Dumb Money Redux


Cartoon by XKCD

Responses are pouring in from my post Computers are the new Dumb Money. A few of the quants I know told me the link was hitting their inboxes all day from friends and colleagues around the industry. A few desk traders I talk to had some anecdotes backing my assumptions up. One guy, a “data scientist”, was furiously angry, meaning he probably blew himself up this week or has some other deep-rooted insecurity about what he’s trying to do and needed to vent.

If you haven’t read it yet, go here: Computers are the new Dumb Money (TRB)

One thing worth keeping in mind about algorithmic trading is that there will always be some strategies that are better executed than others and many that will thrive while their competitors are chopped to pieces. In this respect, they’re no different than any other traders or funds.

For example, the quant funds that were probably most injured this week were those who were in the business of selling volatility or gamma. If they’re short gamma, they end up having to dump a ton of stock when volatility breaks out and prices dive. This kind of action is what exacerbates declines and makes a down-2% day into a down-4% day – especially when everyone is doing the same thing (see ‘portfolio insurance, 1987’). If they’re short vol, then they could be running one of those fabled strategies that picks up nickels fairly consistently until the steamroller flattens them – taking in options premiums in small, yet reliable amounts, and then a crisis forces them to actually make good on all that insurance they’ve been writing.

This has happened before, it will happen again. It doesn’t mean that all quant or algorithmic trading is foolish. It just means that the alchemy still isn’t all it’s cracked up to be.

Sunrise, sunset. 


What's been said:

Discussions found on the web
  1. September 1, 2015 | Mutual Fund Observer commented on Aug 01

    […] Josh Brown makes the argument passionately in his essay “Computers are the new dumb money” and followed it up with the perhaps jubilant report that some of the “quants I know told me the link was hitting […]

  2. Bitcoin Loophole Review commented on Sep 22

    … [Trackback]

    […] Here you can find 35409 additional Information on that Topic: thereformedbroker.com/2015/08/29/dumb-money-redux/ […]

  3. Bitcoin Era Review commented on Sep 30

    … [Trackback]

    […] Read More on on that Topic: thereformedbroker.com/2015/08/29/dumb-money-redux/ […]

  4. 메이저놀이터 commented on Oct 06

    … [Trackback]

    […] Read More on to that Topic: thereformedbroker.com/2015/08/29/dumb-money-redux/ […]

  5. 토토 commented on Oct 17

    … [Trackback]

    […] There you can find 21412 additional Information to that Topic: thereformedbroker.com/2015/08/29/dumb-money-redux/ […]

  6. top online casino malaysia commented on Nov 20

    … [Trackback]

    […] Read More on to that Topic: thereformedbroker.com/2015/08/29/dumb-money-redux/ […]

Read this next.