter, John best trade big volume Bollinger Bands breakeven career day trader dot-com crash down payment financial analyst first trading day five-year learning curve fundamental factors garden-variety trade great traders overnight guaranteed income industry trends Keltner Channels loan documentation Mastering the Trade money build up money management OEX trade options professional trader resistance point retail traders shorter-term trading SimplerOptions.com six-figure income smaller traders success measurement swing trades teaching technical analysis technical approach tech stocks The Disciplined Trader the squeeze time frames time spent TradeTheMarkets.com trading industry trading lifestyle trading philosophy trading place trading slumps volatile markets Certified Risk Manager (CRM) Chicago Board of Trade Chicago Mercantile Exchange (CME) City Slickers movie Commodity Trading Advisor (CTA) Currency Strength Index E E-mini S&P futures (ES) European Central Bank (ECB) Exchange-traded funds (ETFs) Exponential moving average (EMA) F Floyd, Gordon & Partners (FGP) Foster, Alex arbitrary profit targets assignment bear market best indicator buy-and-hold approach client vs. own account contract size economic reports ideal trade long-term trend Monsanto and JPMorgan Chase moving averages news following open positions position size price point profitable trades profit targets S&P 500 shorter-term crossover shorter-term moving averages technical indicators time frame trading options trend follower Williams %R G GAIN Capital Asset Management Gartman, Dennis German, Charles ATR automated trading system backtesting daily chart future market green trade independent trader market portfolio mentors money management moving average price action risk management rule-based approach scaling out screen-based trading software stand-alone type of program system rule trend following definition strategies tools Gordon, Todd Aspen Trading Group Australian Dollar average winner and average loser bank research Blue Chips movie chat room CNBC correlation analysis currency markets currency trade day trading decision making Elliott Wave analysis count methodology E-Trade account Fast Money Floyd, Gordon & Partners (FGP) FOREX.com, senior technical strategist Forex trading GAIN Capital Asset Management, senior trader global market analysis hedge fund initial amount, full time trading investment banks leverage magic methodology market information market makers market volatility Money in Motion moving averages NASDAQ new trader NYSE stocks NYSE trading strategy personal account research reports research time S&P 500 futures schooling share size shortcuts short-term momentum trading short-term traders SOES bandit sports analogies stock-picking service stop loss Strategy of the Day technical analysis technical charts trader quality trading jobs trading style trend lines H, I, J Hemminger, Patrick agricultural futures trading agricultural pairs trading Brent curve calendar spread commodities core position crude curve economic releases E-Mini S&P vs.
My background as a mathematician means I can understand the basis of technical measures like stochastics, but as far as reading and interpreting them, I had no clue. Honestly, I was a tremendous gunslinger, and the only reason I stand here today is because I started with so much money that I was able to lose vast quantities. Eventually, though, my husband convinced me that I had to stop trading and figure out what was going on first. Although I didn’t want to sit out and not trade, that turned out to be the best advice I ever got. So, I began paper trading, and I went from simple to mildly complex concepts, working through them piece by piece. I started by learning moving averages, and from there I fell into Fibonacci after seeing it on a Twitter feed. I knew what the Fibonacci sequence was already, and when I started looking at it, the wave retracements made so much sense to me. All of a sudden, I began to see the market in a whole new way! From there, I spent about six months developing a system that would work for me.
algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business process, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial intermediation, fixed income, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, law of one price, Long Term Capital Management, Louis Bachelier, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, profit motive, purchasing power parity, quantitative trading / quantitative ﬁnance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, trade route, transaction costs, value at risk, yield curve, zero-sum game
The IS is computed as the difference between the realized trades and the trades recorded in paper trading. The paper trading process usually runs in parallel with the live process and records all the trades as if they were executed at desirable price at optimal times. The paper-trading system of Perold (1988) executes all trades at the mid-point between the market bid and ask quotes, ignoring all transaction costs (spreads, commissions, etc.). The paper-trading system also assumes that unlimited volume can be processed at any point in time at the market price, ignoring the market depth or liquidity constraints and the associated slippage and market impact. The IS metric then measures the cost of running the trading system in real market conditions as compared to the costs incurred in the idealized paper-trading environment. 300 HIGH-FREQUENCY TRADING As Perold (1988) notes, the observed IS can be due to several factors: r r r r r r r r r Liquidity constraints Price movement due to information imputed in market prices Random price oscillations Latency in execution Market impact Commissions Fees Spreads Taxes The IS delivers a bundled estimate of the component costs and the estimate is difficult to disaggregate into individual cost centers.
Once the back test performs satisfactorily, the system is switched to run on real-time data, the same data that feeds into the production system. At this point, however, the system is still in the testing phase and the system’s ability to send production orders is disabled. Instead, all orders that would be sent to the broker-dealer are recorded in a text file. This testing phase of the system on the real-time data is referred to as “paper-trading.” Once paper-trading performance is satisfactory and comparable to that of the back test, paper-trading is moved into production. Continuous human supervision of the system is required to ensure that the system does not fall victim to some malicious activity such as a computer virus or a market event unaccounted for in the model itself. The role of the human trader, however, should normally be limited to making sure that the performance Implementing High-Frequency Trading Systems 243 of the system falls within specific bounds.
The typical modeling process is illustrated in Figure 3.4. System Implementation The models are often built in computer languages such as MatLab that provide a wide range of modeling tools but may not be suited perfectly for high-speed applications. Thus, once the econometric relationships are ascertained, the relationships are programmed for execution in a fast computer language such as C++. Subsequently, the systems are tested in “paper-trading” with make-believe capital to ensure that the systems work as intended and any problems (known as “bugs”) are identified and fixed. Once the systems are indeed performing as expected, they are switched to live capital, where they are closely monitored to ensure proper execution and profitability. High-frequency execution systems tend to be complex entities that detect and react to a variety of market conditions.
Whenever I glance at my diary in Outlook, the yellow labels call attention to themselves, reminding me that these trades are open and I need to manage them. Purple. Planned trade. Once implemented, I drag the icon into the box of the day on which I traded and change the label to yellow for an open trade. Green. Profit. Blue. Profit Demerit. I made money on this trade but less than I should have, or violated my own rules. Brown. Research (a paper trade). Figure 3.4 Trading Diary—DB, Entry, Weekly Chart Most of my diary entries include two charts—a weekly and a daily. Depending on the trade, I might also add a monthly or intraday chart. Figures 3.4 and 3.5 show an example of a diary entry. The weekly DB chart (Figure 3.4) shows the source of a trading idea—an e-mail from a friend who ran several market scans and shared the results with me.
Let us begin by tackling the first question: What is the stock’s profit target? A good way to set a target for a swing trade is to use either a moving average or a channel. To estimate a profit target for a long-term trade it pays to examine long-term support and resistance. Putting on a trade is like jumping into a fast-moving river. You can walk up and down the shore, looking for a spot to jump in. Some people spend a lifetime on the shore, paper-trading their way through life. You are safe on the shore: your skin is dry and your cash is earning interest in a money market account. One of the very few things in trading you can totally control is the moment you decide to jump in. Do not allow restlessness or anxiety to push you in before you find a good spot. While you are looking for a place to jump in, there is another important area to scout.
Figure 4.5 EXTR, daily chart, follow-up One of the essential values of keeping a Trading Diary is that it encourages you to return to every closed-out trade a month or two later (see Figure 4.5). It makes you re-evaluate your performance with the benefit of hindsight. If you keep learning from your experiences, you will become a better trader tomorrow than you are today! In retrospect, I could have held much longer—but at the time of the exit there was no clear way of knowing that those rallies would come. There are two sure-fire ways to nail every bottom and top. One is to paper-trade on old charts; the other is to lie about your trades. For the real traders risking real money, fast dimes are better than slow dollars. You have to develop a style of trading that feels comfortable to you and follow it without regrets. Regret is a corrosive force in trading. If you kick yourself for leaving some money on the table today, you will reach out too far tomorrow—and fail. And now let us review another trade.
The Self-Made Billionaire Effect: How Extreme Producers Create Massive Value by John Sviokla, Mitch Cohen
Cass Sunstein, Colonization of Mars, corporate raider, Daniel Kahneman / Amos Tversky, Elon Musk, Frederick Winslow Taylor, game design, global supply chain, James Dyson, Jeff Bezos, John Harrison: Longitude, Jony Ive, loss aversion, Mark Zuckerberg, market design, old-boy network, paper trading, RAND corporation, randomized controlled trial, Richard Thaler, risk tolerance, self-driving car, Silicon Valley, smart meter, Steve Ballmer, Steve Jobs, Steve Wozniak, Tony Hsieh, Toyota Production System, young professional
—THEODORE ROOSEVELT When she was twenty-seven years old, Yan Cheung used all of her savings—a sum of five thousand Hong Kong dollars—to start a Hong Kong–based paper-trading company that supplied paper pulp to manufacturers in mainland China. Five years later, in 1990, she abruptly shut down that growing business and moved to California to start over.1 Moving overseas looked like a huge risk. Mrs. Cheung spoke tentative English. She knew no one. Her list of local contacts was short, and the U.S. waste business was very insular.2 Practically any outside observer would have called her decision to bet her entire savings—again—foolhardy. But within ten years, the paper-trading company she started in California, America Chung Nam, had become the leading paper exporter in the United States—and she was only just beginning.
The Secret World of Oil by Ken Silverstein
business intelligence, clean water, corporate governance, corporate raider, Donald Trump, energy security, Exxon Valdez, failed state, Google Earth, offshore financial centre, oil shock, paper trading, rolodex, Ronald Reagan, WikiLeaks, Yom Kippur War
Within two years it had tripled again. A cause and effect of the big price swings is what my lunch companion called “the horrendous development” of a variety of hedging techniques and their growing sophistication.5 At most trading companies, he explained, one desk handles the physical trade in oil and another handles the paper trade. The job of the latter is to hedge the sales of the former, but in the past few decades the ratio of the daily physical trade to the paper trade has gone from roughly 1 to 1 to 40 or even 50 to 1. “People are sitting there all day just buying and selling paper barrels,” this person said. “Everyone knows we need better rules and regulations, but the people who are making money don’t want the rules to change. Historically paper markets were created to facilitate trade by letting buyers and sellers hedge their bets.
New Market Wizards: Conversations With America's Top Traders by Jack D. Schwager
backtesting, beat the dealer, Benoit Mandelbrot, Berlin Wall, Black-Scholes formula, butterfly effect, commodity trading advisor, computerized trading, Edward Thorp, Elliott wave, fixed income, full employment, implied volatility, interest rate swap, Louis Bachelier, margin call, market clearing, market fundamentalism, money market fund, paper trading, pattern recognition, placebo effect, prediction markets, Ralph Nelson Elliott, random walk, risk tolerance, risk/return, Saturday Night Live, Sharpe ratio, the map is not the territory, transaction costs, War on Poverty
It was nothing more than, “I think the market is going up, so I’m going to buy.” “It’s gone up enough, so I’m going to sell.” It was completely impulsive. I didn’t sit down and formulate any trading plan. I don’t know where the intuition comes from, and there are times when it goes away. 412 / The New Market Wizard How do you recognize when it goes away? When I’m wrong three times in a row, I call time out. Then I paper trade for a while. For how long do you paper trade? Until I think I’m in sync with the market again. Every market has a rhythm, and our job as traders is to get in sync with that rhythm. I’m not really trading when I’m doing those trades. There’s trading being done, but I’m not doing it. What do you mean you’re not doing it? There’s buying and selling going on, but it’s just going through me. It’s like my personality and ego are not there.
I sometimes can’t believe I’m making all this money to essentially play an elaborate 66 / The New Market Wizard game. On the other hand, when you look at all the money I’ve produced over the years, I’ve been vastly underpaid. The more supertraders I interview, the more convinced I become that, at least to some degree, their success can be attributed to an innate talent. Bill Lipschutz provides an excellent example. His first encounter with trading actually involved paper trading in a college investment course. Lipschutz ended up running a hypothetical $100,000 into an incredible $29 million by the end of the course. Although this accomplishment has to be taken with a grain of salt because it didn’t involve real money and the rules of the experiment were flawed by the lack of realistic limitations on leverage, the results were striking nonetheless. Lipschutz’s first experience in actual trading was prompted by a $12,000 inheritance that he steadily built up to $250,000 over a four-year period.
Stock Market Wizards: Interviews With America's Top Stock Traders by Jack D. Schwager
Asian financial crisis, banking crisis, barriers to entry, beat the dealer, Black-Scholes formula, commodity trading advisor, computer vision, East Village, Edward Thorp, financial independence, fixed income, implied volatility, index fund, Jeff Bezos, John Meriwether, John von Neumann, locking in a profit, Long Term Capital Management, margin call, money market fund, Myron Scholes, paper trading, passive investing, pattern recognition, random walk, risk tolerance, risk-adjusted returns, short selling, Silicon Valley, statistical arbitrage, the scientific method, transaction costs, Y2K
Because it teaches you respect for the market. It is much better to learn the lesson that you can lose everything when you don't have that much money than to learn the same lesson later on. I guess that implies you are not an advocate of paper trading for beginners. Absolutely. I think paper trading is the worst thing you can do. If you are a beginner, trade with an amount of money that is small enough so that you can afford to lose it, but large enough so that you will feel the pain if you do. Otherwise, you're fooling yourself. I have news for you: If you go from paper trading to real trading, you're going to make totally different decisions because you're not used to being subjected to the emotional pressure. Nothing is the same. It's like shadowboxing and then getting in the ring with a professional boxer.
The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich by Timothy Ferriss
Albert Einstein, Amazon Mechanical Turk, call centre, clean water, Donald Trump, en.wikipedia.org, Firefox, fixed income, follow your passion, game design, global village, Iridium satellite, knowledge worker, late fees, Maui Hawaii, oil shock, paper trading, Parkinson's law, passive income, peer-to-peer, pre–internet, Ralph Waldo Emerson, remote working, Richard Feynman, risk tolerance, Ronald Reagan, side project, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, Vilfredo Pareto, wage slave, William of Occam
Negotiate near closing time, choose your objective price, bracket, and make a firm offer with cash in hand for that amount.48 Practice walking away if your objective price isn’t met. On Monday, call two magazines (expect the first to be awkward) and use the script on the companion site to negotiate, minus the last firm offer. Get them as low as possible and then call them back later to indicate that your proposal was refused by upper management or otherwise vetoed. This is the negotiating equivalent of paper trading.49 Get used to refusing offers and countering in person and—most importantly—on the phone. TOOLS AND TRICKS Sample Muse Test Page The PX Method (www.pxmethod.com) This sales template was used to determine the viability of a speed-reading product, which tested successfully. Notice how testimonials, credibility indicators, and risk-reversal guarantees are used, as well as how the pricing is put on a separate page so it can be isolated as a testing variable.
If budget permits, increase the number of related terms and daily expenditure so that the entire PPC test costs $500–1,000. 46. This is a checking account for receiving credit card payments. 47. Set this up using services detailed at the end of this chapter and the next. 48. See the online bonus chapter on www.fourhourblog.com to understand all of these terms in context. Search “Jedi Mind Tricks.” 49. “Paper trading” refers to setting an imaginary budget, “purchasing” stocks (writing their current values on a piece of paper), and then tracking their performance over time to see how your investment would have done had it been for real. It is a no-risk method for honing investment skills before putting skin in the game. Income Autopilot III MBA—MANAGEMENT BY ABSENCE The factory of the future will have only two employees, a man and a dog.
Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo
Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business process, butterfly effect, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, Chance favours the prepared mind, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative ﬁnance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, short selling, sovereign wealth fund, statistical arbitrage, Steven Pinker, stochastic process, survivorship bias, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game
“But there was still a fair amount of juice out there to be squeezed.” Soon, it was obvious that D. E. Shaw & Co. had surpassed any contemporary academic research on market anomalies. It had advanced so far ahead that when someone outside the firm approached them to pitch a new trading strategy, they could often guess what it was and what was wrong with it just by looking at its simulated profits. “People would come in with the results they got by ‘paper-trading’ a proposed strategy with historical data, saying, ‘I’ve discovered this amazing effect!’ And we would reply, ‘We don’t want to know what your system is, but if you’d like some feedback, show us what the simulated returns are by month.’ After looking at them, we would sometimes be able to say something like, ‘Your strategy was probably some variant of the following, and this is the financial database you probably used; your simulated profits in this month, this month, and this month are attributable to errors in that database, and your overall returns are artificially high because of the following type of survivorship bias,’ and so on.”
For statarb and other quantitative equity hedge funds, the second week of August was absolutely terrifying, whereas other types of hedge funds and portfolios cruised through the month, hardly noticing. Amir Khandani had just come back to MIT from a summer internship and was looking for a thesis topic. I suggested that we try to figure out what happened during the Quant Meltdown by simulating a simple quantitative equity trading strategy.26 A common practice in the investment business is to evaluate a particular strategy by performing a “backtest,” or “paper trading,” where you use historical prices to calculate the realized profits and losses of trades that the strategy would have called for. For example, suppose a superstitious friend tells you that you should never buy stocks on Friday the Thirteenth—is that good advice? One way to evaluate this advice is to compute the average return of the S&P 500 index between Fridays and Mondays for all Fridays that fall on the Thirteenth, and then do the same for all non-Thirteenth Fridays and Mondays, and compare the two averages.
., 115, 117, 192–193, 195, 198–201; satisficing linked to, 182; Simon’s skepticism toward, 178–180, 183 options, 97, 212, 243, 304–305 Options Clearing Corporation, 358 Orange County, Calif., 320 orangutan, 135, 143; human vs., 146, 149, 150 Origin of Species, The (Darwin), 140 Origin of Wealth, The (Beinhocker), 218 Oster, Sharon, 127 overpopulation, 416 oxytocin, 338 Pääbo, Svante, 151 Packard, Norman, 278 pain, 85–87, 378–384 Paine, Robert, 242 pairs trading, 235, 240, 286 Paloma Partners, 237 panic selling, 261 paper currency, 356 paper trading, 285 Parkinson’s disease, 88, 91 parrots, 162 passive investing, 5–6, 224, 249, 263, 265, 270, 278, 282. See also index funds Pasteur, Louis, 165 Patel, Pankaj, 267 patents, 284, 401, 402, 404 path independence, 208 pattern matching, 66 Paulson, John, 224, 227, 314, 318 Pavlov, Ivan, 80 Pelizzon, Loriana, 376 Peltzman, Sam, 206 pension funds, 230, 264, 299, 408, 409, 413 Pentagon Papers, 55 peppered moth (Biston betularia), 138–140, 141 Perold, André, 274 Perrow, Charles, 321–322, 361, 372 pesticides, 358 Index Pete, Steven, 378 peyote, 79 Pfeffer, Irving, 236 Pfi zer Inc., 332, 333, 334 pharmaceuticals, 403–410 phenylketonuria, 147 Phillips curve, 36–37 phi phenomenon, 70 physics, 2, 10–11, 19, 20, 25, 209–215 Picano-Nacci, Boris, 61 Pickard, Lee, 307–309, 311 Pinker, Steven, 156, 173–174 Pisaster (sea star), 242 Pitts, Walter, 131 Planck, Max, 140 plasticity, of brain, 114, 156 pleasure center, 87 Pleistocene, 174 Poggio, Tommy, 41 Poincaré, Henri, 18 poker, 59 pollution, 358 Ponzi, Charles, 5 Ponzi schemes, 334, 344–345, 351, 354, 355, 393 Popper, Karl, 219 population genetics, 216 population growth, 163, 164, 193, 194, 201, 215, 257 portfolio insurance, 273, 274 portfolio theory, 27, 48, 212, 249 positron emission tomography (PET), 78, 110 Pounds, William, 35–36 poverty, 411–415, 416 prediction, 130 Prediction Company, 278 prediction markets, 38–40 preference orderings, 97 prefrontal cortex, 162, 279; damage to, 102–103, 107; dorsolateral, 337, 339; evolution of, 153–154, 163; as executive brain, 119–122; rational functions in, 96, 99, 100, 103, 105, 119–122, 128–129, 154, 337, 339; short-circuiting of, 104, 122, 343; ventromedial, 102, 107 present value, 98 prices, 2, 5, 9; of commodity futures, 20; discovery of, 109; discreteness of, 71; of hogs, 28–33, 34; of wheat, 20.
Victorian Internet by Tom Standage
Even supposing you could place your wires at the lowest depth ever reached by plumb line, would your wires, even then, be secure?" Nobody who knew anything about telegraphy would be foolish enough to risk building a transatlantic telegraph; besides, it would cost a fortune. So it's hardly surprising that Cyrus W. Field, the man who eventually tried to do it, was both ignorant of telegraphy and extremely wealthy. He was a self-made man from New England who amassed his fortune in the paper trade and retired at the age of thirty-three. After spending a few months traveling, he happened to meet an English engineer, Frederic N. Gisborne, who introduced him to the business of telegraphy. Gisborne was looking for a backer after his failed attempt in 1853 to build a telegraph cable across Newfoundland, with a link to the mainland across the Gulf of St. Lawrence. His plan had been sound enough: Since building a cable all the way across the Atlantic seemed both technically and financially out of the question, building a link from New York to St.
The botany of desire: a plant's-eye view of the world by Michael Pollan
back-to-the-land, clean water, David Attenborough, double entry bookkeeping, double helix, Francisco Pizarro, invention of agriculture, Joseph Schumpeter, mandatory minimum, Maui Hawaii, means of production, paper trading, Ralph Waldo Emerson, Steven Pinker
According to Joseph Schumpeter, it is not at all unusual for the birth of a new business to be attended by a speculative bubble as capital rushes in, dazzled by the young industry’s wildly exaggerated promise. Every bubble sooner or later must burst—the carnival that was permanent would spell the end of the social order. In Holland the crash came in the winter of 1637, for reasons that remain elusive. But with real tulips about to come out of the ground, paper trades and futures contracts would soon have to be settled—real money would soon have to be exchanged for real bulbs—and the market grew jittery. On February 2, 1637, the florists of Haarlem gathered as usual to auction bulbs in one of the tavern colleges. A florist sought to begin the bidding at 1,250 guilders for a quantity of tulips—Switsers, in one account. Finding no takers, he tried again at 1,100, then 1,000 . . . and all at once every man in the room—men who days before had themselves paid comparable sums for comparable tulips—understood that the weather had changed.
Paper Machines: About Cards & Catalogs, 1548-1929 by Markus Krajewski, Peter Krapp
business process, continuation of politics by other means, double entry bookkeeping, Frederick Winslow Taylor, Gödel, Escher, Bach, index card, Index librorum prohibitorum, information retrieval, invention of movable type, invention of the printing press, Jacques de Vaucanson, Johann Wolfgang von Goethe, Joseph-Marie Jacquard, knowledge worker, means of production, new economy, paper trading, Turing machine
“It is important that all cards used for catalogs or indexes should be exact in size, as the slightest variation interferes with facility in handling them. A low card between two higher ones is bridged by the ﬁngers and lost.”58 After the successful introduction of the American Library Association’s card format, the attempt to standardize index card quality once again seems to be accepted by the market. Herbert Davidson is delighted about the successful word of mouth and the growing sales. “We have made a standard never known to the paper trade before.”59 Starting with that “greatest library invention,” the card index, Library Bureau expands its product range bit by bit into areas that are based on a library or archival cataloging logic, yet generate massive economic demands. In 1869, two different ﬁle cabinets are invented: on the one hand, E. W. Woodruff’s wooden containers for folded documents, used mainly by the federal government; on the other hand, the so-called vertical ﬁles that allow folders to be stored in an upright position:60 the Amberg File and Index Company manufactures a container to keep the written material unfolded and on a slant.
Bakken shale, bank run, Credit Default Swap, diversification, fixed income, Gordon Gekko, index fund, light touch regulation, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, paper trading, peak oil, Ponzi scheme, risk tolerance, Ronald Reagan, side project, Silicon Valley, Sloane Ranger, sovereign wealth fund, supply-chain management, the market place
Airlines had historically avoided refineries and other physical assets for good reason, he and other critics argued: they were expensive to operate and riddled with liability. Moreover, a sudden move against the refinery’s owner in the crude or jet-fuel market could wipe out its profit margins. The whole undertaking struck many observers as either a foolish fantasy deal or a capitulation to the idea that it was a failure at fuel hedging. “They must have gotten burned on paper trades in the past,” groused one commodities trader. Ruggles, who was busy negotiating with BP and traders in Alex Beard’s division of Glencore over crude supply contracts for Trainer, took the criticism in stride. He had been disappointed not to bring in a private-equity partner for the refinery investment, which was one of his original ideas for sharing the ambitious project’s risk. But that failure had not hurt his confidence in the deal.
When I Fell From the Sky by Juliane Koepcke, Ross Benjamin, Beate Rygiert
When he showed up, completely ragged, at that door, they at first didn’t even want to let him in. The letter of recommendation, however, opened not only the door for him, but also the hearts of these people, who later became my godparents. So it was that along with our home—the Humboldt House—my godfather’s house became one of my favorite places in Lima. My godfather and his family were German too and made a fortune in Peru in the cotton and paper trade. When my mother arrived in Lima, these faithful friends even organized my parents’ wedding. Up to the age of fourteen, I often spent vacations there. I loved that house, built in Bauhaus style, with its magical garden, swimming pool and goldfish pond, in which I learned to swim. In this garden I also sometimes let my tinamous, which I always brought along in a cage, run free. To this day I can see myself walking down the street from the Humboldt House to the coast, the cage with Little Pillow and Little Chestnut Eye in one hand and my bag in the other.
The Misbehavior of Markets by Benoit Mandelbrot
Albert Einstein, asset allocation, Augustin-Louis Cauchy, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black-Scholes formula, British Empire, Brownian motion, buy low sell high, capital asset pricing model, carbon-based life, discounted cash flows, diversification, double helix, Edward Lorenz: Chaos theory, Elliott wave, equity premium, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, full employment, Georg Cantor, Henri Poincaré, implied volatility, index fund, informal economy, invisible hand, John Meriwether, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market microstructure, Myron Scholes, new economy, paper trading, passive investing, Paul Lévy, Paul Samuelson, Plutocrats, plutocrats, price mechanism, quantitative trading / quantitative ﬁnance, Ralph Nelson Elliott, RAND corporation, random walk, risk tolerance, Robert Shiller, Robert Shiller, short selling, statistical arbitrage, statistical model, Steve Ballmer, stochastic volatility, transfer pricing, value at risk, Vilfredo Pareto, volatility smile
It led me, in a comment concluding Mandelbrot 1972, to remark that the techniques being developed for turbulence would also apply in economics. 209 “as early as 1975” The first multifractal models of price variation were the cartoons to be discussed momentarily and the fractional Brownian motions in multifractal trading time to be discussed starting on page 127. They are closely related and were first presented in Mandelbrot 1997a; see also Mandelbrot 1991abcde. The first tests were reported in Mandelbrot, Calvet, and Fisher 1997, Calvet, Fisher, and Mandelbrot 1997, and Fisher, Calvet, and Mandelbrot 1997. 216 “In fact, this concept…” See Mandelbrot and Taylor 1967. 216 “I co-authored in 1967” In that paper, trading time was not taken to be multifractal, but fractal—but neither term was used because they had not yet been coined. That is, the best I could do in 1967 was to consider the increments of trading time as statistically independent, hence to model the Noah but not the Joseph Effect. The novelty I reported in 1972 was that the Noah and Joseph Effects could be united in an intrinsic fashion. 217 “market behavior” Originally, the function f(α) arose in Mandelbrot 1972, 1974, as the logarithm (suitably scaled) of a basic probability.
Wait: The Art and Science of Delay by Frank Partnoy
algorithmic trading, Atul Gawande, Bernie Madoff, Black Swan, blood diamonds, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta analysis, meta-analysis, Nick Leeson, paper trading, Paul Graham, payday loans, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, six sigma, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical model, Steve Jobs, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel
The computers involved in high-frequency trading buy and sell faster and more frequently than any person possibly could. The industry dates back to the late 1990s, when regulators first authorized electronic stock exchanges. Before then, the bulk of trading in stocks listed on the New York Stock Exchange was done through specialists—human beings who walked around a vast trading floor covered with cigar ash and paper trade records. I still remember joining the bedlam of the NYSE floor one day in the 1990s when a law school friend arranged a tour. It was frantic, with men shouting, lights blinking, and phones ringing.1 At the time, a trade was fast if it took less than a few seconds. Today, high-frequency trading accounts for 70 percent of U.S. stock trades. The Securities and Exchange Commission calls high-frequency trading “one of the most significant market structure developments in recent years.”2 Computers dominate the modern market, and they aren’t patient enough to wait for a specialist to shout or a phone to ring.
The Global Minotaur by Yanis Varoufakis, Paul Mason
active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, Yom Kippur War
In conclusion, over the past three decades, much ink has been spilt in assessing the Reagan–Thatcher years. From this book’s perspective, suffice it to say that the famous duo’s politics proved immensely helpful to the rise of our Global Minotaur. Britain’s image as an entrepreneurial society, and all the razzmatazz generated by the cocky estate agents and slick bankers, depended heavily on the City’s paper trades and the rising house prices. These twin bubbles developed for the simple reason that London had skilfully situated itself as a strategic refuelling stop on the migration routes that the world’s capital took to reach New York. Toxic theory, Part B: economic models and assorted delusions The Global Minotaur relied on sympathetic governments standing aside while its mammoth asymmetries were gaining shape.
Half the Sky: Turning Oppression Into Opportunity for Women Worldwide by Nicholas D. Kristof, Sheryl Wudunn
agricultural Revolution, correlation does not imply causation, demographic dividend, feminist movement, Flynn Effect, illegal immigration, Mahatma Gandhi, microcredit, paper trading, rolodex, Ronald Reagan, Rosa Parks, school choice, special economic zone, transatlantic slave trade, transatlantic slave trade, women in the workforce
—LU XUN, “ANXIOUS THOUGHTS ON ‘NATURAL BREASTS’” (1927) We’ve been chronicling the world of impoverished women, but let’s break for a billionaire. Zhang Yin is a petite, ebullient Chinese woman who started her career as a garment worker, earning $6 a month to help support her seven siblings. Then, in the early 1980s, she moved to the special economic zone of Shenzhen and found a job at a paper trading company partly owned by foreigners. Zhang Yin learned the intricacies of the paper business, and she could have stayed and risen in the firm. But she is a restless, ambitious woman, buzzing with entrepreneurial energy, so she struck out for Hong Kong in 1985 to work for a trading company there. The company went bankrupt within a year. Zhang Yin then started her own company in Hong Kong, buying scrap paper there and shipping it to firms throughout China.
The Great Convergence: Information Technology and the New Globalization by Richard Baldwin
3D printing, additive manufacturing, Admiral Zheng, agricultural Revolution, air freight, Amazon Mechanical Turk, Berlin Wall, bilateral investment treaty, Branko Milanovic, buy low sell high, call centre, Columbian Exchange, commoditize, Commodity Super-Cycle, David Ricardo: comparative advantage, deindustrialization, domestication of the camel, Edward Glaeser, endogenous growth, Erik Brynjolfsson, financial intermediation, George Gilder, global supply chain, global value chain, Henri Poincaré, imperial preference, industrial cluster, industrial robot, intangible asset, invention of agriculture, invention of the telegraph, investor state dispute settlement, Isaac Newton, Islamic Golden Age, James Dyson, knowledge economy, knowledge worker, Lao Tzu, low skilled workers, market fragmentation, mass immigration, Metcalfe’s law, New Economic Geography, out of africa, paper trading, Paul Samuelson, Pax Mongolica, profit motive, rent-seeking, reshoring, Richard Florida, rising living standards, Robert Metcalfe, Second Machine Age, Simon Kuznets, Skype, Snapchat, Stephen Hawking, telepresence, telerobotics, The Wealth of Nations by Adam Smith, trade liberalization, trade route, Washington Consensus
Developing nations join international supply chains to gain competitiveness and then grow rapidly because offshore production brings capabilities that would otherwise take decades to develop domestically. While the revolutionary implications of the New Globalization are being incorporated into thinking about development, twentieth-century mental models linger. The chapter thus starts with a quick overview of that thinking. If nothing else, it provides an excellent springboard for organizing reflections on the new thinking. Note that this chapter builds on my paper, “Trade and Industrialization after Globalization’s Second Unbundling,” but it also draws on the World Bank’s new project, which studies ways of making global value chains work for development.1 Traditional Thinking about Industrial Development Mainline thinking about development has seen three waves—or really two waves and a surrender, according to leading development economists David Lindauer and Lant Pritchett.
The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
affirmative action, Albert Einstein, anti-communist, Ayatollah Khomeini, barriers to entry, Bob Noyce, Bonfire of the Vanities, Brownian motion, capital asset pricing model, card file, centralized clearinghouse, collateralized debt obligation, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, Donald Trump, Eugene Fama: efficient market hypothesis, global village, Golden Gate Park, Haight Ashbury, haute cuisine, Honoré de Balzac, If something cannot go on forever, it will stop - Herbert Stein's Law, In Cold Blood by Truman Capote, index fund, indoor plumbing, intangible asset, interest rate swap, invisible hand, Isaac Newton, Jeff Bezos, John Meriwether, joint-stock company, joint-stock limited liability company, Long Term Capital Management, Louis Bachelier, margin call, market bubble, Marshall McLuhan, medical malpractice, merger arbitrage, Mikhail Gorbachev, money market fund, moral hazard, NetJets, new economy, New Journalism, North Sea oil, paper trading, passive investing, Paul Samuelson, pets.com, Plutocrats, plutocrats, Ponzi scheme, Ralph Nader, random walk, Ronald Reagan, Scientific racism, shareholder value, short selling, side project, Silicon Valley, Steve Ballmer, Steve Jobs, supply-chain management, telemarketer, The Predators' Ball, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, transcontinental railway, Upton Sinclair, War on Poverty, Works Progress Administration, Y2K, yellow journalism, zero-coupon bond
Some grasped it immediately as a fascinating, all-consuming treasure hunt and others recoiled from it as a dreary homework assignment. Warren’s reaction was that of a man emerging from the cave in which he had been living all his life, blinking in the sunlight as he perceived reality for the first time.16 His former concept of a “stock” was derived from the patterns formed by the prices at which pieces of paper traded. Now he saw that those pieces of paper were simply symbols of an underlying truth. He instantly grasped that the patterns formed by trading these pieces of paper did not signify a “stock” any more than those childhood piles of bottle caps had signified the effervescent, sweet-sour-spicy taste of soda pop that made people crave it. His old notions dissolved in an instant, conquered by Graham’s ideas and illuminated by the way he taught.
More than fifty new investment funds had come to market, with nearly sixty-five more waiting in the wings.3 For the first time in U.S. history, it became fashionable for a broad group of individuals to own stocks.4 Buffett would describe this phase as resembling “an ever-widening circle of chain letters,” even a “mania,” populated mostly by “the hopeful, credulous, and greedy, grasping for an excuse to believe.”5 In a business that was still transacted through paper trade tickets and physical delivery of stock certificates, trading volume had reached such a level that the market was nearly crushed under the weight of paperwork. Huge numbers of orders were duplicated or never executed, the tickets misplaced or simply thrown in the garbage, while file rooms worth of stock certificates disappeared, presumed stolen, amid rumors that the Mafia had infiltrated the market.
The topic of the day was the slump in trading and merger business at Salomon and the $75 million that Black Monday had cost the firm.14 Salomon faced the cleanup from Black Monday weakened by the fact that, only days before the crash, Gutfreund, his moon-shaped face impassive, had head-chopped even highly valued longtime employees, laid off eight hundred people, and discontinued marginally profitable businesses such as commercial paper trading (a backwater of the bond business) so abruptly that the disruption hurt relationships with some important clients almost beyond repair.15 These and the losses from Black Monday were going to gouge a deep hole in the shareholders’ pockets that year. And with that, Salomon’s stock fell into the tank. The shareholders were suffering, yet the compensation committee—which Buffett had joined at the request of its chairman, Bob Zeller—began to discuss lowering the price at which the employees’ stock options could be exercised.
Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber
AI winter, algorithmic trading, asset allocation, banking crisis, barriers to entry, Big bang: deregulation of the City of London, butterfly effect, buttonwood tree, buy low sell high, capital asset pricing model, citizen journalism, collateralized debt obligation, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, Emanuel Derman, en.wikipedia.org, experimental economics, financial innovation, fixed income, Gordon Gekko, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, John Nash: game theory, Kenneth Arrow, Khan Academy, load shedding, Long Term Capital Management, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, quantitative hedge fund, quantitative trading / quantitative ﬁnance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Renaissance Technologies, Richard Stallman, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, semantic web, Sharpe ratio, short selling, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, too big to fail, transaction costs, Turing machine, Upton Sinclair, value at risk, Vernor Vinge, yield curve, Yogi Berra, your tax dollars at work
Topping my list are the following: • • • • Electronic market access Market data graphics Spreadsheets Databases and Internet information For quantitative investors, I would add portfolio optimization despite the barriers to wider acceptance of this technology such as sensitivity to errors and unintuitive results (unless they are constrained). Electronic Market Access Thirty years ago, the Designated Order Turnaround (DOT) and NASDAQ electronic systems were concepts on their way to notions. A so-called program trade literally involved wheelbarrows of paper trade tickets physically distributed to floor traders. Today, trading floors from London to Tokyo have been replaced by machinery. Purely electronic markets, the electronic communication networks (ECNs), have come from nowhere to claim a significant portion of volume. Increasingly, the discussion of the future of exchanges is a discussion of technology. The August 16, 1999, cover of the Industry Standard, an information technology trade magazine, proclaimed “Stock Exchanges: RIP.”
Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, buy low sell high, capital controls, central bank independence, Chance favours the prepared mind, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, John Meriwether, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Paul Samuelson, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond, zero-sum game
A lot of people are starting their own firms today and there are very good reasons why they’re doing that.The problem with starting your own firm is that you might get a little bit isolated. Even though there are 50 sheets that you get every morning, giving a review of what happened or everybody’s views and biases, what there isn’t as much of is the ability to interact with other smart people who are managing money. You said earlier that “talk is cheap.” How do you respond to the notion that writing a newsletter is like paper trading or just cheap talk? The truth is that when you retire, you always have a trade on because you have to manage your personal portfolio.Then it becomes a question of being honest. In my sheet, what I do is have biases and trades. The biases are the talk that tells you where I think things are going.The trades are attempts at finding good risk/reward bets that are not inconsistent with my biases.
Predator's Ball by Connie Bruck
corporate raider, diversified portfolio, Edward Thorp, financial independence, fixed income, Irwin Jacobs, mortgage debt, offshore financial centre, paper trading, profit maximization, The Predators' Ball, yield management, Yogi Berra, zero-coupon bond
“That’s hogwash!” The bondholders would tend to accept these offers, no matter how displeasing, because they would find themselves between the proverbial rock and a hard place. As Levy explained, these exchange offers are essentially an arbitrage. If a buyer purchased at par a bond which then came to trade at sixty cents on the dollar, he would probably be willing to exchange it for a piece of paper trading at sixty-five cents—especially if he thought his alternative was to be stuck holding the bonds of a bankrupt company. For these remedies to spell salvation for companies in such dire straits, however, they would have to be completed quickly; there was no time for the months-long process of registering with the SEC. Drexel investment banker James Schneider, in the firm’s San Francisco office, had had workouts on his mind through most of 1981, since ACI was his deal and he had had the responsibility for trying to salvage it.
clean water, Commentariolus, dumpster diving, Eratosthenes, financial innovation, invention of movable type, Islamic Golden Age, knowledge economy, means of production, Murano, Venice glass, paper trading, Ponzi scheme, wikimedia commons
Richard Daniel Smith, “Paper Impermanence as a Consequence of pH and Storage Conditions,” The Library Quarterly 39, no. 2 (1969): 154. 60. Gary Bryan Magee, Productivity and Performance in the Paper Industry: Labour, Capital and Technology in Britain and America, 1860–1914 (Cambridge: Cambridge University Press, 1997), 104–11. 61. Hunter, Papermaking, 538. 62. John Bidwell, American Paper Mills, 1690–1832: A Directory of the Paper Trade, with Notes on Products, Watermarks, Distribution Methods, and Manufacturing Techniques (Hanover, NH: Dartmouth College Press, 2013), xxvi, 1; John W. Maxson Jr., “Papermaking in America from Art to Industry, 1690 to 1860,” The Quarterly Journal of the Library of Congress 25, no. 2 (1968): 121; Matt T. Roberts and Don Etherington, “Cartridge Paper,” Bookbinding and the Conservation of Books, Foundation of the American Institute for Conservation, November 2011, http://cool.conservation-us.org/don/dt/dt0594.html. 63.
Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen
activist fund / activist shareholder / activist investor, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative ﬁnance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond
Many types of trading rules exist, but let me describe two broad classes, which I call a portfolio rebalance rule and an enter–exit rule. The former starts from a macro view of the portfolio, and the latter builds up, trade by trade, from the micro level. • Portfolio rebalance rule. This trading rule looks at the entire portfolio of securities and defines how it is rebalanced. This trading rule is backtested as follows. For each time period, ○ Determine the optimal portfolio of securities. ○ Make a (paper) trade to rebalance to this portfolio. As an example of this type of trading rule, suppose that you find the top 10% cheapest stocks by their book-to-market ratio on the last trading day of each month. You then buy an equal-weighted portfolio of these stocks and hold it for a month. Next month, you rebalance to the top 10% cheapest stocks at that time, and so on. Hence, you always have trades on and the number of securities in your portfolio is stable (it only varies if the size of your security universe changes).
affirmative action, Asian financial crisis, Berlin Wall, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Fall of the Berlin Wall, fear of failure, fixed income, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Mikhail Gorbachev, money market fund, moral hazard, NetJets, Northern Rock, oil shock, paper trading, risk tolerance, rolodex, Ronald Reagan, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, value at risk, éminence grise
The aristocratic, Yale-educated Lehman had reigned during the firm’s glory years and was a banker to some of the biggest and most important U.S. corporations early in the American Century. By the 1960s the firm’s advisory banking business was second only to that of Goldman Sachs. But because Robert Lehman and the other partners hated the fact that corporate clients would have to go to Goldman for their financing needs, Lehman decided to start its own commercial paper-trading operation, hiring Lewis Glucksman from the powerful Wall Street investment bank of A. G. Becker to run it. When Fuld came on board, Glucksman’s trading operation was beginning to account for a majority of the profit s at Lehman. The trading space was noisy and chaotic, with overflowing ashtrays, cups of tepid coffee, and papers piled on the tops of terminals and under the telephones. Glucksman had the windows blacked out in a bid to re-create a Las Vegas casino atmosphere, with traders focused only on the Quotron and Telerate machines that were standard-issue on Wall Street then.
The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz
affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game
(For instance, Florence Jaumotte and Irina Tytell, “How Has the Globalization of Labor Affected the Labor Share in Advanced Countries?,” IMF Working Paper, 2007, argues that technological change was more important than globalization, especially on the wages of low skilled workers.) But more recently, Paul Krugman has argued that the impact of globalization may be larger than was previously thought. “Trade and Inequality, Revisited,” Vox, June 15, 2007; see also his paper “Trade and Wages, Reconsidered,” Brookings Panel on Economic Activity, Spring 2008. Part of the difficulty is that globalization is intertwined with the changing productivity within the United States, the weakening of unions, and a host of other economic and societal changes. There is no obvious way to specify the counterfactual: what would the degree of inequality have been, if we had not had globalization, but everything else had been the same?
Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan
asset-backed security, Bernie Madoff, buttonwood tree, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, mega-rich, merger arbitrage, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra, zero-sum game
death of gold coins of IOUs bought and sold by, 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 5.1 money for Jewish immigrants collected by Sam Sachs made partner of, 1.1, 1.2 Goldman, Rebecca Goldman, Rosa see Sachs, Rosa Goldman Goldman, Sachs & Dreyfus Goldman Sachs: “Ad Hoc Profit Maximization Committee” at, 12.1, 12.2 Administrative Department of American Cyanamid Corporation lawsuit against annual budgeting at antitrust lawsuit against, 4.1, 8.1 arbitrage department of, 5.1, 5.2, 5.3, 5.4, 6.1, 6.2, 6.3, 6.4, 7.1, 7.2, 9.1, 9.2, 10.1, 11.1, 11.2, 11.3, 12.1, 15.1; see also Levy, Gustave Lehmann; Rubin, Robert bad news not shared by, 7.1, 7.2, 7.3; see also “big short” in battles with other companies board of directors at, 17.1, 17.2, 22.1 bond department of, 3.1, 3.2, 5.1, 5.2, 10.1, 10.2, 14.1 Bouton’s potential lawsuit against branch offices of, 3.1, 4.1 Broad Street building of, 4.1, 5.1, 6.1, 7.1 Buffett’s loan to, prl.1, prl.2 business department of Business Standards Committee of, 24.1, 24.2 Buying Department of, 7.1, 7.2, 7.3 calling effort of capital of, 1.1, 1.2, 4.1, 4.2, 5.1, 5.2, 6.1, 7.1, 9.1, 10.1, 10.2, 12.1, 12.2, 12.3, 14.1, 14.2, 14.3, 15.1, 15.2, 15.3, 16.1 Capital Structure Franchise Trading Group of Catching’s company created for Catching’s power grab at collusion accusations against commercial paper traded by, 1.1, 1.2, 1.3, 1.4; see also commercial paper compensation at, prl.1, prl.2, prl.3, prl.4, 5.1, 7.1, 7.2 competitiveness at confidentiality and nondisparagement agreements at, prl.1 conflict management by, prl.1, 15.1, 17.1 Corporate Finance Department of, 7.1, 7.2, 7.3, 17.1 Corzine’s desire to enlarge in crash of 1929, 2.1, 2.2, 2.3, 2.4, 3.1 Depression strategy of, prl.1, 3.1 discipline at 85 Broad Street building of, prl.1, 8.1, 10.1, 10.2, 17.1 envy of ethical code of, prl.1, 8.1, 16.1, 17.1 Executive Committee of, 15.1, 16.1, 16.2, 16.3, 16.4 factors in prowess of as family business fear of Financial Institutions Group of (FIG), 15.1, 15.2, 16.1, 16.2, 16.3, 16.4, 16.5, 16.6 fine paid by Firmwide Risk Committee at Fixed-Income, Currencies and Commodities (FICC) at, 14.1, 16.1, 17.1, 17.2, 17.3, 17.4, 17.5, 19.1 fixed-income division of, 10.1, 10.2, 10.3, 12.1, 12.2, 12.3, 13.1, 14.1, 14.2, 14.3, 14.4, 15.1, 15.2, 15.3, 16.1, 17.1 Ford IPO handled by, 4.1, 5.1, 5.2, 8.1, 12.1 foreign exchange department of, 1.1, 9.1, 14.1, 15.1, 15.2, 17.1 “great rehabilitation” of, 3.1, 3.2 hot IPO’s distributed by hundredth anniversary of internal e-mails of, prl.1, prl.2, prl.3, prl.4 International Advisory Committee of international expansion of, 8.1, 12.1, 12.2, 14.1, 14.2, 14.3, 14.4, 15.1, 15.2, 15.3, 16.1, 17.1, 17.2 interview process at investment banking of, prl.1, prl.2, 3.1, 4.1, 4.2, 4.3, 4.4, 5.1, 6.1, 7.1, 7.2, 8.1, 8.2, 8.3, 9.1, 9.2, 10.1, 10.2, 14.1, 14.2, 15.1, 15.2, 16.1, 18.1; see also investment banking Investment Banking Services (IBS) investment trusts of, 2.1, 2.2, 2.3, 2.4, 3.1, 3.2, 4.1, 5.1, 8.1, 9.1 J.
The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby
airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Benoit Mandelbrot, Bretton Woods, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, Kenneth Rogoff, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game
Now, having spent the 1990s at the Treasury handling emerging-market crises, Geithner brought his experience with collapse to the task of regulating Wall Street. Knowing that regulators could not anticipate where the next shock would come from, Geithner aimed to boost the financial system’s overall resilience. He notched up some considerable victories—in particular, the plumbing of the derivatives market, which had consisted of a frightening mess of unconfirmed paper trades, was modernized, silencing one dog that would otherwise have barked during the 2008 crisis. But Geithner also wanted to increase Wall Street’s capital buffers so that the big houses could weather unanticipated shocks. On this goal, he soon ran up against the limits of regulation. The idea of requiring banks to hold more capital had enthralled regulators, including Greenspan, since the 1980s.
always be closing, bank run, banking crisis, Big bang: deregulation of the City of London, Bolshevik threat, Boycotts of Israel, Bretton Woods, British Empire, California gold rush, capital controls, collective bargaining, corporate raider, Etonian, financial deregulation, fixed income, German hyperinflation, index arbitrage, interest rate swap, margin call, money market fund, Monroe Doctrine, North Sea oil, oil shale / tar sands, old-boy network, paper trading, Plutocrats, plutocrats, Robert Gordon, Ronald Reagan, short selling, strikebreaker, the market place, the payments system, too big to fail, transcontinental railway, Yom Kippur War, young professional
In the end, Burr was victimized by his own ambition, making an ill-fated purchase of Frontier Airlines and trying to beat the major carriers on their own turf. He financed his frantic expansion by a staggering accumulation of debt. Later it was alleged in lawsuits that Phillips egged on Burr to borrow and expand too quickly. Whatever the truth, when crisis struck People Express, some bondholders felt betrayed by Morgan Stanley. They not only suffered serious losses, with some paper trading as low as 35 percent of the original issue price, but accused Morgan Stanley of failing to maintain a market during the turbulence. By one account, Morgan Stanley bought People bonds until it had $40 million worth in its inventory. There was a second dimension to the controversy. For two and a half months, as bondholders suffered, Morgan’s M&A Department shopped People to potential customers, exposing the firm to a possible conflict of interest.