I haven't read the paper that apparently says that trend following at certain times in the past made profits. However, I have read many trend following papers, including one from 5 mathematicians in France that came up with a significant to based on millions of observations. And I pointed out that the funds that follow trend following are tracked by many services and they have inferior performance unless they somehow gravitate into buy and hold in stocks.



The reasons trend following doesn't work are myriad including ever changing cycles transactions costs, and bid asked spreads, the opportunity to game the system against them, and the ease of triggering mechanical rules and the fact that markets are homeostatic, and supply curves change as prices move up or down.

Ed Stewart writes: 

In my opinion, part of it is that people who mostly trade their own money look at IRR or "cash on cash" returns, and thus see issues of gains and losses more clearly vs. those who only look at marketing documents and time-based returns of recently hot funds.

Larry Williams writes: 

Trend following does not work on just one (or 2, 3, or 4) instrument. Trend followers have to have a large basket of 'bets' on the assumption that someplace in the world a market will trend and that one massive trend—think CL this year and last—pays off the other bets.

It's like betting on all the numbers in Roulette one number pays big odds. Trend followers say they cannot predict which number will show or market will trend, but with enough numbers bet, one will win.

Stefan Martinek writes: 

Larry, you make a great point. TF is more risk/exposure management on a basket than trading. Argument that benefits of diversification end after ~20 markets is such a nonsense (my teacher said that too together with other corporate finance theories; they probably never tested anything outside of equities).

Diversification across groups, styles, markets, and time frames improves risk adjusted returns in a long run. Of course in a short run concentration is great - let's bet all on Apple. TF has a nice barrier of entry which is good: First, some money is needed; second, most operators cannot run 2 years without rewards if necessary. They quit. Philosophically it is somewhere between "systematic macro" and "private equity". In PE you expect that most bets will be a crap unless you are in LBOs and other later stage deals. You expect that some areas will be in slumps maybe for years. Patience is such a great thing if one can afford it.

Orson Terrill adds: 

Well if I hadn't unnecessarily deleted all of my old code I would just spit out some examples… I wrote several functions that tested trend following, and mostly what was observed was that the number of intervals (days, weeks, whatever) in which a trade would be open generally follows an exponential distribution.

For those that do not know what that implies: Lets say trend "A" has been going for 5 days, the probability that the next day will be the end of trend "A" is roughly the same as if trend "A" were 1 day old, or 20 days old. The next day the probability of "A" ending is generally the same, regardless of its age (like a Poisson process for the arrival of the end). The general notion that longer trends are more, or less likely to end, due to their age, is not backed up.

Just because a run is multiple days old/young does not mean it was profitable. In many markets nearly half of the period's range is traded through during the next period, on average (I think this is true on almost all scales in the EUR/USD, but its been a while). This means getting in on momentum greatly increases the likelihood that a trade is entered at such a point where near term downside is slightly more likely than near term upside (assuming its a long equity position).

There were marginal improvements through adding responses to measures of volatility(mostly changes in absolute ranges), rates of change of price medians from multiple length of time intervals, and most significantly in the general case: reversing intra-trend can garner a couple tenths of 1%. Specifically applying those while using several time series which switch regimes in the sharing of strength of running correlations in percentage changes like SPY, TLT, and GLD, might have some interesting results (I eat what I kill, so I had to leave it there).



 In the US, coal is on the ropes for several reasons. First, the strong dollar is making exporting coal [and LNG] relatively uneconomic.

Second, coal has become uneconomic. Coal burners are turning to lower-cost natural gas or renewable energy. In fact, no US utility is seriously considering building a new coal-fired power plant. To make matters worse, most utilities who own coal-burning assets are seeking exit plans.

Then, there's this:

"Recent report reveals dramatic decline in number of active W.Va. miners"

The article describes declining mining activity in WVA. They report that 2,596 WVA miners lost their jobs in the first quarter. It should not be a surprise. What they do not say is more jobs will be lost in 2015 as dozens of uneconomic power plants exit from the nation's deregulated power markets.

The article is exaggerating when it suggests the root cause of WVA's mining woes is a federal war on coal. There's no federal war on coal. There is federal [and state] war on carbon.

Just ask the natural gas burners. Ask oil burners. Ask nuclear burners. Ask state regulators. But, don't ask the media. And, for heaven sakes, don't ask a politician.

Victor Niederhoffer asks: 

If all this supply is coming off the market, isn't that bullish? 

Carder Dimitroff writes:

Interesting question. The answer is not simple.

Coal mining will struggle. Coal transportation will struggle. Gas boilers will struggle. Manufacturers supporting these types of assets will also struggle.

Turbine manufacturers are gaining. General Electric, Siemens and other turbine manufacturers are seeing growth in high technology turbine sales (combined cycle gas turbines). They offer turbines that are 60 percent fuel-efficient (coal burners are approximately 20 to 30 percent fuel-efficient). The combination of high fuel efficiency, low fuel costs and low labor costs offers buyers a significant competitive advantage.

Energy prices are unlikely to improve. Market-clearing prices for wholesale power are challenged as low-cost gas turbines enter the market. Ohio alone expects six new gas turbines (the equivalent of four new nuclear power plants). These turbines will likely lower average market-clearing prices by displacing less competitive sources (coal).

Energy prices are also challenged as renewables and energy efficiency programs take hold and grow. As California demonstrates, it only takes a small amount of renewable energy (or energy efficiency and demand-response) to shave off average market-clearing prices.

Nuclear power is winning on the carbon war argument. The State of Illinois recently passed a carbon bill, which helps existing nuclear power plants (Exelon) and renewable energy sources.

While existing nuclear power is a winner, new nuclear plants are losers. It appears no new nuclear plants will be built for a long, long time. Yes, there are nuclear construction projects underway. Yes, nuclear power displaces carbon and other air pollutants. However, it's not enough. After watching TVA, SCG and SO struggle with spiraling nuclear construction costs, it's unlikely other utilities [or state regulators] will repeat their mistakes. In fact, it appears most other applicants have put their nuclear ambitions on the shelf.

Capacity markets are improving. Old and inefficient plants cannot compete. Some assets are failing to clear auctions. As such, it shouldn't be a surprise that the market's losers are forced into permanent retirement. They can blame the "war on coal" if they want, but it's mostly operating economics that are driving retirement decisions. Those decisions are also capturing other types of plants; not just coal plants.

In the spirit of markets, there appears to be clear winners at the expense of losers.

Stefan Jovanovich writes:

Thanks to another part of my misspent youth, when the U.S. Navy wasted its money teaching me about marine propulsion systems, turbines continue to fascinate me. So, any pretense of knowledge here is restricted to that subject only. The inefficiency of what Carder calls "coal burners" comes from the fuel, not the gas that moves the turbine blades. Steam is actually slighty more efficient than natural gas in its isentropic efficiency because it is easier to capture the residual heat energy from steam after it passes through the first (and second) turbines. (Note: "isentropic efficiency" is the ratio of a turbine's actual power output to those of theoretical turbine with perfect physics with the same inlet conditions and discharge pressures. Or, to put it in engineering speak - actual enthalpy drop divided by the isentropic enthalpy drop).

So, "coal burners" - i.e. plants that burn coal to generate steam - are "inefficient" only because coal has a much lower energy density than other fuels. (This why the British Navy switched from coal to bunker oil; the same ships could go much farther without refueling using the same fuel storage spaces.)

As to how prices for fuels will arbitrage the energy density differentials, beats me; but List members should not take the relative electrical generating efficiency numbers to be a statement about the obsolescence of steam turbines. This is not a repeat of the fate of the railroad steam engine.



 The Sound of Their Music, a bio of Rodgers and Hammerstein, by Frederick Nolan, has many layers of interest for the speculator and others, especially considering that Nolan seems to know nothing about the technicalities of music such as harmony or rhythm, and he seems to be uninterested in the personal lives of one of his heroes. Here are some of the interesting layers.

1. It describes the life and career of the greatest musical duo in history

2. It gives a birds eye picture of the evolution and creation of each musical

3. It gives a glimpse of every great popular composer of the 20th century, up to and Lloyd Webber as the duo collaborated with every one of them including Gershwin and Romberg and Sondheim

4. It gives the financial details of raising money in those days for each musical, e.g. 75,000 to put on Oklahoma

5. It provides a great snap shot of what life in the 20th century was like for the middle classes who loved music in the days when there were 150 American piano manufacturers versus 2 or 3 today.

6. It has great pictures of all the stars and directors of the day

7. It contains a great picture of the dynamics of a beautiful 2 person partnership (R and Hammmerstein) and a terrible one (R and Hart)

8. It contains nice details about the significant family events and deaths of each character.

9. It shows by indirection the techniques that built up a billion dollar business in the field masterminded by Rogers.

10. It shows how many musicians including the duo were able to overcome great neurosis and bounce back to do great work.

A great example of boom and bust was between 1924 and 1929 there were 26 new theaters built in NY, and these would house a total of 225 new shows a year. Similarly in 1929, the Hollywood studies produced about 250 talking musicals, but by 1934, hardly none at all and movie theaters would have to place a sign on their marquees: "there is no music in this show". 

I was also interested in some of the lessons for speculators and great anecdotes contained. Here are some of my favorites. When the cynical critics came to vet the duo's musicals in tryouts they often said as Mike Todd did about Oklahoma: "no leg, no jokes, no tits, no chance." They said the same thing about The Sound of Music. And Hammerstein in a typical quote (he was a saint) said: "the cynics hate to see a kid playing, a blushing bride, and a happy family."

Oscar's father and grandfather were impresarios in the business, and one of the rules that Hammerstein emphasized was "there is no limit to the number of people who would stay away from a bad show." Rogers said something similar in "the smartest people to judge a musical are the audience". And he was always willing to change a tune or cut if the audience didn't like it.

The musicals all needed road shows and tryouts to become good. They started out 4 1/2 hours long, and they changed enormously by the end based on what the audience and the critics liked. Hammerstein would have been a lawyer and Rogers, an underwear salesman if they had listened to their family and tried to get a steady job as they were urged. Both fathers were absentee fathers who spent little time with their kids as they were too involved in business. Many chance meetings let to the great shows. Hammerstein collaborated with Kern on showboat because they met at a Victor Herbert funeral. Kern was able to convince Ferber to let them use the book because he met her at a how with Woolcott and interrupted his conversation with a pretty lady saying "you have to introduce me to Ferber at the Circle" and Woolcott said "I think that could be arranged. The one you rudely interrupted is she".

After the success of Oklahoma, Hammerstein took out an ad in Variety saying "Here are my recent failures. Very warm for May, ball at the Savoy, three sisters, free for all the gang's all here, east wind, and gentlemen unafraid. I've done it before, and I can do it again". The latter thought is something that all speculators should perhaps plaster to their walls.

David Lillienfeld comments: 

It's interesting that it was during the mid 1920s that Park Avenue above 42nd Street took on its current characteristics as a major residential street. By 1928, 10% of all the millionaires in the US had a Park Avenue residence. Emery Roth designed many of those buildings (leading to perhaps the greatest irony in NYC real estate). This was also the time that the Vanderbilt mansions on 5th Avenue began to fall and multistory co-ops replaced them.

That there would a number of musicals appearing on Broadway makes sense given the wealth then accruing in NYC.

What I find curious is that when I think of a movie musical, I think of MGM. MGM practically minted money during the 1930s. Louis B. Mayer was rumored to have a $500K (some suggest it was as high as $1 million) annual salary during the Great Depression. So how is it that there were no musicals made?



 The energy of a closed system will increase when heat or work is transferred to it. 

The rises in Asia and Shell's cash infusion had o go somewhere, and Israel shows it best as always.

"Israeli Stocks Head for Biggest Jump in 2 Years; Dubai Rises"

By Shoshanna Solomon and Sarmad Khan (Bloomberg)

Israeli stocks are poised for the steepest increase since January 2013 after drugmaker Mylan NV offered to buy Perrigo Co. Shares in Dubai advanced.

The TA-25 Index climbed 2 percent at 11:56 a.m. in Tel Aviv, to a record high of 1,683.26. Global health-care supplier Perrigo, which has the biggest weighting on the index, surged 21 percent to an all-time high of 784.50 shekels. Dubai's DFM General Index rose 1 percent to 3,790.29.

Mylan NV offered to buy Perrigo for $28.9 billion, or $205 a share in cash and stock, according to a statement on Wednesday. The offer represents a premium of about 25 percent over Perrigo's closing price for its U.S.-traded shares on April 7, which rose 18 percent on April 8 and closed at $198.55 on April 10. The Tel-Aviv Stock Exchange was closed April 9 for the Jewish holiday of Passover.

"Today's rally is all about the Perrigo buyout offer," Saar Golan, a trader at Bank of Jerusalem Ltd. in Tel Aviv, said by e-mail. "Mylan's $205 bid is likely not the end of the story as rival bids may appear and Mylan may need to improve its bid."

Before Mylan announced its pursuit of Perrigo Wednesday, it had seemed to be a likely merger partner for Teva Pharmaceutical Industries Ltd. Mylan's offer is raising questions about whether Teva will seek a transaction with either company or look elsewhere. Shares in the Petach Tikva, Israel-based company added 3.9 percent to a record 264 shekels.



I'm holding a snap contest with a $ 1,500 reward. I ran a piece called "What is a Trader" about terrible and typical things in our ken. I'll give a 1500 reward to the best augmentation to this by the end of next week. Award to be determined by open vote. Send your entries to me here on Dailyspeculations or to my twitter @VicNiederhoffer .



 A trader at the Grand Bazaar in Istanbul where gold trading has been going continuously for 550 years, amid shouts of 10 whole ones for chocolate tomorrow, a trader in sweats and a wool cap notices my screen, and says "Gold? That's what we love to deal." "Yes," I say, "and stocks and bonds, and oil and grain". "Ah, that's what we love," he says. "Tell us about market trading in the States. What's it like?". I start to tell him but… [where to begin?…]

At 4 am in the morning, a sleepy trader wakes up and finds that prices are climbing. He's short. He looks at the screen and notes they're up 5 points. Thank goodness, he says he saw the price of the stock market on his screen, and it wasn't the bonds he's short… The bond price was a mistake. But then he looks again, and the bonds have risen 6 points. He learns later that day that the minutes of the Open Market Committee were released secretly to 100 politicians and bank officials, on a "need to know" basis and that they were acting on it 10 hours before the release.

The stock market opens down 200 Dow Points, and you buy a line. It quickly goes down another 100 in the first 5 minutes. And you're down a few big. A news flashes across the screen that Janet Yellen just gave a talk to selected Democrats at a closed door meeting, and the market spikes up so you have a 2 tick profit of a grand or two. You quickly get out, thanking your lucky starts that you're not broke, and indeed you have a profit. The market continues to go up, and ends up 400 Dow on the day, and if you had just held your position you would have been able to retire and pay for the education of all your kids.

You stay at your screen for 48 hours straight, nursing a losing position that's being hammered by instability in Europe. The market is very thin, and you need a big move and big news to get out. Finally after waiting without sleep or food, you go to the refrigerator to get a coffee for 30 seconds, and in that time an announcement that the ECB is stepping in comes out and the market rises to where you would have had a profit, but by the time you get back there's only 2 contracts bid for, and by the time you find enough liquidity to get out, your loss is gigantic.

You're sick in the hospital bed, all wired up with tubes and lines but they're on rollers. A mentor comes from California to visit you to see and comfort the family. You have a big position, and have to trade it. But your ashamed to be looking at at the prices, while he's here to see if you're alive. So you go to the bathroom trailing your lines behind you, and your friend says to your wife, "I guess the kidneys are in desperate shape".

 You have a big position in gold, and it's gone against you 100 bucks. You pick up your terminal and you find that Goldman had issued a bearish report on the metal the previous night. Their next report: "As predicted, gold has plummeted to 600. Our prediction was right on target. But we said sell at 800 and it only reached 795 overnight so we missed 5 bucks of the move."

A lot of people have asked me why so many hundreds of thousands trade short term in America. Almost all of them lose. Almost all of them base their trades on mumbo jumbo things that are completely random. The only constant is the vig they pay to the house, which is often 25% of their average gain or loss on the trade. The chances they'll end up a winner is less than the parts in a warehouse spontaneously assembling themselves into a beautiful girl.

I asked an eminent psychologist who has written many books on the market about it. And he said there is a feeling here that no pastime is good unless it causes pain. Most of the traders feel guilt about their childhood, and what horses asses they were and what evil thoughts they had. They wish to atone through trading where the pain of a loss is infinitely greater than the rare occasions that they make a comparable profit. I don't know enough about psychology to know if he's right, but as I suffer through the trading year, and take our small profits on every big move in my favor, but lose it all in the few big moves against, and the little woman says, "when are you going to learn to cut your positions by 90%", I think he may be on to something.

A trader from South Africa comes to your office, and says he's been following your blog for years, and you're the one person in the world that can appreciate his methods. He says he has an IQ of 190 and was on the Olympic handball team. He has the ability to predict the exact range of the day in every market. But his marketing firm won't let him trade unless they execute the trades for him and he wants you to back him. You tell him that being able to predict the range is useless for making profits as far as you're concerned. He leaves the office, curses you out and says he'll be throwing mud on your well deserved and soon to be utilized grave.

A weather forecaster is introduced to you at a party by a friend. He informs you that he's been able to forecast correctly a month in advance the last 7 major droughts in the Midwest. He wants you to subscribe. You ask him why he doesn't just make a killing on these things himself. He informs you he would but he was caught big in one of his forays and lost his stake.

An expansive trader who knows stocks and bonds but knows nothing about the grains decides to take a position in soybeans. He buys a few hundred contracts at the market before the open, and it opens limit up and closes limit down. He finds that he didn't get out before the delivery notice, and his broker informs him that he's now storing 10 big train loads of soybeans in a warehouse at a charge of 10,000 a day + interest.

A trader opens a position in a short put spread selling 20,000 of premium. It goes in his favor for a few days, and it's 15% away from his higher strike price and potential loss. He checks with his broker on the margin and finds that he has 1,000 of premium left but the required margin is 1.5 million. He calls up to find if it's a mistake. "No, that's correct, during the last 3 days before expiration, we assume 10 scenarios, and take the worst which in this case was an immediate 30% decline in price. Furthermore, we're charging you 5,000 a day in Exposure Fees, to compensate for our extra risk. And yes, we just doubled our charges, because we got hit for a 300 big loss on Swiss franc positions, so don't complain."

The lone trader does his analysis and doesn't worry about being taken because he is just one guy trying to make a few trades. And then his setup happens and he takes his position…and the market does exactly the thing that will cause him the biggest loss. How can this be? he thinks. He is just one clown trying to clip a few ticks or points, here and there, not worthy of being a target. But he starts to suspect that maybe he is just one of a thousand clowns, or ten thousand, who are all doing exactly the same analysis at precisely the same time and taking the same positions, which are exploited by a better algo in a co-located box somewhere with huge backing. This "thousandth clown theory" starts to gnaw at him, makes him doubt.

Orson Terrill adds: 

An investment bank with operations in Houston hires an MBA from one of the most prominent business schools in California, he's also the son of the CEO of one of the largest banks in Latin America, and surely there will be huge deal flow for them. They put him on with great access and freedom. Instead of putting on a bad trade of several hundred thousand, he's able to executes several hundred million, accidentally, and loses several million in the first day. He ends up being a high paid restaurant manager, for his financial acumen and pedigree, and he sets the place on fire.



 Steve Stigler, in discussing regularities relating to the height IQ correlation proposed a rule of his father "the correlation between the intelligence of economics and their height is 0.99 with the exclusion of Milton Friedman and John Galbraith (6'8'')".

Andrew Goodwin writes: 

The idea I heard pitched once in Harvard Anthro classes was that it was the body size to cranial capacity ratio that had greater correlation with intelligence. Dolphins are supposed to rank highest in this ratio among the mammals. Dolphins probably have greater intellect than the humans looking at such simple and deterministic measures.



 The book Fundamentals of Modern Statistical Methods by Rand Wilcox describes many situations where slight departures from normality create large distortions in the usual methods of statistical analysis. It recommends more robust procedures such as using the median, the trimmed median, bootstrap simulation, absolute deviations, running correlations, likelihoods, and something I hadn't seen before, M-estimators, to overcome what seem like trivial departures from normality like mixed normal distributions rather than single such.

The book is self contained and doesn't require a high level of previous mathematical or statistical background. It contains summaries of each chapter in five easy steps. It's a good primer and spark for improved methods of looking at data.



 Franklynn Phan writes:

Dear Mr. Niederhoffer,

Thank you again for the "What Is A Trader" challenge. I thoroughly enjoyed reading the varied submissions.

Recently, I was listening to a radio show from the CBC that reminded me of "The Education Of A Speculator". The broadcast (Wire Tap - Forgotten History) describes a Brighton Beach/Coney Island environ as vivid as the one that you describe. I have taken the liberty of attaching a link, not only because I think that you might enjoy it, but also as a thank you for the many eclectic show tune classic that you post (the most recent one being a fav).

(It starts at 3:26)

Best regards

Victor Niederhoffer replies:

Thanks for those resonant memories. Now I'll tell you one.

Joseph Heller was born in Coney Island and always went to steeplechase where the clown blew up the skirts. You got a 50 ticket card for 25 cents there. As you went through the rides the 50 holes were punched. Joseph couldn't afford the 25 cents but it was no problem. They'd wait for the old men to come out, and then say, "mister can I have your ticket." The old men would give it to him, usually with 40 holes left and the kids could enjoy the rest of steeple chase for free. About 50 years later in '64 right before steeple chase was closing, as a blast, to recap the old, Heller brought Puzo and Mailer to steeplechase. They bought the tickets, but when Puzo when through the roller, he fell, being somewhat rotund (by the way Puzo never met a mafioso but did the whole thing on library research). Okay, the three of them sat on a bench and cursed their agents, and talked about the declining sale of hard back, and the problems with their royalties et al for the rest of the day. As they got up to leave at 4 pm, some kids approached them: " Mr., Can I have your ticket". They looked at their tickets 49 left on each of them.



 The demise of Capt. Cook, Hawaii, Feb 14 1779











1. The book Captain Cook by Vanessa Collingridge tells the story of the rise and cannibalization of the greatest explorer in English history, and the discovery of Australia, and the attempt by a nobleman illustrator to take away his renown by showing that a Portuguese actually discovered Australia, and is a great travelogue of an intrepid modern day explorer geographer in Vanessa Collingridge, a cousin, and contains much material of salience for Aubrey lovers, e.g. Joseph Banks the naturalist rode with Cook and had a Maturinesque relation with Cook similar to Maturin's with Aubrey. But for me the highlite of the book was the story of 10 disparate random things, terrible coincidences that led to Cook's death at the hand of the Maori's in Hawaii. First, Cook had to create hostility with random killings by his rebellious officers on the previous visit, then he had to be turned back by icebergs when he left trying to find a northern route bak home, then he had to choose to go bak to the Maoris, then a Maori chief had to steal the tiller and carpenter's tools, then they had to have a miscommunication as they decided to blockade the harbor but Cook went out alone to catch the culprit, then the chief was ready to come aboard as a hostage, but at the last minute the wife intervened to beg him to stay, then one of his officers on the other side of the island had to kill a native, then the marines and Cook failed to watch their back not believing that a deity like Cook could be in danger. All had to happen for the fatal clubbing behind his back to kill Cook. It's like what happens with a bad trade that is not properly thought out that leads to disaster. Brett Steenbarger is rite that a few minutes of delay and thought before pulling the plug can save the Kingdom.

2. The round numbers are becoming particularly attractive all over.

3. The more I study chemistry, the more convinced I am that all the quantum and whole number states and jumps between wavelengths as in climbing up a ladder and angles between the atoms of the molecules have direct and useful implications in our field.

4. LoBagola is living in many markets with moves up and down the ladder occurring with inordinate frequency.

5. The Japanese baseball is a perfect model for how all traders should be prepared in our field, and it would be useful for all to see a Tokyo Giants game. An added bonus is that there are beautiful songs for each player.

6. The books about Rothschild show that he played the same role in financing the railroads at the start of the Industrial Revolution in Europe that the venture capital firms in Silicon Valley play today.

7 The best sushi restaurant in the world is in Awaji Island (outdoor scene restaurant the food ),the shellfish capital of the world. The beauty of eating non-frozen sushi just off the boats, and having abalone in abundance rite out of the shells is unrivaled.The price of a comparable meal in NY at Masa or Nobu would be 10 times as high, and 1/2 as good.

8. I know of many kids of Commodity Traders who are as independent as their fathers and often turn that independence into rebellion

9. Crude oil goes up and down with Mideast hostilities but like all commodity markets ultimately moves as Sushil points out to telescope future supply at lower prices and moves to balance today what future prices will transpire when the supply at current prices is reduced. In other words, the cobweb theorem still holds and trumps Russian and Yemeni and Saudi moves.

10. The elderly agrarian at the Fed seems intent on bulling up the economy when it will help our agrarian counterparts in the legislative branch.



Speed Traders Make Peanuts in Profits From Economic Data Plays - Bloomberg News Item

Vic Niederhoffer:

Excellent academic paper with many fascinating facts, e.g. the human reaction time is 200 ms. vic

Paolo Pezzutti adds:

It is called:

"Do High Frequency Traders Need to be Regulated? Evidence from Algorithmic Trading on Macro News" by Tarun Chordia, T. Clifton Green, and Badrinath Kottimukkalur

The link:

http://www.bus.emory.edu/cgreen/docs/Chordia,Green,Kottimukkalur_WP2015.pdf [38 page pdf]

Burgess Humbert comments:

Taking the paper at face value, and Ceteris Paribus, the elimination of excess profit down to a 'utility' rate of return is a natural phenomenon in a field whose technological advance has resembled an arms race of late.

Unfortunately - ( and this does not denigrate the thrust of the paper or its authors ) - a call to ex colleagues in the field just now led to them falling off their chairs laughing at the idea that the marginal returns are ( or are beginning to ) decline.

As to the other part of the paper about the need for regulations etc. Let me answer this way -

Execution via High Frequency execution has both improved and decimated 'liquidity'. ( Here , I refer exclusively to spot FX, commodity futures, long end interest rate futures and stock index futures )

It has improved liquidity for transacting small parcels that are small enough to be executed within the first two levels of the bid/offer depth order book. I find the improvement stunning - particularly FX.

In terms of dealing in size - well, just a year ago, one could call a counterparty and get a stunning bid and or offer in say 75 mio GBP/ USD Spot FX. No more…. a combination of regulatory change and HFT execution has worsened fills by about 0.00015 in this amount. ( please let's not even start with discussion about using market maker provided execution 'algorithms'…. )

A real life example to put some meat on the table ; The last time I sold 50 mio GBP USD the rate going in was 1.4987/89… the following 'fill profile' is typical of a market order of this size nowadays-




Worse case fill at 86 when dealing with senior professionals just a year ago.

There are ways to improve on this, but I wanted to demonstrate how HFT has both improved and decimated liquidity at the same time.

Andrew Goodwin is skeptical:

What is the cost to every resting limit order in every correlated asset? Think of all assets including options, stocks, futures and derivatives or combos. Isn't is a fool's errand to look at profit from S&P 500 futures to generate the conclusion that HFT does not make much money on news breaks?

Burgess Humbert agrees:

Indeed. Let's call it 30 billion a year with a Sharpe of something approaching infinity.

stef says:

The real problems with HFT are the rules and how they protect the manipulators

See "Direct vs SIP Data Feed" http://www.nanex.net/aqck2/4599.html

Burgess Humbert adds:

There are indeed some very nasty yet very legal order types. The description of some of the orders extends to 20 pages ( yes twenty pages ).

But, there are ways to minimise and work with it some of the time.

I encourage all to regularly read;


One particularly amusing story on that site ( that caused a change in Federal Reserve data release policy !!!!) is called something like '… Einstein and the great Fed robbery …'

Look it up- it will change your world.

Surely a candidate to be made into a film one day.



Larry is treated as a God in Japan. He started the whole industry of technical trading in Japan and about 1000 of his students were in attendance. He believes in conveying specific tested trades to his audience, and he has many students that he has been teaching for 20 years. One of his students handed me his card, and he was the Richard Branson of Japan owning 15 businesses including one involving the cruise ship outside our hotel . Larry concentrated on specific trades, and I concentrated on principles. We were a great tag team. But we both felt that we didn't get the universal respect we are entitled to. We decided at a great sushi dinner the nite before to rectify the situation. The only way to get universal respect in America, guaranteed fawning from the media is to come out of the closet. So we announced that we were coming out of the closet at our Sunday afternoon presentation, and we were greeted with appropriate plaudits, and Tokyo tv which followed us around and video'd the whole program was suitably appreciative. The highlite of the tirp for Larry and me aside from seeing all his fans was our trip to the Tokyo Giants suggested by Larry. I got there at 3 pm to see the 4 hour warmup. The best part was the 80 year old manager leading his team in calisthenics, all the time berating the laggards for not doing it expeditiously enuf. I used that scenario in my talk about the importance of preparation and wa. vic



The trading contest entries were fantastically good,and I compliment all of the entrants on great ideas and spirit. The Prize was 2250. The winnner is # 59 . The second and third place are 18 and 37. The prize will will be split 1500 to the winner and 400 each to the second and third place. Some of the entries were so good that they deserve to be rewarded . I am just back from Japan but will review all the entries and send canes to a number of the great entries that were not winners. The canes can be used as you know for hobbling down with your overplus to wall street during period of panic. Winners kindly send your address to  Lap@mantr.com and a check will be sent. Thanks for your heroic and valuable efforts. Sincerely, Victor

ps. The contest went so well that another contest will shortly be held. vic



 One comes back from a trip to Japan with yet another mumbo concept to inspire fear. This one is that 26 days have gone by without the market showing 2 rises in a row. Indeed the last time the S&P 500 went up 2 days in a row was 2 17 when it moved 2076 on 2 12 to 2086 on 2 13 to 2088 on 2 17. This supposedly is bearish showing that the market can't put a sustained rise together. The song "Let's Misbehave" comes to mind. But does it ever occur to anyone to test it? That's what we're here for. "Er, have you tested that" is the motto of some parts of the spec list. Indeed there have been 6 occasions since 2007 when the market went 25 or more days without two consecutive rises. And indeed 5 of 6 of them were up an average of 2%, three days later.

Much more important, the stock bond ratio at 2053 to 164. or 12.45 is at a big, 28 day minimum and what are the alternatives to stocks, for investors, centrals, and pension. Same holds true for Japan and I predicted a new high there 3 to 5 years from now.

One notes the advanced computer technology in all of Japan and one was particularly pleased to buy two tickets on the bullet train to Kobe. And there were 50 sets of 3 seats on the car. The computer left only one vacancy and it was next to us two Gaijin . It was good to see that the computer is programmed to espouse Japanese values. And good to be back.

Just for fun a music video: Let's misbehave .

Anatoly Veltman replies:

The video trumps the test, by far. I thoroughly enjoyed the flick; but the test idea - not nearly as much. The moment I saw 2086 to 2088, I immediately thought to myself: this can't be serious. I've always questioned the idea of day's + or -, which at the same time didn't differentiate between a substantial and a randomly minuscule. So test results and expectations would differ if some day's delta was -2.00 as opposed to +2.00 with the subject value of 2,086.00? Something tells me the idea should be refined before a test. Great to have u back.



As there have been many excellent contributions to the "What is a Trader" contest recently, we will extend the deadline for votes for the best until Friday, the 20th. We will pay interest and augment the prize to $2,250. Good luck.



Kindly vote for the best entry to "what is a trader" contest. The entries are numbered. Just tell us the number of entry you think is best. We'll announce winners at end of week. I would also say that the entries are well worth reading as they constitute the best writing on what trading is about that I have ever seen. Vic



Here is a nice more recent study of life expectancy with statistics on intervention showing a 20% reduction in the hazard rate.



A surprising number of SPU 500 stocks are between 95 and 100 having fallen recently below the round. JNJ, MCD, AON, GPC, GILD, HSY, ITW, NKE, PVH, PEP, PNC, R, SWK, PLC, SBUX, INTU, CME, MCO, MJN, it will be interesting to see how many of them and in what duration climb above 100 and whether this is non-random or not.

Jeff Watson writes: 

Corn and beans went through their round. Wheat is hovering above it…for now.



 Hi Vic,

Sorry I didn't get to say hello at the last Junto meeting, which was terrific.

Regarding the question you asked at the event: This is not a comment on the validity of Mackey or Teicholz's position. I think Gene was right about needing to do the marathon rather than the sprint, i.e., reading up in greater detail to get fuller knowledge of the topic. But you asked Teicholz whether she rejected the findings of epidemiological studies in the face of many experts who considered them valid.

My question is how you come down on The Phenomenon Formerly Known as Global Warming, i.e., climate change, and whether the skeptics (called "deniers," as in "Holocaust deniers," by the proponents) should bow to the opinion of the majority of experts, notwithstanding the fact that the 30-40 years ago the experts were very concerned about Global Cooling.

I think you or one of the other questioners raised the point that medical journals have 20 referees on an article. So perhaps the studies are more reliable than those in financial journals, where a professor at UMass assigns his grad students to study the results reported in articles and finds that 25% have serious errors. No need to write a treatise on this, but I'm interested in your thoughts.

Best regards,


Victor Niederhoffer replies:

The hazard rate is the gold standard in epidemiological studies. And the hazard rate for life expectancy in the typical studies of meat versus vegetable studies is about 2 to 1. You can imagine the significance of such a difference with 80,0000 subjects or so. The estimate of p has a binomial distribution. When you have a sample in the millions as the meta studies of such divergences have, there is no room for selective sampling. What are the chances that a million people are selectively different from the remained. The statistics of quota sampling are relevant here.

I would also point out that all the epidem studies use the cox hazards model as their statistical foundation. The cox model is like a standard multiple regression model but deals with probabilities instead of levels or changes. All such studies control for all measurable independent variables such as health status, smoking history , and weight. The chances that other independent variables mite affect the outcome with numbers this large in the meta studies is zero.

 You ask why science is sometimes wrong about such things, and I would say that the epidem studies with millions of subjects in many different counties with many different independent variable and selected groups are in a completely different kind of scientific category than climate change where the dependent variables are temperature changes over time, and the independent variables are chemical entities with say 10 or 20 observations and more independents than observations. There are no epidem studies possible in climate change.

I believe Nina is very out of her area of competence and it was dysfunctional to have her armchair rebuttals of highly refereed studies and statistically significant results in the one in a billion categories based on sampling errors and hypothetical differences in the groups studied.

Victor Niederhoffer adds:

 Another way of responding to this tomfoolery less statistically and more qualitatively and common sense is this. The differences between the groups that eat meat and eat vegetables in the many life expectancy studies are of the order of 5 to 10 years. Such differences are important to most human beings who wish to live. With samples in the millions in aggregate and attempts to control for all measurable independent variables there is a reasonable likelihood that the two groups are representative of the populations.

Now if there was a difference in these groups with respect to some other variable, like exercise or preference for risky activities, and somehow that was not covered by the other independent variables, then what could that variable be. Let us find it, because it would be the key to health. i.e. if it had so much of an impact by not being measured, it is truly important, much more important than the diet, and if it could be found it would be the open sesame.

But of course it can't be found because it would be statistically impossible to find something uncorrelated with the other variables that have been studies that has such an effect. It only exists in the armchair and the debunking retrospection and Monday morning quarterbacking. 



Perhaps it would not be remiss to express some thoughts I had over night.

1. Friday was perhaps the greatest loss in wealth ever.

2. Extraordinarily rare since the 90s for both stocks and bonds down 200. Actually only once since 1999. That in 2009.

3. Useful idiots attribute it to revision in expectations of fed increases.

4. But actually the rise had nothing to do with that but had to do with discounted value of returns on capital and lowering of inflation targets.

5. Amazing that good news can cause so much havoc.

6. But the market is the market. It will do what it wants.

7. But of course the stock market vigilantes, and now the bond market vigilantes will make it do the rite thing, especially before election.

8. Ephemeral things can cause great consternation.

9. The threat is worse than the execution.

10. They got me big yesterday. I actually make a nice little profit in SPU by getting out at 10 am.

11. However, I lost big in bonds, very big.

12. One will have to be more careful as the markets rise to new highs again. 

Jeff Rollert writes: 

It felt more like a systematic deleveraging. A balance sheet shrinkage, on both sides.

Anatoly Veltman writes: 

I think there is an important element missing from all these statistics. A drop such as Friday's is felt big by an SP futures long, because the SP futures long is very leveraged, while his currency exposure (hedge) is straight cash, unleveraged.

On the other hand, the real one day depreciation is miniscule for a holder of US stocks - as USD gained so much on the day. Compare a holder of US stocks Friday with an EU or UK person who held no stocks but their cash in the bank - and that person lost plenty, without being Long of US stocks.

Hernan Avella comments:

Anatoly, the reason why it was indeed very big is because you did not have the buffer of buying bonds, golds or oil. Furthermore, the 50-50 theoretical portfolio lost big on Friday on top of a bad streak of 5 down days out of the last 7, and now it's slightly down on the year.Now, when one accounts for stock market appreciation over the five year period as strictly "fundamental", "value of returns on capital", etc etc - one yet skips over a harder to quantify element of market truth: that Central Banks, with their long-standing zero interest policy, have left little alternatives for world wide investors but to pour cash into stocks the past five years. Some of that cash hasn't gone all in based on fundamental projections, it's just gone in. Like in "market will do what it wants". Enter one of the current day hot factors: EU is in dis-array. There is a lot of European capital that isn't investing based on long term returns on equity these days…They are paralyzed in fear of what next shoe will drop. So corrections such as Friday's are inevitable



 "Hey, red pants, old man, whats trading like in America?"

Everyone plays it off the announcements. But not the way you'd expect. If the economy is weak, say the unemployment is up, that's very bullish because the Fed will do more QE or they will keep interest rates below zero for longer and interest rates will stay down and then stocks will go up. But then interest rates go up regardless. But stocks go down anyway. And the opposite happens when say the Manufacturing is up. That means less QE. And interest rates will go up. And that 's bearish for stocks, but then interest rates instead go down. But instead of interest rates going down they go up. But stocks go up anyway. Almost all the announcements are ephemeral. Meaningless because of seasonal adjustments, or in case of manufacturing, they only take account of 15% of the US economy for one month, or even worse in one region. But still they effect the market by 1 or 2%. You want to throw up your hands and say, "this isn't right, or as good tennis players used to say when the opponent stayed at the baseline and pushed, "this isn't tennis". But it is the market. Why are things so topsy turvy and volatile after meaningless numbers? To get people to do the wrong thing. To lean the wrong way. To trade and dissipate their wealth through commissions, bid asked spreads, and fear.



Remember the story of Anthony Morse who along with Flowers used to bull all the canals and trolleys up. He had quite a pool behind him. But then when Flowers died, he couldn't bull them up anymore and got caught in a few panics. His friends left him and he lived on the Bowery where my dad might have had to take him to the morgue if he were working in that era. But then bedraggled, he came to Trinity church to beg for a sandwich, as it were in exchange for a tip. But someone recognized him and just the remembrance was enough to cause an enormous bull move on the board. Of course when the move peetered out, he was alone and desolate, a man who was financially and morally belly up as it were and had to go back to the Bowery again.

Okay, just at the height of the bond rise yesterday, the bedraggled and discommoded and man of ill repute who haggled over bonuses for his colleague and publicity, and who has been leading the read for years like Morse came out with his usual that stocks were in an unsustainable boom and bubble, and that the Fed was likely going to do something about it. If only instead of his yoga mat on the beach he could go back to the Bowery when he touts his bearish views on equities similar to those he had at Dow 6000 and talking his book on bonds.

Alex Castaldo notes: Anthony Wellman Morse (active 1860's, described in Markham's Financial History of the United States as "specializing in the cornering of railroad stocks") is not to be confused with Charles Wyman Morse (October 21, 1856 – January 12, 1933) who cornered the copper market in 1907.



This is an excellent article on deception with many applications to our field where deception is needed at all levels to stay ahead of competition.

Gary Phillips writes: 

We're not only susceptible to being deceived by the narratives of others, but by ourselves as well. We take a linear view that doesn't lend itself to the complex systems described above. We see something happening in the market, and we can't help but create our own narrative to explain what's happening. Traders are very good at linking cause and effect, often incorrectly; thereby unintentionally deceiving themselves.

However, you can't understand a complex system, by simply looking at it's individual parts. There are multiple heterogeneous agents that make independent decisions that evolve over time. These agents will interact which leads to emergence i.e., the whole becomes greater than the sum of the parts. and, emergence will disguise cause and effect. Therefore, it may be difficult to determine if deception would have an effect on the outcome, or not.

In hindsight, it's often the hidden factors that one did not anticipate or even consider, that were the drivers behind a move. So, even a move built on the back of deception or misinformation, may still be an actionable event, if one if one practices good trade management.

Jeff Watson writes: 

I remember back in the pit days when I'd want to shake out some weak hands by trying to fake a rally…..I'd start, then after 5 minutes I'd start believing my own fake out.



 There are a google of factors affecting this company, all seemingly electroaffinitive to the observer from the grandstand, leading to the question of whether companies hit hard by currency depreciation versus the dollar are good buys. Talk about bad luck. This company hurt by currency depreciation to the us and currency appreciation to Europe. How often has that happened to you in your trading and life.

"SodaStream Maker Thwarted by Currency Troubles"

Anatoly Veltman writes: 

I find this a prevailing factor 2015 in the Orlando Resort market. Strengthening US currency worldwide is a double whammy: first the resorts see reduced foreign tourist flow. Room Occupancy figures languish, and shrinking top line eventually feeds into a deficit bottom line. How long can a resort in an over-built market like Orlando operate at a loss? So the seller will become progressively more distressed as we move from 2015 seasons into 2016. I see a brief period looming when properties will be given away. Chinese or other foreign investors will be priced out of US bidding by their own depreciating currencies. The Chinese were purchasers of over 25% of all hotels sold in Australia this year - and that's thanks to AUD devaluation by 20%. Similar devaluation is on the way in EUR, CAD and most other open to foreign investment regions…So bargains of our generation may well be abound in US resort property market, and that's something worth heed and preparation for a speculator these days



The history of deception in war. Very applicable: "All is Fair in Love and War" by John Chomeau

Steve Ellison writes: 

"Find out what the enemy is predisposed to believe and to reinforce those beliefs while at the same time altering your plans to take advantage of these reinforced false beliefs."

Many participants in the market are predisposed to believe that a catastrophe is just around the corner, judging from the perennial success (in selling subscriptions) of bearish newsletter writers. A whiff of actual bad news may get them selling in earnest.



At BEA. Okay, she's one of us. Let s not embarrass her talk. Gives her room. But let's not make it too high either. We're getting a lot of flack from those who say that 10% of GNP is actually negative like the defense. But not too low either. The election's coming up and we need to keep our girl in. Feather the nest so to speak. The rates have been going up. Keep it down a little. Stocks can handle it. They're near a high. They're estimating 2.0. Lets go with 2.2. Okay. Let the dem caucus know so they can alert the cronies and lobbyists. All agreed? Fine.

anonymous writes:

I would add it is a universal truth that when the word jobs (employment) is uttered by an agent of government the conversation in no longer without partisanship.



One has been looking for a long time for a good reference to the part of gestalt theory developed by Fechner that covers the just noticeable difference phenomenon where if you put a frog in boiling water he'll jump but if you heat it up he won't. It came to mind with the recent moves of gold. Here is a great reference very readily quantitative with much qualitative significance. Highly recommended. We must tip the hat to Irving Redel on this as he first brought it to my attention 35 years ago, and used it often in his forays into gold where the small moves were designed to keep you in and the disruptive moves to get you out.



 We're talking about watch sales around here. Rolex apparently sells 650 million in watches each year. Susan says that wearing a watch these days is like jewelry for men, and that it's useless since everyone has a smart phone. We're thinking about Apple's watches. They'll have to compete with all the other watches. Supposedly they forecast it to use up 1/2 of all the gold production in the world. I wonder when Apple will stumble and launch a product that doesn't set the world on fire. Samsung wearable watches apparently didn't do that great. What do you think, and how will it affect the price of Apple. We just bought some on the news that they had to pay 600 million out of 150 billion in cash on a patent suit, which will probably be reduced to 10 or 30 million.

Stefan Martinek writes: 

I agree with the view that watches = jewelry, but then it is more about IWC Portuguese watches in platinum having an unassuming steel look and simple elegant design. Apple is not a competition here. Apple watch will need a phone for core applications + daily charging. Some people probably like to carry two devices when one is enough. Some people probably disagree with Diogenes "who wanted to be free of all earthly attachments — on seeing a boy drinking with his hands from a stream he threw away his drinking bowl, his last remaining possession".

Pitt T. Maner III writes: 

Given the popularity of the "Quantified Self" and Fitbit, why not a watch that monitors all your physiological parameters (via implanted sensors) and provides feedback on the optimal things to do next.

An early example might look something like this: "a new digital wellness and telemedicine platform which helps patients live a healthier lifestyle and connects healthcare providers to patients using telemedicine and wearable mobile technologies, today announced that its platform will be fully integrated with Apple Watch products. Or this: "Apple Watch wearers with diabetes will be able to use an app to monitor their glucose levels."

Carder Dimitroff writes: 

I believe the iWatch will be an ongoing success. Like they've done with the iPhone, Apple will convert the old watch into amazing and useful technologies. As such, the iWatch will likely become less of a watch and more of something else.
In my family, we seldom call each other. It's either an email, text or FaceTime. Phone calls are the last option. Our iPhones are not used much for phoning home.

Like the iPhone, each iWatch upgrade will pack in more technologies on less real estate. We will likely learn new tricks, become mindful of health issues and live a better life.

You can sign me,

Dick Tracy

anonymous writes: 

My son asked me why he has to go to school? "Why can't all this learning simply be uploaded into my brain?", he asks.

anonymous writes: 

The question becomes:

1. Will it ever have a cam?

2. Will it ever be independent of an iPhone?

3. What body sensors can be built into it?

4. Perhaps it will be the base for iHome?

Just some questions.

Duncan Coker writes: 

A watch is a perfect accoutrement for a man as it is rooted in a practical function. The form and design however vary greatly. They can be showy and expensive or simple, like the Timex my father had. Men like things that have a purpose. Watches are handed down from fathers to sons or daughters for generations. The Tank watch is one of my favorites though I don't own one. Fountain pens are in the same category as would be certain sporting gear like classic hunting rifles, bamboo fly rods, Hardy reels, or Swiss pocket knives that every man used to carry. For Apple I know design is very important along with function which is a good start for continuing this tradition.

Jim Sogi writes: 

A Swiss army pocket knife with can opener, screw driver, wine bottle opener and blade, a simple model, is the most handy camping tool. I love mine. I also have a pocket tool with pliers, knife, screwdriver with multiple tips. It's very handy for many things like sports, camping, and skiing. 

anonymous writes: 

I got a very nice waterproof sport watch used at the Salvation Army for $6. The guy at the jewelry store laughed when he saw the price tag and the battery was $15. You can get a real nice casio waterproof sport watch for $20 with alarms, date, stopwatch. I just don't understand some guys desire for expensive watches or computer watches. If the watch were small, had a phone and music and alarm, and GPS and the battery lasted… maybe.



Very happy. February 26, 2015: Exactly unchanged to open and from open to close. Anyone who trades loses the bid asked spread and more through stops.

Paolo Pezzutti writes:

There cannot be a forecast at any moment, but there are technical situations in markets that stimulate non random moves. These patterns occur over time. Although cycles are everchanging and all good things eventually end. You have to listen to the inner music of the market, the hidden messages that it sends at certain times of the day, certain days of the week, when it moves from point A to point B in a given time and magnitude. Behaviors are recurring because of regulations, operational technicalities of big players, effects of fear and greed on the herd, impact of margin calls, announcements, rollovers, etc… It is up to your creativty, intuition and ability to scan the markets finding the hidden jems that can provide you with a meal for a lifetime. Unfortunately, this is not enough to be a profitable trader. Similarly to other endeavours in life, I would say that the technical edge is never enough.

anonymous writes: 

Imagine the 1000's of shorts looking for their profit target on a day like today– "missed by a tick or two". Price moves back to breakeven– "Never turn a profit to a loss, time to exit". Price reacts down again– "but I can't afford to miss the overdue correction, It's now been confirmed". Then stopped out once again, to be repeated at the end of the day. If it held it overnight, it will gap up big the next morning for maximum capitulation. 

Gary Rogan writes: 

But is this intentional (teleological to get all philosophical) or just a day out of many days in which this particular relationship between the open and close holds? Almost all the other days are different, so how should one view this particular day: a totally random occurrence, somebody's clever plan, or the market itself deciding through some collective thinking process to play a practical joke on all the short-term trading participants?

Ed Stewart writes: 

Gary, if for a short-term trader there are questions that leads to meals for a lifetime if studied and answered, that is one of the better ones I have seen.

anonymous writes: 

The round number magnet effects must be exacerbated by the fact that many options strikes are at round numbers. Pin risk and gaming risk of options are real. Exotics make the numbers hidden but draw in large capital sometimes.

You can't see the motivations if the options are OTC and not listed. Recall the story of the large macro manager who got into a lawsuit with his exotic option brokerage firm. He was able to get prices to go just one momentary tick beyond his barrier knock-out/knock-in strike and the prospective payout was so large that the breaking of the barrier on the single tick was contested by the parties.

One of the parties offered unlimited supply on the offer to stop the breach of the strike. –Can't recall seeing who won that lawsuit. Still the fact that large players often think in terms of hidden strikes, could lead to defending and attacking of certain price levels on a given day. The exotic expirations are customized as well.

anonymous writes: 

A word about round numbers & option strikes in the OTC markets.

It is interesting to consider, study & think about the following;

1. What is the 'real' round number. Consider the currency markets. As I type, the AUD USD spot FX rate is 0.78244. The June 2015 AUD futures contract is at 0.7773. The forward FX points that one adjusts the spot rate by the get the outright forward are merely interest rate differentials expressed as FX points. So, if the futures price rallies UP through the 0.7800 round then the spot market will likely be around 0.7845/50 - arguably a 'nowhere' price.. So, because the futures price incorporates the forward does that 'round' have any significance at all. Arguably, the important 'rounds' are only relevant to the core market. It is an interesting null hypothesis that currency futures rounds of a given expiry are 'artificial'… Something to chew on there.

2. Another point about the 'Strike Price Heat Maps' that our magnanimous friends in various market making institutions provide in 'research' pieces/ updates. Be aware that many, many flows are NOT included in these due to wording in various Prime Brokerage agreements, other legal documents and sometimes courtesies given to, for example, institutions in mercantilist high growth non English speaking parts of the world. So you end up just looking at poor quality partial information infected by contractual, confidentiality & 'cover my posterior' bias.

For the avoidance of doubt and to pre-empt the snipers on the list who pop their heads up when a sacred Taboo of theirs is breached, I am specifically referring to OTC markets, incomplete information provided by market makers & bias that anyone who has tested the information will have seen in out of sample results.



 The tennis playing slice backhand former fake doc, bathtub loving, former owner of forecasting company based on blast furnace usage, chair of the Fed, gave the perfect Delphic prediction, right out of Delphi and the singers. "Something big is going to happen". Yes, that will be true whether the Athenians or the Spartans win and since it has no time horizon, 100% true by randomness. Hats off to someone at his advanced age with access to lunch at the Fed every day to further enhance his consulting company gravamen, for his Delphic pronouncements.



 One's reading material for his trip to Florida to say hello to Irving Redel were 3 chemistry texts: Principles of Chemistry by Michael Munowitz, The Extraordinary Chemistry of Ordinary Things by Carl Snyder, and Science 101 by Denise Kiernan and Joseph D'Agnese.

I'm too aware of my ignorance to try to devolve the million things we can learn about markets from chemistry so I'd appreciate my more erudite colleagues here to suggest things. However, I found the tendency of all elements and molecules to form Octets very resonant of moves to the inextricable move of markets to round numbers, and their stability as of the noble gases once they reach there.

Also, one found the discussion of catalysts and inhibiters very resonant as some recurring things like aluminum chloride a catalyst like Janet Yellen or employment and inhibitors like enzyme inhibitors and the quiet before announcements also very common.

What are the acids and bases of the market? The activators? And how does total energy stay constant in markets in a closed system and what predictive value does it have like when the Greek news was very bad, the potential energy was so great for a move to the upside. An ignoramous like me poses these ideas and solicits some erudite thoughts and possibly paths to reduce his ignorance.

And of course, the most salient of all chemical relations. What is the periodic table of markets about. Which are the groups of similar behaved ones? Which are most reactive. Which combine and reduce and increase et al?

Jeff Watson writes: 

As of late, the equity market has been chugging along, with a bias to the upside but within a narrow range. News and reports that one would expect to wreak havoc and change on the market have not made it budge. One could compare the equities market to a buffer solution. A buffer solution is composed of a weak acid or base and it's conjugate acid or base in an aqueous solution. A buffer solution readily withstands a moderate amount of strong acid or base added to it where the pH will only change a little. Consider the market to be the buffer solution and the added acid or base to be the news or reports. Bad news does not make the market go down that much but conversely, the good news doesn't make it rally hard either. Along those lines, one would consider the buffer capacity to be the most important characteristic and measurement. The buffer capacity is a measurement of the resistance of a buffer solution to pH change with the addition of hydroxide ions. This can be easily quantified, and the formulas can be found in any quantitative analysis textbook. The buffer capacity of the market can be defined as how much resistance the market will have to change, given the amount of good or bad information supplied it.



 Vic Niederhoffer and Irving Redel, 2/20/2015, Florida, USA



Dear Mr. Niederhoffer:

Insider Insights' Top Trades Email Alerts are sent four times daily: 11am, 3:30pm, 7:30pm, and 10pm Eastern Time. They contain the top 20 insider purchases and sales filed at the SEC in the hours between each alert, based on dollar value.

These are factual lists, not buy and sell recommendations. Dollar value is only one factor when assessing the importance of an insider transaction, and, frankly, often not the most important metric that determines if an insider trade is significant.

At InsiderInsights.com , we find new investment ideas just about every day using these and more intricate insider screens to determine where we should focus our subsequent fundamental and technical analysis. And while stocks don't (or shouldn't) move up or down based on insider activity alone, insiders tend to be good indicators of when real stock-moving events like earnings surprises, corporate actions, and new products may be in the offing.

So use these regular emails as the initial research tools they are meant to be, and click the links in the tables to analyze a company's or insider's full insider history. Also feel free to email

InsiderInsights.com Top Purchases for 2/19/2015 (3:30pm)

 Filer Name          : HELMER WILLIAM F
    Insider Title(s)    : DIR
    Company             : STERLING BANCORP
    Ticker              : STL
    Trans Type(s)       : OB
    Dollar Value        : $591,924
    Shares Traded       : 46,100
    Trans Date(s) From  : 2/18/15
    Trans Date(s) To    : 2/18/15
    Trans Price(s) From : $12.84
    Trans Price(s) To   : $12.84
    Direct Holdings     : 285,311
    Indirect Holdings   : —
    Other Info          : —
    Input Date       : 2/19/15 2:12:57 pm



Popperian falsification of hypothesis that stocks need oil up to go up today.



In their quiet way (as grandpa Martin would say), bonds have Lobagolad up and down by 6 point since year end 2014.

Gary Phillips writes: 

If one thing is to be gleaned from from last week, it was there were no real signs of systemic risk or true market stress; only the perception thereof. The dissemination of public information forced the movement of common knowledge. The media's voice became the context of the market and the market's negative sentiment made for the healthiest of market environments. The time to get really worried is when the market is priced to perfection and everyone is overly bullish. Therefore, true trading ability is not determined by how well someone can interpret an illusory chart; but by the ability to identify the message's ambiguity, and by the conviction to become a non-conforming player. This is what separates the successful trader from the herd. 

Bill Rafter writes: 

We've had a significant overweight in the bullish sentiment for quite a while now. The market has rallied against that along with the classic wall-of-worry. True trading ability is whichever tool you use that can generate superior relative returns, including charts with various inputs.



When you put a limit in, can the market smell a man like a duck, and come in very close, and then veer away at the last minute saying "whew, am I lucky, that man almost got me with his gun (limit)".

anonymous writes: 

It might be like recent tests show of cancer cells. They give off their own vapour /smell, to the HFT guys at a minimum.

Ed Stewart writes:

I think so. If the short-term edge is too great, they don't want to give you a fill. You have to let out some line first. And if you try to counteract what occurs you will independently discover the banned trading techniques.



 Specs. I am trying to write a little something about technical analysis. Here's what I came up with. (by the way the first one to show that random charts and stock market charts look similar was Harry Roberts I think in 1956 or so but Holbrook working may have done it 20 years before). Anyway, how would you improve on what I wrote.

Most traders in the markets use charts and technical analysis to establish and exit their positions. Academicians and skeptics point to the random nature of many technical patterns. Here's a typical chart generated by random numbers. If you don't tell a trader it's randomly generated, they'll come up with all sorts of predictions and patterns that the chart generates. And if you dare to suggest that what they're doing is mumbo jumbo, they take great offense and beat you on the head with examples of great traders who follow charts, and examples of others who consistently make a fortune by using charts.

There's a trader from Harvard who uses charts and has made 20 billion who says "using a chart is like a Dr. taking your temperature before a diagnosis." Another one says that if charts are so useless how come everyone including you looks at it before making a trade. One of the most respected and successful traders, a friend, puts the debate in focus: "There are lots of great tools in technical analysis (some of them in his book like trader's positions, and breakouts, open interest and spreads). They're very useful as part of a bigger trading process. There are good saws and hammers but it takes a good carpenter to make them work."

There's a guy in Japan who calls himself the Japanese Victor Niederhoffer who has turned $ 10,000 into 5 million by using charts. I hope to meet him in Japan when I visit there for a talk arranged by one who believes in charts, an estimable fellow who combines charts with anthropology, life extension and sports, and perhaps I will become the American Matsohita-Masamichi.

Options values are determined by using random numbers with the same standard deviation and distribution of prices as would be generated with the random number generators I just mentioned. Every trader on the floor uses such generators to predict the price that an option should trade at, and they do very well with this model– until something like the 1987 crash occurs and they go broke.

A famous former academic big options trader and head of the exchange said that almost all the scientific options traders he knew found that when you apply the random walk model to options, it turns out that puts are priced much too highly. He said that he's watched every last one of them go broke. The problem here is that extreme events tend to occur much more frequently than the random walk model would predict.

As I write, the Swiss franc recently jumped about 100 standard deviations above its last price in a few minutes, a one in a trillion shot, and billions were lost by option writers who used defective models to place their bets.

Andrew Goodwin comments: 

The error made is in the actual coin flip method versus the computer generated random flips. If you flip a real coin an infinite amount of times, then the side that is heavier because of a greater extruding feature weight will land more often on the bottom excluding unknown aerodynamic effects.

I hereby wish to debunk weighted coin tosses as fair. That includes the wear and tear on the coin that changes the weight. Over time, the side with the extruding images on the same coin wears down and you get closer to random results.

With the computer generated flips you get no advantage betting either way unless you game the random seed.

If you get Monopoly style game dice that are indented 6 times on one side and just one time on the other, then you are better off betting on the heavier 1 dot side landing on the bottom on a given role over large numbers of roles even if the edge is tiny.

I officially quite playing indented dice board games now.

anonymous writes:

One approach I have taken is to identify some price formation of interest that can be defined by quantitative rules (perhaps "inside days" or "upside breakouts") and then analyze that formation in an actual data series. If the occurrence and distribution of the formation in the actual data series is consistent with randomness, then I make the assumption that it is highly unlikely that the formation contains any additional predictive information.

Sushil Kedia writes: 

"A synthetic price series if generated using some function incorporating random numbers looks similar to a real stock chart"

Q1. Is every variable in that function taking random numbers as inputs? Q2. If A1 is no, then is any such function using random numbers akin to the error terms in the assumptions of a good regression model? Q3. If A2 is yes, then how does such a random number generated chart conclude that real markets are random? Q4. If A2 is no, then which parts of the synthetic price generating function are significant enough to conclude that the final outcome is really random?

Please allow a surmise to be placed on this table, before you tear it off:

The outcome of prices is a joint function of the random reaction to new information at that instant as well as a function of sensitivity of all participants to trigger or not to trigger actions on such moment by moment information updates. Sensitivity is again a multi-variable function comprising of but not limited to factors such as existing position (bias), risk perception (capacity to add or reduce risk at that instant), time horizon and so on and so forth.

Please allow just one more surmise on this table, for the moment, where I will unabashedly borrow from the Palindrome's famous idea of reflexivity. Markets have a feedback loop.

My arguments supporting the surmises:

Cause & effect thinking that is the cause celebre and raison d'etre of known forms of sciences has yet not evolved into modelling, evaluating or concluding enough about phenomena that have feedback loops as well as random reactions.

That's where art steps in.

Eventually as the long held and commonly accepted belief (derived from philosphical arguments) of this list has been that there is no possibility of any reward without some risk, since at zero risk the other side of the trade does not exist, all workable methods will have approximations and estimates.

If one method may or may not be better or inferior than the other, having a method is better than no method. If even in the illusion of forecasting better than randomness one can use a chart, any form of art, or any other mechanism to stay actionable in the face of risk and prevent oneself from ruin, then too randomness will allow one to get closer to being rich enough.

Finally I will quote two giants from this list itself:

Ever Changing Cycles as espoused by the Chair himself, refute any scope for any one method to remain superior or inferior to any other.

The Senator having said once to me that every Cigarette packet comes with the statutory warning that smoking kills and yet it is the user of that information who ignores it. So any method is not the bigger factor in performance, it is the user of that method.

Whether Technical Analysis appears archaic, has refused to involve beyond the simplistic and lacks the sex appeal of rigorous numerics, so long as it triggers a trader to be adaptive, manage his risk and makes one pay one's bills, it's ok. There are enough systematic quant funds that have blown up and the biggest blowout did happen when Genius Failed, since it refused to recognize the ever changing cycles. 

anonymous writes: 

A price chart is an attempt to model relevant aspects of price change. Price change is not linear displacement, whether vertical, horizontal or oblique. Nonetheless, price change can be represented as vertical displacement and time elapsed as horizontal displacement. Such a model, however, invariably supports relationships that does not correspond to anything in the original process.The angular inclination of a trend on a price chart is a visually striking feature of this representation. Such angles have no intrinsic meaning for the price series, but this is one of the many factors (along with our facility for pattern recognition and wishful thinking) that contributes to our interpreting more from price charts than rigorous testing reveals is there.

- William Eckhardt



 Everyone has to sleep at some time or another, even when you're watching the market for that move to your price. You can't leave a limit because an announcement created quantum jumps so you have to watch it. But guaranteed whenever you doze off the price will move right to your desired level, and you'll miss the price.

Closely related is the law of friends and parties. When you're invited to go to a party and accept you would have made a fortune by staying and trading. When you decline to go because you need to trade, it will be the best party ever, and you would have seen the most attractive others ever and they all were talking about how they wanted to meet you, and you'll lose a fortune in the market by trading.

We all know the law of friends, and it's just too bad that whenever you invite a friend to see you trade, you lose a fortune, and he goes back thinking you're a robot wasting your time on mumbo et al.

Orson Terril adds: 

When in school I had an account with one of those forex online bucket shops, ran up ten fold in a short time….it was exam time and I fell asleep from exhaustion, only to be awoken by alarms from my cascading margin calls. Good experience.



Mr. Bollinger is correct in that all of my trades, my colleagues, and my many followers, and many former employees, a google of whom are contributors to this site, use quantitative analysis of prices, volumes, seasonals, interactions, et al to base their trades. That's a good modern definition of technical analysis I think. In addition, as Mr. Bollinger says, most of us from time to time look at charts. However, many of us, don't believe that charts are predictive except in the sense that commonly used chart techniques like triple tops, and pivot points, are deceptively inviting for bad trades, and should be coppered. A good paper on superstition and ritual in pigeons is most educational I think.



A Commenter writes:

Vic, this being a public forum you probably wont reply, but have you ever thought YOUR method is mumbo jumbo and you were just smart enough to stay your whole career on the right side of the drift, with humongous leverage? Think about it. Your junkyard-boeing analogy doesn't hold water. Soros way works. Munger way works. Icahn way works. Even Buffett way works. Time tested. To the $ billions. Yours didn't stand the test of time, not once, but multiple times and this is the most robust stat test. Maybe you were just lucky to skim enough OPM residuals to provide a comfortable life for your family, and more power to you, but otherwise to an outsider, this looks like a huge waste of one's abilities.

Victor Niederhoffer replies:

Yes, I often feel my methods are mumbo jumbo. And I am always trying to improve based on that supposition. I have had enough pitfalls and debacles so that if I didn't doubt my methods, I would be even more of a useless idiot than you think I am. My self skepticism is compounded by the fact that I am pretty much the founder of the field of using statistical interactions to predict markets, and my former employees who I have taught are legion, and use vast financial and human resources that dwarf me by many thousand fold in their extent and erudition. I try to learn from people like Soros and Munger and Icahn, most of whom I have worked for or studied in one way or another. What I learn from them is mainly that they are one with the idea that has the world in its grip, i.e. they profess a line of keeping man small while rising above the tide through clever use of the service and public attachment to the forces of agrarianism to deflect competition and attrition. Luck and the path has much to do with it also. My family and I are quite cognizant of your criticism, and are never hesitant to deflate my exuberance with sobering warnings and critiques such as yours. 



 1. The January barometer has become a Judas goat for the weak to be slaughtered having failed big when down the last 3 times, in 2009, 2010, and 2014 with average subsequent rises in double digits each time (after holding in 2008) but failing in 2005 and 2003.

The stock markets swoon in last few hours on Friday, Jan 30 was 10th worst in last 15 years.

3. Some constructal numbers of the week: gold below 1300, SPU below 2000, and wheat below 5.00, and vix above 20.

4. The best book on science I have read is Michael Munowitz Principles of Chemistry. Some other great books I am reading is Paco Underhill Why We Buy (does for buying what we should do for the market in terms of scientific analysis), Russ Roberts How Adam Smith Can Change Your Life (applies the theory of moral sentiments to how to live happily in current days), Paul Moskowitz and Jon Wertheim Scorecasting (applies sabermetrics and counting to our favorite sports shibboleths), Michael Begon, Townsend, and Harper Ecology 4th edition (the best selling standard ecology book these days) and William Esterly The Tyranny of Experts (how planning leads to poverty compared to the invisible hand), Chris Lewit The Secrets of Spanish Tennis (gives some great footwork drills the Spanish use to rise to top), Lamar Underhood The Duck Hunter's Book (the most beautiful writing about fauna I have ever read and reread that makes you long for the beauty and poetry of bygone pastimes) Uri Gneezy and John List The Why Axis (uses pseudo experiments in real life and contrived anthropogical settings to attempt to prove liberal shibboleths like why genetics and incentives don't matter), David Hand The Improbability Principle (why miracles are likely by chance). That's enough.

5. The service rate paid by the world's most sanctimonious billionaire has risen from 2.5% to 9.5% on quarterly ebit this last reported quarter.

6. The ratio of stocks to bonds is at a 1 year low.

7. Gold is playing footsie with 1300 and SPU with 2000

8. Crude broke a string of 15 consecutive weekly declines with a 7.5% rise this week finally showing that futures moves to telescope reductions in supply the way Heyne elegantly shows they do.

9. The pythagorean theory of baseball runs scored for and against is a statistical due to random numbers, completely consistent with chance and has nothing to do with any recurring tendencies or baseball tendencies.

10. When my kids and relations start calling me worrying about how far the stock market is likely to fall, it's bullish. Conversely when they all start apps, it's time to wonder whether that goose has been plucked.

anonymous writes:

As to point 1.

I posit that all 'indicators', techniques and strategies in the public domain are worse than useless as presented. Within this I include everything preprogrammed into trading software like Bloomberg or Tradestation, the 'January effect', every indicator written about in Futures magazine etc… There are a few public strategies that some firms have made money from but the volatility is enormous and no note is made of survivor bias of others who used the strategy. There are then the preprogrammed techniques available that can be very useful but only as part of a bigger trading process. These last are probably less pernicious than claptrap like the RSI.

It belittles us all to discuss these things.

Consider it this way– everything that makes its way into a magazine or gets programmed into trading software is detritus from the core of truly predictive strategies.

If there is anything to be gained from this it is that you have to do your own homework. 

Larry Williams writes: 

With all due respect you are way off base on this issue; you mean to say OBV is useless, that seasonals have no value that volatility breakouts are worthless, that Bollinger bands are junk and select price patterns have no value? COT is just a joke, that watching spreads and premiums is the same as an Ouija board? Delivery intentions tell us nothing and advancing stocks, volume and Open Interest reflect nothing?

There are lots of great tools in public domain, just as there are good saws and hammers but it takes a good carpenter to make them work.

Anatoly Veltman writes:

Paragraph 1 falls apart on many levels: so what that "it" failed in 2009 and 2010 at price levels triple and double the 2015 level? So what that "it" failed in 2014 - then via principle of alternating years, "it" better work in 2015! But most of all: in day and age of still ZIRP manipulation, what historical market stats? The 2009-2010 were onset of QE, and 2015 is sunset!

Ed Stewart writes:

Taking into account changing cycles, I tend to disagree. I think there is quite a bit of stuff in the public domain that is very worthwhile.

For starters, a careful reading of Victor's book revealed many more specific ideas than it seemed on a casual reading, which I'm sure many/most here know. I have actually made more than decent money with a few ideas (gasp!) I found in the first market wizards book. Larry's book is a bit of a brain dump (which I always like, no offense there), but once again I found some good ideas in it.

I made (for me, not relative to a big fund manager) very significant profits in 2012-2013 using concepts that I first learned about (If I recall) on Falkenstien's blog, and for a time I tried to get a fund started to trade that market. My thought is that sometimes the market is rich for a particular approach do to a counterparty paying a massive premium, consequently sometimes these things go on even when everyone doubts them (which is why they might keep working).

I think the key to public domain stuff is that if one gets the concept behind a good rule-set there might be 1000 other rules related, waiting to be discovered that might be more attuned to the current cycle of market behavior.

Another is in combining ideas. For example in my way of seeing things there are environments were "naive" strategies are very effective - it is a matter of if u can catagolize that environment and then if there is some persistence to it in the next period (My finding is that there often is), though never perfect.

One last thing I learned is (perhaps contradicting the above) Don't ever write anything and assume that no one will reverse engineer and map out every qualitative thing you write. I had a trading blog that admittedly was mostly goofy stuff i wrote to draw free traffic from google, but also some pretty good core ideas I have made good hay with. Then one week I got emails from two different guys (one a big algo firm, the other an execution algo guy at MS) basically saying, "hey, I mapped out these ideas ideas, they really work - thanks!". The next week I took the blog down. So my conclusion is while some good stuff is in the public domain, don't put anything of value in the public domain yourself, even in vague terms not intended to attract a sophisticated audience. 

Stefan Martinek writes:

From whatever I tested, +90% does not hold or does not improve the base case. Few areas are fine despite being in public domain. They can be further developed. It also helps to start PC at least 250-350 times per year, and make tests before forming opinions. There are so many people with beliefs but when you ask them "show me the codes", there is nothing to show. Sometimes an argument goes that you can take anything and make it working, making the dog fly; I agree but I do not think it is a good use of time.



 Here's a quick list of what I came up with but I hasten to add I know nothing about football.

1. Don't try to be tricky. The members are too enabled.

2. Slow but steady wins the race. Don't go from long to short in one day.

3. Stick with the drift. Bonds and stocks have a drift.

4. Be calm and steady. Stay away from exotic and barrier options and all prop things in markets.

5. Regression fallacy is ubiquitous. The last pass to Butler was good. Don't think it will work again.

6. Don't try to make money the same way two times in row.

7. Stay with the quants. You would think that sabermetrics would tell the right way.

8. Never force your opponent to hit a good shot. They set up a play that allowed Butler to reach it.

9. The cobbler should stick to the last.

10. Don't over strategize. Stick with winning.

anonymous writes: 

If nothing else (not being much of a sports fan), Monday morning analyses often emphasize (to me) the existence of the recency bias, or in wikipedian terms, the serial position effect.

The likelihood that the end of the game last night actually had one of the worst play calls ever is actually fairly low. I suspect that lots of decisions poorer than that one have been made in the past. Similarly, there seems to be a longstanding tendency that when the public is surveyed about their opinion of the quality of presidents' administrations in recent history, the current office holder nearly always is at one extreme or the other.

Ralph Vince writes: 

39 F Curl X-back up. Montana through that to win the 89 Super Bowl. The ball was on the 9 yard line with 39 seconds to go. It was a pass right up the middle, in the back of the end zone however, when the more obvious play would be to throw it right at the goal line, by the sidelines — that would have been much harder to intercept, and if you came up short, there was time to finish it. That up the middle pass left Cincinnatti time to try one last flailing attempt, but, most importantly, it is the kind of pass that led itself to being picked-off.

But no one second guesses the plays the worked, or the fact that every play mismanages the clock one way or the other. You never get top tick.

Andrew Goodwin writes: 

Point 9 of the Chair indicates that one should stick to what one knows. The "last" is a form that shoemakers use.

The Seahawks failed in not sticking to their "last." Their footmen were capable and the excessive trickery failed in the pass call.

The right play was run to Lynch on foot instead of to pass. Let the star who got you to the endgame be the one of who fails. You can pay him less next time even if you lose the game.

Point 8 contains the concept of never cornering the opponent in order to avoid his making a brilliancy. That encapsulates a wonderful ambiguity –Never answering but always provoking thought and sometimes provoking profitable action.

Dan Murphy adds:

It was, indeed, the worst play call in Super Bowl history for the following reasons:

1. The Patriots were almost certainly incapable of stopping Lynch from getting one yard if aligned directly behind Wilson. They were by some metrics, the worst team at stopping runs on 3rd or 4th and short this season, and Seattle the best at picking up those yards on the ground with Lynch. There was one key 3rd and 1 earlier where the Pats stopped Lynch in the Red Zone…but that is only because the backside OT pulled on the read-option and the unblocked DE (Ninkovitch) ran the play down from the backside. Straight ahead man-on-man blocking and there is little chance NE prevents a touchdown (maybe 25%) …give them two chances and the probability of success is probably over 90% (and there was a remote chance of a 3rd play with a quick time-out if the first attempt failed)

2. The explanation of “it was being done to run time off the clock” was as dumb as the call itself. An incomplete pass runs no less time off the clock than an unsuccessful run AND if the Patriots were desperate to stop the clock (it would have been running on a failed rush but stopped after an incompletion) they would have been forced to use a time-out (although seems unlikely that they would have called time-out given that they didn’t use one to stop the clock at :50 after the first Lynch run). What would have been a reasonable explanation was “We wanted to make sure that we had three chances to score instead of two.” At least there is some logic to this. With two failed runs and only one time-out, they might not have gotten off a 3rd play before the clock expired. By passing on 2nd down, they had the potential to throw an incompletion, fail by rushing on 3rd down, and then get a last play by calling time-out.

Regarding the throw itself ..as anybody who has watched a lot of Tom Brady over the years can tell you …the safest place to throw that ball is ankle high.. where only your guy can get it. The problem with that is Russell Wilson is 5'10? and therefore throwing in the seams can be dangerous from the perspective of tipped / batted balls. Throwing the ball between the #s from the pocket is his weakest point as a QB … yet another reason why this play call was a disaster.

Personally, I thought the Patriots were going to win the SB from the pre-season…finally Belichick had the personnel to play his kind of defense on a high level (for the first time in nearly a decade), although I’ll admit I didn’t feel too good about this prediction with 30 seconds left in the game.

anonymous writes: 

Caution: Professor Phil will probably disagree with most or all of this.

Even the very best major league hitter can only cover (at most) half the hitting zone for any one pitch. He can, if he is Altuve or Posey or any of the other dozen or so HOF quality current players, cover the entire plate side to side and 90% of it up and down (hence, "high" and "low" ball hitters) with his stance and swing. But, at the speed and spin that good pitchers throw, even with 20/10 vision and complete concentration he can only cover half the plate. So, the challenge for the hitter is where to look and, for the pitcher, to do a reverse Wee Willie Keeler. Sabermetrics "works" in the same way that the having a legal tender convertible to a fixed weight and measure of gold works; it offers a yardstick that is not political. Where sabermetrics fails is in the details of a particular contest; probabilities cannot forecast a game any more than the Constitutional dollar standard could predict the credit markets. 



 I just made a post on twitter about true psych regularities as opposed to things that only appear on contrived questionnaires given to college students to advance socialist agendas. The two that I know are true are the sold out bull effect, and one that is particularly quantifiable and weighty today. The tendency to have a chance for something very good to happen, and then to see it taken away, which causes grievous disappointment. I mean oil way up yesterday way above 50, up 5%. Hope, hope, hope. But then down 200 today. Hope disappears. Tremendous self recrimination. What other real psychological tendencies do you see from trading that are real and important rather than the college questionnaire stuff of the Nobel person designed to be self fulfilling of the flimsy hypothesis.

Stefan Martinek writes: 

The higher frequency of trading we have, the less happy and impulsive we are. A relatively large pool of impulsive sociopaths on intraday time frames can create a good mean-reversion environment.

Victor Niederhoffer replies: 

Could be bad for familial harmony also. 



 Okay. What market situation is similar to The Seahawks decisions to pass with first and goal on The Patriots 1 yard line with 1 minute to go which pass was intercepted.

anonymous writes: 

Working a bid/offer to get flat with a profit ahead of an announcement only for it to come out 1 minute early and go the wrong way resulting in a painful loss.

Andrew Goodwin writes: 

That play call will go down in the annals of history as one of the worst calls ever. The folks who gathered to watch where I watched included one most vocal who cried for Lynch to get the ball to run. Many were calling for the run.

Let us call this a trick play that backfired. The deception factor was high but the pass call was otherwise a poor decision.

David Lilienfeld writes: 

Respectfully, with the benefit of a good night's sleep on it, I disagree. Go take a look at the defensive line. Where was he going to run. The line had been getting a surge. I'm not sure that's the exact passing play to use. A screen might have been better, but a run wasn't going to necessarily do the trick, and with time running down, an incomplete pass buys time for another play. Bad passing call, but going to the pass makes sense. Just not that play. Something a little harder for New England to read would have been better, though.

Chris Cooper writes:

I'm in the middle of reading Scorecasting: The Hidden Influences Behind How Sports Are Played And Games Are Won by Werheim and Moskowitz. The authors do an exceptionally good job of demonstrating how conventional wisdom in such situations can remain wrong. I would not be surprised to find that this particular example was a theoretically correct call which nonetheless always leads to opprobrium by the masses.

I recommend the book, and note that it is on the Chair's reading list as well. The insight into referees is particularly well expounded. Likely many market lessons.

Tim Collins writes: 

At the very least, you try the run. Lynch is truly hard to take down. Call time out if he doesn't make it. Use a QB roll out on 3rd down. Throw it away if not there. That would leave any play open for fourth.

anonymous writes: 

The play made sense in terms of clock management. It was about NOT giving a guy like Brady an extra 20 seconds to come back and beat you. Further, one must wonder why Seattle didn;t let the play clcok run down to :01 and call a timeout at that point.

A similar analog occurred at 2:02 left in the fourth quarter, when NE kicked off winning 28-24. I was certain they could kick the ball short, allow for a run back, let the clock burn on the play and then stop for the 2 minute nonsense, rather than giving away a pass play for free by kicking a touchback.

NE didn't do that of course, and by the two minute warning, the ball was at midfield.

The point is,running down the clock, or not, is not without its risks. The hypothetical — give the ball to Lynch, could have been a fumble as well. The game is comprised of such things, and no play is without risk, as is no trade, hanging out there by its lonesome.

Tim Collins replies: 

Fourth down play doesn't matter, so you have one run and one pass with the one time out. As long as my QB doesn't take a sack on the rollout, I'm fine. Plus, I thought they took too long to get to the line. There was 55 when they huddled up/lined up. Seattle took over 30 seconds to run that 2nd down play. Either way, I run on 2nd down. I'm stopped short and call time out. I now have roughly 20 seconds (plenty more if I actually get lined up in a timely fashion and run), so my QB rolls out. He is told to throw it away if there is not a wide open lane to the end zone or no one is open. As long as he does what he is told, I have plenty of time to run one last play from the 1 yard line. It doesn't matter what the last play is. I either score or the game is over as I will turn over the ball.

Sure, you could switch these and run the roll out on 2nd and the running play on 3rd down. I might even leave that decision up to Wilson based on his read of the defense, but these are my 2nd and 3rd plays. And, yes, I would run it again with Lynch on 4th down from the 1.

Pitt T. Maner III writes: 

My 2 cents and second guessing– Don't lead the receiver. Aim at his body so he boxes out the defensive back(s). The bigger and stronger the receiver you run across the middle the better. More chance of a defensive interference call. It was a play with poor execution. Lynch can catch the ball too as was seen– one would rather have him fight a rookie DB over a short pass. A fade to the corner with your tallest receiver might have been good too. It's all about size and position and ball placement.

Victor Niederhoffer adds: 

"Seattle Coach Pete Carroll Stands By Decision to Pass"

Scott Brooks disagrees: 

I disagree.

He had one time left and The Beast in the backfield. Run the ball twice and then use your timeout. At the very least, he Belichik would have been forced to call a time out to preserve the clock in the (likely) event that Seattle could have Beasted that ball across the goal line.

Worst case scenario, if you pass, do a fade route to the corner.

The Pats were stacked in the middle prepared to take on Lynch, why throw it into a sea of blue?

They even had time to do a play action and give Wilson time to improvise and still throw it away if there's nothing there. Then run two running plays and use the timeout in between.

It was a stunningly poor call, one that will haunt Carrol for the rest of his career.

Pitt T. Maner III writes: 

Think of the money involved (excluding endorsements and lots of other things): "This year, the salary bonus for players on Super Bowl teams has inched up a bit to $97,000 (up from $92,000 a year ago) for each winning player, compared with $49,000 for players on the losing squad ($46,000 a year ago). So the total gap between the game's winners and losers should be a bit higher than it was last year, when the difference was just under $3 million."

anonymous writes: 

Read a paper earlier this year that the most statically reliable goal line play was the slant pass. The least was the fade pass. In my observation the receiver needed to be about 2 yards deeper. He was too shallow to get separation.

Craig Mee comments: 

This reminds me of turning a winning position into a loser. We have probably all achieved this in a number of ways. Spreading off risk and turning over possession has got to be up there. I must include talking to a fellow trader and after the chat swinging your position from net long to net short, and watching the market go limit long.

anonymous writes: 

What about the quarterback sneak?

Would be good to have stats on how many inches/feet can be reliably picked up on a quarterback sneak, even if everybody knows it's coming:

"Around the time Pro-Football-Reference added the Game Play Finder in 2012, I used it to look up Tom Brady's rushing success in short-yardage situations (third or fourth down, 1-2 yards to go). The results were staggering. Including last season, in his regular-season career Brady is 88 out of 91 (96.7 percent) on these runs, including 56 straight conversions. That's almost as efficient as the extra point. After researching some other quarterbacks, I found that most of them had great conversion rates. This is largely due to the quarterback sneak, which has worked 85.9 percent of the time since 2009".



 Talk about a biased study where if you get to the top 1% of course you're growth was way up but if you are in the bottom, you ended up way down. A regression fallacy designed to create egalitarianism and agrarianism. Could have been financed by the forces of collectivism.

"1450% Income Growth Is What You Need to Join the 1%":

By Gail Degeorge (Bloomberg Business) — New research shows that not only are rich Americans making more money than you, they're also making money faster than you. A lot faster.

"Average earnings growth over the life cycle varies strongly with the level of lifetime earnings: the median individual by lifetime earnings experiences an earnings growth of 38 percent from ages 25 to 55, whereas for individuals in the 95th percentile, this figure is 230 percent," according to a paper published in January by the National Bureau of Economic Research, by four authors including one at the Federal Reserve Bank of New York. "For those in the 99th percentile, this figure is almost 1,500 percent."

For those in that top 1 percent, that means going from making about $50,000 when you're 25 to about $750,000 when you're 55, said Fatih Guvenen of the University of Minnesota, one of the study's authors.

"Every year, the median worker between ages 25-55 experiences 1 percent annual growth," he said in an interview. "For the top 1 percent, it's about 9 percent per year. And because of compounding, their incomes grow by 15 fold." Age also makes a difference — and the early years really count.

"Across the board, the bulk of earnings growth happens during the first decade," according to the study, which drew on a sample size of more than 200 million men between ages 25 and 60 from 1978 to 2010.

Meanwhile, momentum in earnings growth slows as workers age. For those older than 45, the only groups with earnings growth on average were those in the top 2 percent.

The research also showed that the richer or older someone is, the harder they can fall. Earnings shocks that workers encounter are usually harmful and become "more severe as individuals get older or their earnings increase (or both)," the paper said. This is because earnings growth slows as workers age, and there's an increasing risk of having a sharp fall in income after the age of 45. 



 Stock market vigilantes create Greek moussakis delight

"Tsipras Targets Deal With Euro Area After Market Pummeling"

By Nikos Chrysoloras and Corina Ruhe (Bloomberg) — Greek Prime Minister Alexis Tsipras sought to repair relations with creditors after a week-long selloff in bonds and stocks, a move welcomed by euro area officials concerned they were headed for a showdown with the bloc's most indebted nation.

Greece will repay its debts to the European Central Bank and the International Monetary Fund and reach a deal "soon" with the euro-area nations that funded most of the country's financial rescue, Tsipras said in a statement e-mailed to Bloomberg News on Saturday.

"The deliberation with our European partners has just begun," Tsipras said. "Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole."

Bond yields surged on Friday after Finance Minister Yanis Varoufakis said the new government will turn its back on the rescue program that allowed Greece to pay pensions and public wages for the past five years in exchange for a punishing regime of spending cuts that wiped out 25 percent of its economy.

Gary Rogan writes: 

You'd think that almost 3,000 years after inventing Western Civilization they'd have enough sense not to believe the "No more bailouts, no more submission, no more blackmailing" promises of a wild-eyed radical.



We can soon expect to hear the mumbo about how if January is down the market is likely to be down for the year et al. How many times does this have to fail before it loses its impact.

Rocky Humbert writes:

Feel free to call this "mumbo" — but there are hundreds of millions, if not billions, of US stock market positions that will exit if the market closes today below the 1960-2000 level. I am not predicting today's close and the probability of falling 40+ spu points is always very low (hence betting on this outcome has lousy odds).

However, I will predict with confidence that should these "stops" get triggered, you will be rubbing your eyes next week at the much lower prices you will see. 

Hernan Avella writes: 

What happened with the idea you championed back in December about the wisdom of the common man, that poured $36.5 billion into stock funds on Xmas week, marking the biggest inflows on record as U.S. stocks surged to record highs. Are those the positions that are looking to sell today? Enlighten us please.

Rocky Humbert writes: 

The "common man" will do just fine. It's the professionals who will be selling based on things such as this.

Anton Johnson writes: 

Wondering about the self-promoting Mebane Faber and his recently launched ETF buisness, I found this value nugget:

Cambria global value ETF (GVAL) return since inception (3-12-2014 till 1-28-2015) is ~ -19%.

'The Cambria Global Value ETF seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the Cambria Global Value Index[…]The Index next separates the top 25% of these countries as measured by Cambria's proprietary long term valuation metrics. The Index then screens stocks with market capitalizations over $200 million. The Index is comprised of approximately 100 companies.'

anonymous writes:

Meb Faber likes to look at 12 month moving averages computed at the end of the month. For S&P we have:

Date              Close

1/30/2015       ??

12/31/2014     2058.9

11/28/2014     2067.56

10/31/2014     2018.05

9/30/2014       1972.29

8/29/2014       2003.37

7/31/2014       1930.67 

6/30/2014       1960.23

5/30/2014        1923.57

4/30/2014        1883.95

3/31/2014        1872.34

2/28/2014        1859.45

You can verify that he would be bearish if the end of January value is 1959.125 or below.

This I believe is the source of Rocky's numbers



 1. The key bellweather these days is the Dax.

2. The reason The Knicks won 3 in a row was that they got rid of Smith. He was the rotten egg that ruined the barrel. After losing 16 in a row they won 3 in a row. The market went down 5 in a row then up 4 in a row. The market learns from sports team.

3. Every situation in baseball and basketball including whether a fielder should have made a put out is captured on video and quantified these days. The book Mathletics by Wayne Winston uses regression analysis to find the value of each player and each play in the major American games. A better technique would be montecarlo simulation. Often Winston makes the part whole fallacy of fitting many variables to an outcome and then reporting an improvement from a naïve strategy. The pythagorean theorem gives good results in baseball, and basketball, and it could do the same in market. Use the ration amount gained in rises /divided by amount lost on losses to predict the % of wins. But there is the part whole fallacy in it. Naturally given the distribution of gains and losses, if you know how many points gained and losses there were, it's going to give you a great estimate by simulation of the games won, that will do much better than the squares of James et al.

4. I've given up on dealing with the big low priced broker as they now add a risk fee to the regular commissions, but it seems like a great stock to buy, as they leave no contingency unopened in order to make a profit at the expense of their clientele. Good bye to any thought of option trading also as I recently had a position with $1,000 of premium with a few days to expiration where the required margin was close to 1 big. The thought too smart by half comes to mind.

5. The main reason that stocks go up more than bonds and the explanation for the dimsonian 70,000 fold a century multiple you make is the power of compounding on a base of the return of capital. It has nothing to do with dividends. However, the differential between earnings price ratio and 10 year rates continues to rise, and that is extraordinarily bullish for stocks for much the same reason as above.

6. Reading Roman history, one sees the wisdom of Nock's idea that the only thing worth studying in history is the Roman and Greek history because everything happened there that will happen again. The prelude to the Crusades is particularly relevant today.

7. The Nasdaq refused to go down with every other equity down on Friday.

8. Gold is now playing footsie with the round of 1300 the same way it did with 1200 last year. But of course everyone was bearish last year so it went up a fast 100 bucks in 2015 proving the old adage that the things that go down the most in 1 year go up the most the next year. However, I stopped trading gold except in small quantities because one can only predict a day or so, and you can't get in or out of a position with poise when your numbers tell you to do so.

9. The Asian markets amazingly go down even more on each meaningless survey than the US or European markets. Of what significance is it that the growth rate in China forecast is lower by 0.1 % from time to time from 7.6% to 7.5 %.

10. One should never forget that once the Fed changes a qualitative rate, the average run in the same direction is 10 or 12 further changes, i.e. a run of 10 in the same direction.

11. I can never read a text on chemistry or physics without getting a million ideas as to how their foundations and findings and experiments provide vast insights into our field.

12. How much does supply have to go down in the oil industry for oil to start moving up again.

Anatoly Veltman writes: 

On 10. The upcoming FED rate hikes: yes, historically, it has been observed that once official hikes or cuts got rolling, they wouldn't stop for that many counts to come. And of course, it is VERY advisable to position yourself in advance for another re-run of the scenario. Curiously, that's exactly where the profit will be made: on an anticipatory position. Because once the first hike occurs, I'm not at all sure that history will play an infallible guide this time around. Why? Because what we've had in the current cycle with ZIRP was unprecedented, and thus this time may be different: after a hike or two and a market upheaval, the FED may reverse back to manipulation.



 I would urge all the electronics experts on this site, old and new, to treat the market as an electric circuit with the inputs tied to an op amp with a negative multiplier attenuated—ultimately with histeresis. Almost all the market moves can be quantified with an output statistically significantly related to the inputs. It's much better than looking at technical indicators which are mumbo. At least this is something you know about and can test.

anonymous writes: 

Interesting…Is this the type of circuit you're suggesting to take a gander at?

Victor Niederhoffer replies: 

Yes. The circuit can be connected to all sorts of components. An input could be the open. It's a start. A good book with all sorts of op amp circuits is Exploring Electronics by Michael Merchant and many paths and outputs seem market related.

anonymous writes: 

Here is something good about Op Amp basics you can read online.



If only the Yale prof would realize that if (a + b) is positively correlated with c, and b is negatively correlated with c, then a is highly positively correlated with c. Also that earnings don't live in a vacuum and the best estimate of next years earnings is last year's + 10% not the 10 year average. When the collab and I pointed out the errors in his thinking, he said it could be an Ito process where all such relations don't necessarily hold, but he realized the gaps in his ideas and they weren't very important to him. Of course the main thing is that the professor has been bearish since 1965 suffering from the English disease that the main determinant of stock prices moves and variabilities is the dividend distribution.

Andrew Goodwin writes: 

A dividend distribution factor as a key determinant of stock price moves seems misplaced given the case of closed end funds that distribute assets instead of solely income as dividends. More on this subject might be of interest.

I have not studied the subject deeply enough to share a view yet.



"Saudi King's Death Brings Visits by Obama, Cameron, Erdogan"

The one thing that the ministers told Carlos was that the Saudi Ambassador must not be harmed as the country was the Lynchpin of everything. The visit by Obama and the avoidance of the French by the US provides evidence 25 years later of the wisdom of Carlos.



It is interesting to see that the US is about the only market down this year to date, down about 1% with all Asian and European markts up about 5% with a s.d. of 3%. Naturally there was unaminous agreement that the US market would be best this year.



Why do markets naturally gravitate to a state where things that are good are considered bad and vice versa. The idea that deflation is bad is a horse from that garage. When deflation and prices goes down that means that the stock of wealth is increased in real terms. That's good. How have we been cowed into thinking that when our real wealth goes down, that's bad, and we should encourage our central banks and governments to create inflation.

Etali writes:

The Chair of course knows the answer to his own question. Deflation is good for savers and bad for debtors. There are more debtors than savers. Inflation helps debtors by devaluating their claims. Governments, for example, the Swiss and the Luxembourgers, are the biggest issuers of IOUs. Why, the Dutch mathematician asked, "do government clerks and bailiffs become rich, yet leave their offices in great debt and financial chaos?".

Gordon Haave writes: 

1. The banks have an interest in inflation. They get zero percent loans and invest in things that pay interest.

2. Everyone is obsessed with GDP numbers and deflation can make GDP look "worse". There has been little to no research into GDP and how it's calculated in the last 50 years and people take it for gospel that GDP going up is good, GDP going down is bad. They are having trouble however explaining why GDP has been up but the average person's financial picture hasn't really improved in 20 years. They also can't explain they GDP in southern europe is flat to down, but the average person is vastly worse off.

The answer lies in the two things going together. Deflation is the cure to the world's economic problems. In order to prevent the cure the government and central banks have enacted policies that make the GDP number look ok, or stable, but it isn't doing anything for the average person.

Incidentally, this is also the cause for the "wealth disparity" issue.

anonymous writes: 

Finance-based (collateral) deflation and technological progress based deflation are not the same thing, exactly. The fact that we can buy a computer cheaper this year does not cause banks to fail or a contraction in the money supply/ability to pay interest.




 I have just read Mathletics by Wayne Winston and Mathletics by John Barrow. Both are great books, with many techniques and applications to markets. The Winston book uses regression analysis to find the value of different plays and players in baseball, football, basketball, and gambling. It also uses game theory and simulation. It tries to teach you how to replicate the results with excel. The Barrow book uses probability theory and physics to show you how to improve and analyze any sport including diving, kayaking, high jumping, running soccer. It's ingenuity is overwhelming. Considering the level of analysis and ingenuity and attention to detail in these books, our own field looks very tired and ossified. Highly recommended both.



The loss of a nail caused the loss of a war. It all starts with the horrific having two positions on opposite sides at same time. Worse yet is the use of mental stops with the idea that the broker can't read your mind.

Andrew Goodwin writes: 

Voice brokers know the locations of the stops and the times when they will make margin calls or force liquidations. The broker does not need to read your particular mind to know the levels that once hit will create more trading activity. Mental stops fail because a broker can extrapolate the actionable levels from the inside view of the collective levered positions and stops given by other clients.



A topsy turvy day. Everything the opposite of what it seems. Bonds start way down as never before and then rise 2 1/2 points and goes down. Gold starts down 10 and goes up 5. SPU starts up 15, goes down 10 and now up 10. What an opportunity to do the wrong thing.



 Along with MFM Osborne, Holbrook Working was one of the two original seers, innovators, beacons, and founders of the field of speculation, dwarfing the lesser lights after them in all ways.

Working was the author of the study Jeff forwarded to us (which has the title "Wheat Studies of the Food Research Institute, Stanford University, 1932"), and when I looked at the first 3 pages, I mentioned to my colleagues, "only Holbrook Working could do good work like that". Sure enough page 55 states "This study has been prepared by Holbrook Working, with the assistance of Adelaide M. Hobe and P. Stanley King".



Some recent moves.

Jan 12     10 minute abs values 182   alg change 13   ratio 14

Jan 13     10 minute abs values 165   alg change 6     ratio 27

While the move yesterday of down 6 seems quite minor, the range from high to low was 50 points, and the sum of the absolute values of the 10 minute changes was 165. There was considerable opportunity to make or lose a fortune. I would propose that the ratio of absolute values to algebraic change might be a good indicator or how much money the reversalists made relative t o the trend followers, and it might be that there are some interesting predictive regularities in the ratio for the next days algebraic change, and the profitability of reversing or some such.



 I'm waiting for our specs to give me examples from any field of things as exciting as the S&P last week and these racket things from table tennis or this.

Boris writes: 

Lake Placid - Olympics final, Team USA vs. Soviet Union.

Laurel Kenner writes: 

How about the gladiator contests of ancient Rome? Fed would be the patron with the thumb. Up/down.

Alston Mabry writes: 

One of the exciting things about tennis (and similar racquet games) is a function of the game's structure: No matter what the score is in a tennis match, the player on the verge of losing can come back and win the match. Contrast this with a game like American football, where there is a clock, but also where a team far behind in the score can take big risks (long passes, onside kicks, trick plays) to try to get back in the game.

The natural question for a trader: Does the market have a game structure, say, during the course of a single trading day/week/month, that constrains the possible outcomes or the nature of risk-taking? For example, once the relationship of equities vs bonds (or USD vs the €Mark or crude vs whatever) gets to a certain point, does the game require that a rebalancing occur?

anonymous writes: 

America's Cup, 2013 with the U.S. having to win last 8 in a row to win 9-8.



High drama in the S&P. Like a Dumas or L'Amour n= novel.

(who else writes adventure like this?)

   monday change   -30
   tues change     -26
   wed change      +35
   thur change     +36
   fri change      -20
   prev week change -40

Perhaps this explains the movement up in Vix. It's like a boxing match in the final round, or a tennis rally in doubles with all 4 players at net blasting at each other. What other sport situation?



A very interesting article reminding us that we can estimate the standard deviation of most of our data as the range/4 or (b-a)/4 where b is the highest and a is the lowest obse ration.

This leads to many interesting augmentations. You can quickly calculate the significance of a result by 4u x n to 1/2 /(range).

I was led to this result by a very interesting 1980 Box on evolutionary manufacturing operations. I was amazed that the authors were so clear and precise about the statistics, but then I saw that the author was Box and Draper, considered two of the world's leading statisticians.



We regret to inform you that Edward T. Dunne (more simply know as Ed, or Mr. E), a longtime friend and major inspiration for this site (in fact he was one of the 4 spec list founders, back in 1998), died on Monday of a heart attack.  To honor his memory, the Dailyspec will be in mourning for 1 week.

Information about the memorial service can be found here .

Some memories of Ed. He knew more about the technical details of the infrastructure of every market than any man alive. He always knew what the current and future weather conditions of every country in the world were and would call you up to wake you up , to stay out of the cold, or beware of a coming earthquake or tsunami, or get out of your positions.

He was the inventor and early user of many of the financial innovations in the fixed income and energy markets. He was a loyal friend who would always be by your side in a time of need.

He played a great piano, and confided that several of the pieces that Billy Joel and Chris Rock sang, he wrote for them.

He liked to tell you that grains were sure to go thru the roof because he had just driven thru the farms in Iowa and could tell you exactly what the growing conditions were.

When an attractive woman was in the audience, he would confide to her that he personally owned 50% of the entire world wide soybean crop and could guarantee that his market call would be rite.

The last time I saw him we sang Old Man river together . He had a great bass voice, and a beautiful operatic voice. The last time I spoke to him he called me up at 1 am to tell me that there was conspiracy going on in France particularly and that a eminent personage I mite have wished to communicate with was likely a spy, and that any contact with him mite bring us all down.

I had the pleasure of lending him money when he was in need, and he confided to me that he didn't wish to sell any of the 5 or 10 business magazine he owned at this time as they were worth in the hundreds of millions but he didn't want to sell them now because he cared for the employees.

When he entered a room, all conversation would stop and he would sit in a big arm chair and stentorianly regale the hundreds in attendance with the latest conspiracies that were going on, and how he had made billions by seeing thru it.

He liked to confide that he had picked up a check for the junior members of a firm, because of oblige. He was very proud of his son and confided that he was the best trader and squash player in the firm and was running it, except for the boss.

He and I liked to talk about his ancestors, who was the head of Tammany Hall, and the best handball player in the world and the power behind the building of the Brooklyn Bridge and every other important thing that happened in NY in those days.

If there were an attractive woman in the room, he would let her know just how powerful he was and all attention from the woman would gravitate to him. He liked to send 200 newspapers from around the world to you every day so that you could not be the only one to miss out on the skinny.

He confided that he was one of the three people who had seen the keys to Rebecca and in that book, it told him what each day was going to bring for the next 1000 years in the markets.

He was a character out of Shakespeare ( Falstaff ), Louis Lamour ( Old Doc Yak ) and Rabelais ( Pantagruel ), and he loved to play the role. No one knew how to work the phones better than him, and he loved to call up important talk shows and get on with his certainty of being connected with his battery of phones, only to get the host in a conversation that would move markets in his direction.

He grew the best tomatoes in the world, and caught the largest tuna in the world in his boat, and would often bring a portion of two of tuna to the spec parties. He was a very good athlete surprisingly mobile, and confided that he once won the pivotal game against Princeton.

He often had personal ones on ones with the Chair of the Fed at Princeton soirees which only he and a few select friends were allowed to attend. He could game the system and pretend to be various persons in Email better than anyone in the world.

He confided that his bonus for the last year was in the nine figures but that he hadn't taken it for fear that it would create too much havoc. He loved to call people a girl if they made a market prediction based on regularities that was in an opposite direction from his recently taken 100% gain.

He and Yale Hirsch were always fighting about his conservative views and Yale's opposite and Yale demanded a vote as to who would stay on the list, and he won the vote 100 to 1.

He loved to tell you how he just made 100 million and was up 100% in the
month, and better yet, he got it from the pockets of the atheists,
people of  the wrong persuasion, immigrants, and liberals.

I could go on, but there never was a man like him. He was powerful, multi-talented, omnivorous, ad totally sagacious, and completely cognizant of all his assets, and he only wished that you could share in them. There never will be one like him and the world is a much smaller place. He was highly religious, and certainly believed that he would be watching over us in the unlikely event that he ever died, which was impossible because he had just lost 50 pounds and exercised every day. Vic



 A nice fund raiser typical of 5 I get from Harvard every day.

Dear Mr. Niederhoffer,

Talent, Passion, Determination, and You.

These are essential ingredients for success at the Harvard School of Public Health. With just hours left in 2014, we want to make sure you have a chance to support HSPH's faculty and students — and improve the lives of people around the world. Make a gift today.

Give Now

Give Now If you have already given in response to our year-end appeal, many thanks!

Please join us on Twitter and Facebook to inspire others to support HSPH!

Richard Owen writes:

I wonder about the economics of modern charitable fundraising. Everyone has adopted the pressure selling model of the type that would get you scolded on a consumer affairs programme if it wasn't for the fact that it's done for 'charidee'.

My old college's annual fundraiser uses a compliance script that first gets you talking about how successful and great you are and subtley brings in the college as a topic (ie. the two factors are connected) then downshifts you through about five donation configurations, the final one of which is might as well have ", or are you an ungrateful and tight bastard who won't even give £X even though you clearly can afford it" on the end.

Now you might say that such approaches have a positive ROI, so it's a good thing. But I wonder to what extent it impacts the unmeasurable flow of future large donations forgone, by turning people off the cause in the short and long terms. A compliance response is rarely going to yield a huge overshoot to the ask.

For example, my college's compliance script is of the form originally designed to sell more double glazing to grandmas. The fact that they graduated a supposedly smart bunch of people implies most will recgonise the sales techniques for what they are.

The compliance approach yields more recurring current income/donations, which the charity staff maybe, subconciously or otherwise, dont mind because it provides flows to cover salaries.

If you digitally give the equivalent to a mainstream UK chairty that, historically, you would have put in a charity bucket, it seems that most of that donation is today used to finance outsourced professional money raising firms to upscale your donation to something serious.



To what extent will the markets and companies that did the worst this year, do the best next year. And how could this be quantified and tested with as of the time data.



It is interesting to look at all the stock indexes of the various countries, e.g. Asia [below] and see what the man from Mars would conclude. Most of these indexes were started at 100 at some time like 1970 or 1980 and now many of them are in the 20,000. What does that tell us about the prosperity of these countries and their inflation rate? What would the man from Mars a la Osborne think of this?



 To what extent are companies that have a high cost of search for an initial order from customers and then have recurring repeat business from profitable subsequent sales better values in the market than others. Such companies in my day were called mail order or data base companies. Companies like Keurig and LinkedIn and Gillette come to mind. Would searches under "repeat business" NYSE enumerate a subsection of companies with superior performance?

Richard Owen writes: 

At the other end, also a great source of accounting pyramids/shorts, as such long term customer strategies provide opportunity to diddle with customer acquisition costs, etc.

Ed Stewart writes: 

One good example of that type of business is the alarm business. U sell the equipment/sensors then sign the user up for a service contract. The service contracts are valued (and trade) at multiples of RMR (Recurring Monthly Revenue). The RMR multiple you can get is based in large part on the credit quality of your customer base - so if you ask for a credit check up front u get a higher RMR but might lose some sales of the basic system install or service up front.

It has been a terrific business for a long time and banks lend very willingly against the cash flow. On of my best friend's father took their relatively small business to a very large private company I estimate well over 1B private market value by pyramiding these cash flows with the aid of leverage, buying something like 70 companies over the years. One of the features of the cash flow is that the customer relationship is ammoritized quite aggressively. Basically so long as you grow u don't pay much in the way of income taxes on all the cash flow. Presently, they are considering keeping the highly valued (by investors) alarm business and sell their physical security (providing security guards to companies) business, which employs thousands of people. It is profitable yet not a great ROI, plus a major headache to operate do to employee count, potential liability, etc.

With employee problems growing including the new O care costs, It makes logical sense at the moment. Yet I can't help but think that in the next 15 years the Alarm business will face more extreme and innovative competition from tech companies (potentially from things like google nest?) as high ROI's must eventually draw in competition. At the same time the "crappy" business might go up in value as there is an increasing need for private physical security, even for residential areas. I could be dead wrong - perhaps Im rationalizing sellling the winner and keeping the loser? Perhaps the formula would be to sell the physical security, use the proceeds to expand alarms, then sell a few years beyond that? 



 If ever the appropriate thought were "physician, heal thyself" it would apply to Smith. He's the source of most of their problems. And when he gets back in, the Knicks will be totally hopeless. One tends to forget how bad he is when he's out.

Jim Wildman writes:

It would seem to be a case of someone who is sure of their talents being unaware of what talents they lack. He is unable to see himself as part of the problem because he does not see himself as having weaknesses.

Pitt T. Maner III writes:

Happy Holidays and New Year to all. A quote from a Knickerbocker caught my eye:

While he has been out, Smith has spent a lot of time watching film, trying to figure out why the Knicks have struggled so often late in games, losing 16 times by single-digits. "I think that's the million-dollar question," Smith said. "It looks like it's so many things, but at the same time it's got to be something real small to change because we're still in most games. It's hard to tell right now. If we knew our record would definitely show it."  



Here's a pretty kettle of fish. Suppose you have two forecasts that are disparate. One is bullish and the other is bearish. For example it's up 100 over 4 days. That's bearish. But it's up 4 days in a row, that's bullish. How to combine? There's a bayesian approach, a regression approach, and an inverse variance weighted approach, and a practical approach that Zarnowitz found. Just add up the number of bullish and bearish and that's your forecast. But what's your best way of solving same? The answer might provide a meal for a lifetime. I asked Stigler this question 15 years ago, and he thought it was a very good question, and I've not seen a good answer yet.

Alex Castaldo writes:

I would start with Diebold and Pauly: The use of prior information in forecast combination.

Gary Rogan writes: 

There has got to be some way of incorporating the rare nature of one of the set of circumstances. Clearly 100 points is more unique than 4 days. Does this carry any special weight? Also there is a very large number of other possible "circumstances", like time of day, month, year, what the future portends if prior history was similar during this time of day, month, year. where are we in the economic cycle? With respect to various moving averages? What's the money supply and it's history? What has the price of oil and any number of other thing doing and where is it? And what matters more: all these other things or the one unique thing?

anonymous writes: 

You're mixing apples and oranges. The premise for regression and related approaches is that there is a fixed law that can be discerned, or at least modeled, in such a way that it does not vary in any dimension. Whatever the model/rule was 50 years ago is still what it is today—unless of course, additional information either disproves the model or allows for its refinement. Either way, it's time invariant. Bayesian analyses are different by definition. Unless the prior is the same, the result will be different. Since priors will change with the passage of time, the analysis is time-dependent. You might try to specify the Bayesian model as fixed at any one point in time and try some form of combination, but since the moment you do that, the prior will shift and the exercise becomes worthless.



I saw a sign reading "abandon all hope" in the SPU on Tuesday and crude yesterday. What other markets leave ye hopeless and without funds before torturing ye by taking a path to all time highs. How can this be quantified.

Vince Fulco writes: 

Only caught it on the periphery through news stories (thankfully). Cattle was a house of pain the last 2 weeks.



 In Codes of the Underworld: How Criminals Communicate, he mentions that since criminals find it very hard to communicate directly they often take their signals from vivid events and happenings like in The Godfather which is their favorite (by the way, Puzo had never met a gangster and wrote the book completely from transcripts). They adopt the language and the styles and the activities.

The top feeders in our field have a similar problem. They can't communicate their actions directly as they would be front run and also the public would not be able to weaken and succumb to give them good fills. So they wait for vivid events like today to do their stuff, first clearing the action to make sure there are no others around to intercept their messages. The horse's head was yesterday, but today FOMC was the massacre of bears.

Ralph Vince writes: 

The best bridge is played before the first trick is.

Orson Terrill comments: 

What about the ECB signaling that next year is when they'll stimulate. Was that a "FOMC, we know you're tightening to some degree soon, and this time we want to lag behind in the interest rate cycle, to get a relatively weaker currency"?



"Can Money Supply Predict Stock Prices?"



In looking for major lessons for a lifetime beyond the day I thought of how the moves in gold and grains up, even bonds preceded the debacle in stocks and oil. I found this version of the predictive power of the quantity theory relatively accessible and also good for separating out the long term and short term properties of the growth of money supply. It could be simplified for reasonable short term predictivity.



 Suppose we consider prices as a building whose purpose is to reach a certain goal as do architects when they are building a skyscraper or some such. What form does the price have to take in order for it to reach its goal? What attributes must it take on the way up, and what backing and filling must it take in order for the building to have a proper stability?

Jonathan Bower writes: 

In my early days on the exchange floor I was intrigued by Market Profile (sample) which is the accumulation and "stacking" of ohlc bars. Several companies allowed one to aggregate on different time frames other than the original 30 minutes. While I never became interested in the "analysis" of profiles, I always thought they were useful in viewing the market from another perspective. Maybe it's worth going back and doing some quantifying.

Paolo Pezzutti writes: 

One interesting characteristic on the way up is the continued occurrence of false breakouts to the downside on the various time frames as bad news hit the market. Regardless the efforts of the "jinx of the day" prices move down just to hit the tight stops incautiously positioned by traders and regularly move up and squeeze the few shorts left in the market.

anonymous writes:

One industry analyst with which I had frequent contact (he covered the metals and mining industries) used to assert that whenever a company senior exec is about to retire, you can be pretty sure that his incentive options will be nicely in the money.

Stefan Martinek comments: 

Victor, I would argue proper stability is not needed, as those with stability i.e routine retests of previous highs on a break out, are just as susceptible to fail over time as a market which trades parabolic. It is just the problem that these markets, like usdjpy recently, give you few constructed setups re: risk reward–to get on, when they start moving.

Victor Niederhoffer responds: 

 But this must be quantified, Mr. Martinek. Regrettably Mandelbrot was not able to program or count. See Roberts work on 1950 showing the similarities and impossibility of differentiating all the "scaling" and "regularities among the irregularities" of Mandelbrot and random charts.

Stefan Martinek adds: 

From B. Mandelbrots The(Mis)Behavior of Markets:

There are too many very big and very small changes, not enough medium-sized ones. And the changes appear to scale with time: The proportion of bigger to smaller price-moves follows a regular pattern as you look at monthly, weekly, or daily charts. […] The size of the price changes clearly cluster together. Big changes often come together in rapid succession, like a fusillade of cannon fire; then come long stretches of minor changes, like the pop of toy guns. There is scaling here, too: If you zoom in on an individual cluster of big changes, you find it is made up of smaller clusters. Zoom again, and you find even finer clusters. It is a fractal structure. Nor is it just the price changes of interest; at times, the price levels also exhibit some kind of irregular regularity. The charts sometimes rise or fall in long waves, or with small waves superimposed on bigger waves. But none of these phenomena—clusters of volatility, or irregular trends—resemble any of the cycles, waves, or other patterns that characterize those aspects of nature controlled through well-established science.

Craig Mee comments: 

"But none of these phenomena—clusters of volatility, or irregular trends—resemble any of the cycles, waves, or other patterns that characterize those aspects of nature controlled through well-established science."

I'm not so sure about that statement. Irregular trends and phenomena = what he discussed = do not resemble other patterns of nature controlled through well established science. Price does not have to equal nature all of the time. Just some of the time. Pick your battle.



An unusual lobogola. Usually the elephants are diffuse as to time but this time, they were like the crocodile. The exact time, and the exact announcement. The all important inventories of natural gas at 1020.

keep looking »


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