Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner

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Let us never underestimate the influence of deception in markets, even in the e-mail age. Often the market percolates randomly until it ferrets out a pocket of weakness, then having found it by signal and scent, it moves to capture the prey. Often I have seen it wait for a month with an individual stock before I get out of a position then rally dramatically as soon as I am out. The same for Long-Term Capital in August 1998. The billions that were available there were too great not to take.

It's random. A system makes money through ephemeral or special factors, but then the mistress of markets knows that someone will discover it. If it's a trend, then the trend followers will discover it. Indeed they will already have profited from it. Then they will raise 100-fold to exploit it (I speak metaphorically and hyperbolically here), and then contribute so much more to the market with bid-and-asked spreads as the market moves in the opposite direction from the form just to take their chips away.

The prisoners in The Great Escape used level 4 deception a hundred times a week to fool their captors only to be killed at the 97% level when they all fled. The market uses level 4 and level 5 deception routinely to take the chips of those who follow systems without adjustments for survival bias and multiple comparisons. At least the escapees were free for a week or so. -- Victor Niederhoffer

While often overlooked, the main contribution of Education of a Speculator (Niederhoffer, 1997) and Practical Speculation (Niederhoffer and Kenner, 2003) is the memorialization of deception and ecology effects. EdSpec devotes a chapter, "Ecology of Markets," to the subject, while the theme of deception runs throughout PracSpec. We present here a collection of writings by us and other traders about deception.

-- Victor Niederhoffer (May 26, 2004)