Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Joe Stocks who wrote (67065)	7/29/2006 10:30:23 PM
From: mishedlo	Read Replies (2) \| Respond to of 110194

Joe, did you write that and if so can I use it on my blog? Mish

To: Joe Stocks who wrote (67065)	7/30/2006 5:59:09 AM
From: YanivBA	Read Replies (1) \| Respond to of 110194

I once met the founder of a proprietary trading firm in a recruitment conference. He said they trade interest rate futures in Europe and that they make a significant portion of the volume of the interest rate market. Quoting from memory: "The market we trade is very deep and efficient. It is very hard to find inefficiency in those markets. To find inefficiency in an efficient market you have to go into the very short term. My traders hold positions for just a few seconds. We are trying to advance to holding positions for just a few minutes but so far with very little successes." Ever increasing computational power enables the market insiders to go deeper and deeper into the short term. Be it humans holding positions for just a few seconds or computers holding positions for just a few milliseconds they all react to market action in a fully pre-planed way. They live where automatic action is the only action possible. Surly they have refined the automatic action to a level that has not been seen before. However, I believe there is only trade possible within such short terms. This is the "return into historical norm" trade. A trader identifies a relation in the market that he regards as statistically significant. He identifies a deviation from the relation and trades against it hoping the relation would return to historical norm. By working this trade they impose on the market to keep behaving in the same way it did before. Correlations are being protected beyond their natural lifespan. More and more correlations are being imposed in the same time. At one point too many correlations are being protected and they begin bumping into one another. The more liquidity is injected into the market the more rigid it becomes. It starts to turn slower. Looking only on himself Mr. Market walks in a day dream. He no longer looks at reality. He just goes trough the motions. The dance becomes "now I go down, now I go up" where it once was "now I should go up, now I should go down". But reality is there. Rigidity in one market only transfers change to some other market where the hedge fund gods can not enter. Change itself is unavoidable. In the end the hedge fund god is a creature of belief. His real power comes from the net inflow of funds into his domain. The net inflow of funds is determined by the marginal saver. The marginal saver is the one has been the most skeptical of all believers and life on the secular lane (cash) is becoming nicer and nicer. Here we are back at interest rates. Trying to stop the marginal saver from leaving the fund, the hedge fund god can only turn to the one trick he knows. He goes deeper into the short term. He will bring new sources of wealth from going deeper and deeper into the seconds. He will teach the computer to trade the milliseconds the way he trades the seconds. He will teach the servers to trade the nanoseconds like the computer traded the seconds. Into the ground he shell go. But the cave must get smaller. He has to check more of the ability to think in order to get in. Ever seen a blackbox wonder how stable are the walls? YanivBA.