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Round Number Theory and Smallmouth Bass, by J.T. Holley

I have recently finished Smallmouth Bass: An In-Fisherman Handbook of Strategies , by Sura, et al. for the second time in one month. I am brushing up for the spring season on the James River. As I read the text--the sentences and phrases of the distribution, life and patterns of the smallmouth bass, smallie, it is amazing the similarities and the striking resemblance to that of the round number phenomenon in trading and statistics.

The smallie is a "homebody" by nature, rarely roaming around a river, lake or reservoir during the year like other fish do. Unlike most other fish they stay in fairly limited areas. Because of this they must have all that is required to live and prosper in that limited range. The necessities in a smallie's life are "opportunity to reproduce, find comfort (quality habitat, adequate water quality, and temperature), and obtain sufficient food". They must be able to find these conditions within a fairly limited area to thrive and survive against nature and competition.

These groups of smallie's are based in distinct areas of the bodies of water they live in and aren't ones to travel far once they have attained everything they need. This makes them vulnerable to being caught! The fish aren't shaken very easily from these spots by much. The most common example of migration are caused by drought or low water and also they move during floods. It was very interesting to read also that "when fish are removed from a home range and released at a distant point usually return to a home area".

Lastly they stressed with fisheries the smallmouth have had forced multiplication of their kind. But, few environments offer the conditions mentioned above for their proliferation to take place. So even though the smallie has a fairly wide range of distribution today it is rarely the dominant fish in that distribution of which makes them less likely to be the principal fish.

Wow, when looking back at my notes the round number theory popped into my noggin'. Are we smallmouth bass? Do we simply choose round numbers when asked our weights because of convenience or is it just like the smallie in that we are "homebodies" and like to be around that number for comfort and ability to obtain food? When trading to bids and asks fight to find the "spots in the river" where "reproduction, comfort, and sufficient food" is located in that being liquidity and action. Do trades tend to stay in one area and not migrate or move much but only when droughts force us out or the flood of a bull market pushes us up to the next higher round number?

Food for thought at least.

Wonderful Fishing, from Scott Barrie

Growing up, my Father taught me and my three brothers to fish. He was a stickler for only buying the best equipment - which to him was Mitchell reels and Fenwick rods. But, I learned on my latest trip that fish really do not care about the equipment, but more about the bait (which may be a lesson which is obvious to many).

The last 7 days, I took my family (wife of 16 years, son age seven and daughter age five, as well as my mother) to a spot in the Sierra/Nevada Mountains above Fresno, California called Mono Hot Springs

Upon arriving around 3:00 pm, we dutifully unpacked the car quickly, and my brother, son, daughter, and I hit the San Joaquin River to fish. I took my trusty fly rod, my brother used a spinning rod and a spoon as did my son. However, my daughter Katherine (aka "Kallie Pally") was set up with her little $5/Barbie fishing rod (a pink push button caster with pictures of Barbie on it, reminiscent of an old Zebco), a bobber and a worm... really to include her and keep her busy while the boys fished. Well, after about 20 minutes of getting nothing - in one of my favorite childhood holes - her bobber went under water, while the boys had not even gotten a strike. She reeled in a beautiful 13" brown trout, and taught the rest of us to fish.

She taught us a lesson... not the tackle but the tactics (bait) which makes fish bite.

Well after her fish, she decided to go pick wild flowers and play with the butterfly's. We all switched to worms and bobbers and ate well that night.

Over the next several days, we visited several of the areas around the Mono Resort ("Resort" is a stretch, the cabins are best described as rustic, the beds are dated from the 1930's, and each night we found treasures in our cabin, including several lizards, a rubber boa snake, six scorpions (non-poisonous), and a frog which landed on my wife's foots after putting the kids to bed and created quite a seen, which the children found very funny).

For the serious fishermen on the list - or those interested in learning - this is a great spot. On Wednesday of last week, we took pack horses up from the Lake Edison pack Station up to Graveyard Meadow - a three hour ride, up about 2,500 feet to 9,000 elevations. In the meadow, we fished for golden trout - very small, about 6" to 8" - but very wily. From their, my brother, son and I hiked down - my daughter preferred to ride the horses back down with my wife as opposed to fishing, go figure?

After fishing and hiking for about an hour, we hit brook trout country. Brooks run a bit larger, and have great coloration, though not as vibrant as the Goldens. We fished brook streams for several hours, and eventually made it back to eye sight of Edison Lake, where we caught mostly rainbow trout, but my boy caught two browns.

As far as I know, the high sierra surrounding Mono Hot Springs is one of the few areas where one can catch a full deck of trout (Rainbow, Brown, Brook, and Golden) all in the same stream - the San Joaquin.

Be warned, anyone enticed by this description and considering visiting that the roads to get there are treacherous! The 10 mile stretch from Kaiser Pass (elevation 9,500) to Mono takes about 90 minutes, as the road is a single lane, curvy, and one may have to back up a long distance to a turnout when faced with the occasional bit of traffic.

The lessons learned fishing in a river or on the world's bourses are similar, but the one I walked away with this time is that the tackle and equipment is not that important as long as one can find the right bait and present it where the fish are.

PS~ Much to my chagrin, Mono is now supported by limited cell phone coverage, but most of the other modern conveniences are absent - i.e. all power is solar and generator, toilets require at least an hour between flushes (but hey, they are "flushy's", and the Restaurant leaves much to be desired.... however, the ability to walk for six miles in a day and not see another person or a beer can more than makes up for it.

PPS~ The season is almost over, but you can book for next year. This vacation is very cheap, and provides a glimpse into the real wilderness that John Muir documented so well.

PPPS~ Mountain visitor etiquette requires when possible to pick up hitchhikers, especially those weary with large packs - they smell bad, but usually can spin a wonderful yarn about weeks in the back country. Usually I buy them a dinner at the restaurant and a bath at Mono.

J. T. Holley adds

excellent post, thank you so much for the valuable Spec Lessons as well. My Pa Pa would use the cheapest Zebco's he could get his hands on from yard sales and flea markets. He would restore them back to their original conditions and then go fishing with me during my 5-15 year ages. One of the most valuable lessons ever learned from him was to always use live bait! He explained that nature was the hardest thing to duplicate. When ever available always use what nature provides to catch fish. No matter how detailed someone could manufacture a "fly", "jig", "lure", and other styles it would never mimic living insects, frogs, minnows, helgamites and such. The only problem this has caused me in my life is when I am fishing "bait casting" with live bait and a "Purest" Fly Fisherman comes around and asks me how I could be so cruel and such a non-conformist? I usually keep quiet, let the conversation end and go back to fishing. I lived in Missoula, MT for a spell and this didn't go over as well as I would have liked. Game Wardens, Die-Hards would constantly harass and question me, but as long as you are following local and federal laws they inevitably leave you alone. I simply don't catch fish I don't intend on eating.

I too have experienced catching a Golden Trout! It was in the Mission Mtns. In Montana. Nice hike and beautiful lakes. Catching a Golden is equivalent to seeing you first Eagle in flight. It is imprinted in your mind for the rest of your life.

Jim Sogi comments

Modern fishing is high tech. Color computer displays on the boat tell the depth of the water, the bottom contours, the depth of the fish, the size of the fish, where the fish are, and the location by GPS. Ancient methods of watching for birds, ocean currents and bait fish are still necessary and hi tech is no substitute for ocean knowledge. The fish finder allows the angler to lower the bait to the right depth and not snag the bottom, and put the bait near the fish. Despite the gadgets some days the fish don't bite. This weekend, the sharks were out in packs stealing the bait, cutting the lines and scaring away the fish. They are nasty brutish creatures and cutting them open reveals prehistoric structure lacking a spine or skeletal system. They hunt in packs and get aggressive. They know exactly where the fish are and the best spot is. I suspect in the market ocean there are participants that occupy a similar niche.

With a good fish finder or depth finder for the market the bids could be placed at the right levels, just off the bottom, and the location of the bottom would be known. The fish finders send sonic beams and measure the time and the angles of the reflection of sound off the bottom and the fish. The algorithms decipher the random mass of sonic reflections using statistical methods. Since traders don't have fish finders or depth sounders, a good device would be to look at the down bars that drop down and measure their depth and speed. The prior history gives a record of the the depths to which the bars will go, and the speed of and angle of their bounce back. As with the computer on board which interprets the information into a readable format by way of little pictures of fish, a trader might take the varied data and out them into a format readily discernible which shows where the fish are in the market and where the bottom might be. One method is to look at the standard deviation and the maximum historical draw down for a given spot. The distribution of prior occurrences gives some probabilities of hooking up a fish without losing the bait. Last week I wrote of finding the summer fishing holes. A friend advised "drop bait deep" , "Big sharks". Good advice, then. This week is so different. No holes. No down bars.

This week looks like a big marlin on line, fighting on the surface, jumping. In fact jumping so high that there was an intra day gap, something I hadn't seen before in my limited experience. Here is the data. 1230.25 got gapped over as the marlin jumped completely clear of the water. A normal bar chart won't show this. That's a big fish on line. Note the trade at ask of 1619 contracts. Big fish there. When on line, jumping tires the fish out. They are trying to shake the hook.

Globex SP Mini Sept 05
Bid,9/6/2005 12:53:34 PM,1230,271
Bid,9/6/2005 12:53:34 PM,1230,20
Bid,9/6/2005 12:53:35 PM,1230,10
Bid,9/6/2005 12:53:36 PM,1230,2
Bid,9/6/2005 12:53:36 PM,1230,145
Ask,9/6/2005 12:53:37 PM,1230.5,1619
Bid,9/6/2005 12:53:37 PM,1230.5,103
Bid,9/6/2005 12:53:37 PM,1230.5,138

There it is...no .25 straight from 30.00 to 30.50. Have you seen much of that before in the middle of the day on Globex?

Lobster BBQ, by Jim Sogi

September is an R Month, and that means lobster season opens. We dive at night for lobsters (Pacific spiny) with underwater flashlights from an outrigger canoe. The lobsters hide in caves and deep holes in the water. Like many traders we have our secret spots and places to fish. I won 't divulge some of the tricks we use. Diving down, at night, upside down, looking into deep holes is a singular experience, not unlike last week's trading in that the ability to hold your breath a long time can determine whether or not you get the lobster. "Seeing." the lobsters at all at night is an art. They are camouflaged, but their eyes glow, and that is a giveaway. One trick is to watch their antennae. If one is pointing back and one is pointing forward, that means there is an eel in the same hole, and it is not such a great thing to stick your hand in their to grab the lobster, and get bitten by the eel. It was possible last week trading to reach for the lobster and get bitten by the eel. Meanwhile, the waves surge and can smash your head into the sharp rocks. Sharks lurk in the darkness, so a spear is always close at hand. Knowing which hole to look in is a trick too, Like last week's market, which hole to buy? How long can you hold your breath? Was there a chance to catch a breath when at the surface for an instant before diving down for another lobster? Meals for a lifetime.

Meanwhile,the kids gathered the Kaiawe (mesquite) wood and the fire is burning to embers on the beach. Take the lobsters and slather with butter, pour a bit of soy sauce over them, and double wrap in extra heavy duty tin foil, and seal tight. Place them right off the coals on an old rusty rack found on the beach. We did 20 minutes right in the hot embers for 2-3 pounders. They had more flavor than the Maine lobsters, perhaps because of the subtle smoky Kaiawe mesquite flavor. Dip in drawn butter as usual. Eat with garlic bread also wrapped in tin foil and barbecued over the coals and salad. The steaming captures the moisture so the meat stays moist and tender and full of flavor, but not watery as when boiled. Thomas Keller at Per Se cooks the entire lobster in 3 pounds of butter to kept it moist. It was an even better recipe than last year.

Lobster and Trading Gangs, by Victor Niederhoffer

The lobster catch in Maine is down about 75%, to approximately half a lobster per trap, from the normal two of the last several years. The price of lobsters having increased 50%, total revenues from lobsters are down by about 60%. The catch of herring, the basic feed, is also down, increasing the cost of feed. Thus, things are very bad for Maine lobster fisherman right now. This was evident in the bad state of the economy on the lobster islands such as Vinalhaven which I have just visited, where the four or five stores that are normally open were frequently closed and the locals were even more sullen than usual towards the sunbirds that swell the population of such communities by a few hundred % during the few weeks of August sun.

The dynamics of lobster fishing are well described in the excellent book k The Lobster Gangs of Maine by James Acheson. This is an anthropological study of the territorial behavior of the island communities. They defend their territories like hawks, and are constantly alert to weaknesses in neighboring territories for opportunities for expansion. There is great solidarity between the members and the ones that have the most equipment and best sites are treated with great veneration An 11 year old nephew of mine received typical treatment in this regard when his traps were cut as he intruded on the patches held by the older cohort on the Island.

The territorial behavior of the rings and gangs on the floor exhibits similar characteristics to the lobster gangs. They protect their territories by making it all but impossible for a member of the public to trade without the benefit of a helping hand from a member. It always seems that the orders on their books from the public only get filled after all the members have had an opportunity to forage at the previous price.

There is much fighting in the pits during the summer when food from the public is at a minimum, and on a recent visit to the energy pits Mr. Sogi from Hawaii was amazed to see a fist fight develop about a price that was not yet taken down. "The floor traders remind me of the lobsters themselves in the tanks, red faces, claws waving , fighting."

A nice introduction to the economics and game theory of territorial behavior is provided by Ernest R Keeley in "An Experimental analysis of territory size in juvenile steelhead trouts". He provides experimental evidence to quantify the tradeoff between the costs of defending a territory versus the benefits of searching for new territory. The basic idea is that territory size is often inversely related to food abundance, intruder pressure, the vigorousness of the defense of competing territories, and the cost of searching in terms of energy used.

One reason that lobster gangs exist is that lobsters are confined to small areas on the bottom of the oceans. Technology has not been good at finding better ways of hauling lobsters than the old fashioned lobster boat with winch to pull up the traps. Thus, the cost of search is high there. Technology has been much better in reducing the cost of search in the markets and now the electronic trading on markets such as Bunds and S & P Minis has given the public the enormous advantage of being able to seek benefits in these areas with almost the same ease as the members.

What predictions can be made from the extensions of the foraging and territorial models to markets? The ones that are most obvious to me are that electronic trading changes the dynamics of price interrelations. Also, that volume of trading is a key factor in determining the relative performance of the various participants in the market ecosystem, such as trend followers and contrarians.

It would make a good thesis, and I encourage the reader to fill in some of the holes here, that in the interim one should and will be exceedingly careful when the prices are down, the public participation is low, and new technology threatens the defenses.

Yishen Kuik adds:

Chair has written much about viewing the markets as an ecosystem, with the public as the slow moving herds and professional speculators as predators.

I was just recalling an interview with a market technician recounting the late 90s, who described how many reliable signals broke down in those boom years because the professionals failed to realize that this time around, the population and activity of the herd in the market was bigger than ever. The slow moving herds had gathered into a thundering stampede moving together and any predators who, failing to notice the change in regime, stood their ground expecting to intimidate the herd as before (such as many old lions boldly shorting hysteria, expecting multiples to back down) were run down.

As the public thundered into and subsequently out of the marketplace, the field was alive with activity, like the rising VIX as market makers widened spreads to protect themselves from the herd's mad demand for liquidity. Today, public interest in equities has waned from the late 90s and the herd is again slow moving and wary of the predators hiding in the bushes and circling ahead. Indeed, there are more predators than ever before, going by the growth in hedge funds, and so the field is quiet and empty of open easy prey.

One wonders if shifts in the composition of the market ecosystem : relative population of predators (funds), prey (public interest) and decomposers (brokerage houses) might indicate regime shifts that would warn us that it is time to change the indicators and signals we rely on for navigation.

Sushil Kedia adds:

Electronic trading has changed the interrelations of prices in several ways. Some changes have been for the better and some for the worst (not worse).).

In the electronic era while one can be reasonably anonymous in building exposure or cutting down in a particular contract, but on the same hand one is groping in the dark not knowing the anonymous opponents. So it's like blindfolded lobsters being fished for by blindfolded boatmen.

Secondly, I've yet to come across any sort of an audit of any electronic exchange as to the veracity of information security. Is there sufficient protection from selective access to information about trade flows, asymmetrical distribution of information relating to positions, etc.? Is there a precedent of any sort of a regulator in any corner of the world finding it important enough to lay down norms for a periodic audit of data security?

Data is far easier to distort in electronic markets. At least that has been the case in India. Extremely high or low openings by a trigger of a tiny trade at the open is common, while the occurrence of those Milstein prices happens rarely even in months. So analysts of prices, whether through the charts or through tabular analytics, are more likely to be misled. History has become more possible to be written for the fools and certainly by the mightier, trickier, deceptive champions.

Yes, technology has achieved an unbelievable expansion of the footprint of exchanges, taking the possibility of trading live prices to small towns deep in the hinterland worldwide. A larger market, a larger population at the bottom of the food chain too.

Volume attracts so much attention. The large thrusts of volume which get mistaken as liquidity by even experienced eyes does get a stock re-rated enough to be included in an index. However, would impact cost be a better measure of the contrary opinion existing in a stock in inverse proportion to the movement in impact cost?

Jim Sogi comments:

My friend Joe Wilson has a high tech lobster feed lot here in Hawaii. The Natural Energy Lab pumps up pure, clean, ice cold and nutrient rich seawater from 2000 feet down. Originally intended for energy production using ocean thermal energy conversion, it has developed into a great source for aquaculture. He ships lobsters from Maine, feeds them and fattens them up, then ships them to Japan as well as local restaurants and groceries. Instead of a 50-70% mortality rate, it is cut down to 10%, since they are nicely fed and healthy after a spa in the rich cold cold water. He also rubber bands the claws so they don't bite each other or him when he reaches in. I drive down there with a cooler and for $8 each fill the cooler up with lobsters.

Local spiny lobster season opens on September 1. We have our secret holes of course. We dive at night to catch them as their eyes glow in the dark. My friend Keoki tells me when you see one hiding in their hole with one antennae pointed backwards, that means there is a big eel right behind it. Don't reach in because the eel with big sharp teeth will bite your hand. After not being fished all spring and summer though, the lobsters are easier to catch and are nice and fat. So:

  1. When you see a nice fat juicy S&P down at the bottom of a hole, be careful that there is not a big eel there waiting to bite your finger.
  2. Technology and innovation will come up with businesses that benefit all.
  3. Another an example of the law of unintended consequences, where an energy production facility ends up as a lobster ranch.

Clive adds

A while ago there was a great story in the NY Times magazine detailing the differences between Australian and New England lobster men

Gibbons Burke adds

Speaking of Maine lobsters, the Journal has a front-page story in Wednesday's number on the subject, and it provides another lesson for the markets...

In a Maine Town,
A Lobster Tale
Ensnarls a Fisherman
Despite a Crustacean Boom,
Hamlet Finds No Peace;
Mr. Drouin Gets Taunted

August 24, 2005; Page A1

CUTLER, Maine -- Saltwater dripped from the big load of trouble that lobsterman John Drouin hauled up from the deep one recent morning. The tangle of trawl line hanging from his boat had ensnarled an anchor and nine lobster traps.

Powerful tides here sometimes whip lobster gear into such knots. But so do rival lobstermen out to settle scores. "I have no idea what happened, but I'm not going to blame anybody," Mr. Drouin said as his boat rocked on the waves....

There's another very good article on the state of the Maine Lobster fishery in The Atlantic - April 2002.

Stalking the American Lobster

[Government scientists say that lobsters are being dangerously overfished. Lobstermen insist that stocks are plentiful. It's a familiar kind of standoff except that now a new breed of ecologist has taken to the waters, using scuba gear, underwater robots, and even nuclear submarines, in order to figure out what's going on. It turns out that the lore and lessons of the lobsterman are worth paying attention to]

by Trevor Corson

"Sir, I have a target, distance two hundred meters," the sonar operator said. "It looks big." The nuclear-powered submarine NR-1 was hovering 600 feet under water, on the edge of the continental shelf. Robert Steneck, a professor of marine sciences at the University of Maine, decided to check the target out. The helmsman nudged the sub forward, and Steneck, a short, energetic man with a thick red beard, slipped below the control room into the cramped observation module. There, through a six-inch-thick glass viewing portal, he was confronted with the biggest lobster he had ever seen. It was a female, about four feet long, weighing nearly forty pounds. She turned toward the sub as it came right up to her, nose to nose, and defiantly shook her claws.

Steneck is an unusual lobster scientist. Many of the leading scientists who track the North American lobster population do so mainly on computer screens in government laboratories, and from that vantage point lobsters appear to be in danger. From the mid-1940s to the mid-1980s Maine's lobstermen hauled in a remarkably consistent number of lobsters. But during the past fifteen years they have nearly tripled their catch, raising fears among many scientists about overfishing. The situation recalls the recent history of the cod fishery in New England, in which an exponential rise in the catch was followed by a devastating biological and economic collapse. In 1996, as lobster catches continued to hit all-time highs, a committee of the country's top government lobster scientists warned of disaster, and they have since recommended drastic management measures to save the fishery......

I wonder if Paul Allen uses his 10-man sub/tender on his 413' giga-yacht OCTOPUS for this sort of lobster fishing?