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Posts Tagged ‘Hedge fund’

Insider Trading Probe Looking at 100s of Potential Targets

In Financial Markets, Law & Regulations, National Economic Politics, Technology on 13.01.11 at 16:21

According to FOXBusiness, we have barely seen the tip of a massive iceberg when it comes to the on-going insider trading investigation by the U.S. attorney in Manhattan and at the SEC. Some people on Wall Street are quite nervous right now.

“There is a possibility of 300 potential targets. What we are talking about is possibly the largest white collar criminal case ever.”

FOX Business News


Sources close to the investigation are talking about hundreds of potential targets involved in this probe, FOX reports. One of its sources says “There is a possibility of 300 potential targets. What we are talking about is possibly the largest white collar criminal case ever.”


This has a lot of people on Wall Street nervous, no doubt. And some are already lawyering up.

One big question is who the ultimate targets are.

The employees who were suborned into providing nonpublic information are not the prosecutorial prizes in all of this.

“They (prosecutors) have not gone after the hedge funds yet. That is clearly the next shoe to drop,” FOX Business News notes.

Many would perhaps agree.

It seems, however, that SAC Capital, led by Steven Cohen, is one potential big fish, but there are most likely others.

It’s unclear how arrests and charges against hedge fund execs will unfold. Could it be that prosecutors are waiting to see how the trial of Raj Rajaratnam plays out? He is scheduled to stand trial Feb. 28.

A lot is riding on it.

FOX Business News reports:

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Will Supervising Hedge Funds Put An End To Systemic Risk?

In Financial Engeneering, Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Technology on 19.11.10 at 15:24

To put an end to systemic risks is the ambitious aim of Europe’s new laws to supervise hedge funds, the EU Parliament’s own TV channel reports.

But the new regulations, which will come into force in 2012, already have their detractors, the EU informator reports:

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Gold – The Utimate Bubble?

In Financial Engeneering, Financial Markets, Health and Environment, High Frequency Trading, International Econnomic Politics, Learning, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 13.11.10 at 17:04

Jonathan Burton has an interesting piece at MarketWatch Saturday morning. San Fransisco based Burton, the website’s money and investment editor, argue that investors are being lured into a speculative gold bubble comparable with the oil spike of 2008. Mr. Burton points out that gold in reality is an insurance against a total market collapse and other catastrophes, and that an even higher gold prize means that the value of most other assets will crash.

“Gold buyers beware — the karat can be a sharp stick. As with any speculation, gold can lose luster as fast as hedge funds and other traders can unload it.”

Jonathan Burton


Rate hikes are kryptonite for gold; accordingly, concerns that China will move aggressively on rates, and that the US and developed Europe will ultimately follow, have dulled gold’s glimmer over the past week, Jonathan Burton at MarketWatch writes.

Gold has become highly prized bling-bling, with the prize per ounce reaching another all-time-high this week at 1.395 dollar per ounce.

Anxious and astute buyers, from hedge-fund players to central bankers, flock around the “currency of fear.”

Gold at around $1,400 an ounce is almost double what it commanded two years ago, and gold’s price is up almost 25% so far this year alone.

“It’s been a great ride. Except gold is a bad investment,” Mr. Burton states.

Adding: “Gold’s feverish run has made a lot of people a lot of money, and though the rally has taken a breather in the last few days, there’s no shortage of flag-waving supporters who claim gold is on a march to $1,600, $1,800, $2,000 and beyond. After all, gold is still well below its 1980 peak, when it was worth around $2,300 an ounce in today’s dollars.”

Pure Speculation

The MarketWatch editor also emphasise that the recent raise in gold prizes is caused by nothing else than pure speculations.

“Certainly there are reasons to own gold in a diversified portfolio. Yet gold isn’t like a stock or a bond. It offers no income, no dividend, no earnings. It is considered a store of value, an alternative currency that’s safe beyond reproach, but it is not cash in the bank, or even the mattress. Gold has no untapped intrinsic value; it is worth only what people are willing to pay for it. And lately, many people have been only too willing,” Jonathan Burton writes, backed up by the following quotes:

“Gold is going up because people are buying it, and people are buying it because it’s going up.” (Leonard Kaplan, president of Prospector Asset Management).

Gold is always a speculation. (James Grant, editor of Grant’s Interest Rate Observer).

“Gold may be a good speculation; even cautionary voices concede that gold is not yet displaying the parabolic hockey-stick pattern that frequently forms an ugly bubble. Low yields on safer assets such as bonds and cash encourage risk-taking and speculation, which favors gold, silver, metals, commodities and many stocks. If the U.S. dollar continues to decline, gold will be a main beneficiary,” Burton continues.

According to the last disclosure in June, the three giant hedge fund managers, George Soros, John Paulson and Eric Mindich, controls 10% of the worlds leading gold ETF, SPDR Gold Trust.

Of course, they staked their claim early, and their view on gold and the dollar may now have changed, as investors will soon discover when these influential funds release Sept. 30 portfolio holdings.

“But gold buyers beware — the karat can be a sharp stick. As with any speculation, gold can lose luster as fast as hedge funds and other traders can unload it,” Burton warns.

The Greater Fool Theory

To Jon Nadler, senior analyst at Kitco Metals Inc. and a veteran gold-market watcher, Wall Street’s buy recommendations remind him of speculation in 2008 that propelled another must-have commodity — oil, the “black gold” — to stratospheric heights.

“I don’t think gold is an opportunity at $1,400 an ounce,” Nadler says. “Just because gold has been above $1,000 for 14 months, everybody thinks it’s a new paradigm. This is very much what we heard about oil a couple of years ago.”

“An investment is something you buy near its value. If gold costs $450 or $500 to produce, at $1,400 you don’t have value, you have momentum.” (Lenord Kaplan at Prospector Asset Management).

Perhaps Leonard Kaplan at Prosoector Asset Management clarifies the issue best: “Gold at $1,400 is not what I would call an investment. An investment is something you buy near its value. If gold costs $450 or $500 to produce, at $1,400 you don’t have value, you have momentum.”

And as any experienced trader should know by now – momentum is just another word for the greater fool theory. (The strategy of buying with no other intent than selling at a higher price – until the rally stops and the greatest fool is not able to find any new buyers).

It is similar in concept to the Keynesian beauty contest principle of stock investing.

An Insurance You Don’t Want To Use

“I called gold the ultimate bubble, which means it may go higher,” Soros told an investor conference in New York in mid-September, repeating a warning he’d made earlier this year. “But it’s certainly not safe and it’s not going to last forever.”

The recommended strategy at the moment is to hold between 5 and 10 percent of a clients’ portfolio in gold.

But this is not a new strategy. In fact, it’s an essential part of the old school investment lesson on long-term planning,  designed to expect the unexpected.

“If it works really well, chances are the other things in the portfolio aren’t going to be looking so good.”  (Karl Mills, president of investment advisory firm Jurika, Mills & Keifer.)

“We actually hope it doesn’t work too well,” Karl Mills, president of investment advisory firm Jurika, Mills & Keifer. says. “If it works really well, chances are the other things in the portfolio aren’t going to be looking so good.”

Jonathan Burton

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“Indeed, that’s how most individual investors should look on gold, as a way to mitigate investment risk — and an insurance policy you hope never to use,” Jonathan Burton at MarketWatch concludes.

Well, that’s actually how it’s always have been, and always will be.

PLease, don’t forget that.

Now, read the full story at www.marketwatch.com.

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Hedge Fund Managers Still Bearish – Fear Of Currency War

In Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 01.11.10 at 22:53

US hedge fund managers remain bearish on US equities, according to the monthly survey by Barclay Hedge and Trim Tabs. The fund managers also see currency wars as biggest threat to global financial stability at the moment, and belive the world leaders will focus on the wrong problems when they meet in Seoul  later this month.

“Many managers need a blockbuster Q4 in order to collect performance fees for the year.”

Vincent Deluard


Hedge fund managers remain downbeat on US equities, according to the BarclayHedge/TrimTabs Survey of Hedge Fund Managers for October.  About 39% of the 102 hedge fund managers the firms surveyed in the past two weeks are bearish on the S&P 500, up from 37% in September.

“The lean toward bearishness surprises us a bit because extreme caution in September produced substantial underperformance,” Sol Waksman, CEO of BarclayHedge writes in a statement.

Adding: “We suspect managers will invest much more aggressively in the current quarter.  Stock prices keep grinding higher, and hedge funds hauled in $18.8 billion in the past three months.  Managers have to put that fresh cash to work.”


About 32% of managers cite currency wars as the biggest threat to global financial stability, and 36% feel world leaders should focus on the problem of too-big-to-fail institutions at the  G-20 Summit in Seoul later this month.

So far, that particilular issue has not quite made it to the top agenda of the world leaders summit on November 11 – 12.

Hoping For A Change

Only half of managers think a Republican party victory in the US midterm elections, Thursday, will be a plus for stocks, while a quarter feel it will have no impact.

“That Republicans will seize control of the House tomorrow is already baked in,” Vincent Deluard, Executive Vice President at TrimTabs explains.

“Also, while the FED is capable of inflating the value of stocks and bonds, hedge fund managers are seasoned enough to know there is little politicians can do to juice asset prices,” Deluard says.

About 28% of hedge fund managers are bearish on the 10-year U.S. Treasury note, the largest share since the inception of the survey in May.

In contrast, 32% of managers are bullish on the U.S dollar index, the largest share since June.

Only 9% of managers aim to decrease leverage in the coming weeks, while 19% plan to increase it.

“Why are downbeat managers inclined to lever up?  Short rates that round to zero mean borrowing is virtually costless—that’s an attractive incentive,” Deluard notes.

“Also, a third of hedge funds are underwater for the year, and half posted a return smaller than 2% through September.  Many managers need a blockbuster Q4 in order to collect performance fees for the year,” according to Deluard.

And here’s the list of the CTA’s with the best performance over the last 12 months:

The TrimTabs/BarclayHedge database tracks hedge fund flows on a monthly basis.  The TrimTabs/BarclayHedge Hedge Fund Flow Report provides detailed analysis of these flows as well as relevant topical studies.

Click here for further information.

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The Golden Hedge

In Financial Markets, International Econnomic Politics, Learning, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 01.11.10 at 15:46

Investors who do not hold gold or view it purely as a temporary safe haven asset are failing to harness its full potential to protect wealth, according to a new study published by the World Gold Council (WGC). In the analysis the WGC shows that during the period between October 2007 and March 2009—the height of the global financial meltdown—an investor with a portfolio of US$10 million experienced an additional US$500,000 financial loss simply by not maintaining a position in gold.

“In 18 of the 24 tail risk scenarios analysed by the WGC, portfolios which included gold outperformed those which did not.”

World Gold Council


Perhaps not big news, but yet an important documentation: In its latest report – “Gold: Hedging Against Tail Risk” – the WGC shows that a modest, consistent holding of gold mitigates the potential for significant loss of value during extreme market events.

In the analysis the WGC shows that during the period between October 2007 and March 2009—the height of the global financial meltdown—an investor with a portfolio of US$10 million experienced an additional US$500,000 financial loss simply by not maintaining a position in gold.

The study used a composition similar to a benchmark portfolio,1 which included an 8.5% allocation to gold, to show that total losses incurred during the period reduced by 5% relative to an equivalent portfolio without gold.

In 18 of the 24 tail risk scenarios2 analysed by the WGC, portfolios which included gold outperformed those which did not.

The term tail risk refers to extreme events that may be considered unlikely, such as the “Black Monday” market crash of October 1987, but which tend to have a considerably negative effect on an investor’s capital when they do occur.

“In the last decade we have seen two of the worst bear markets in the last hundred years. As one might expect, sensitivity to risk still runs high for investors around the world, and as assets are rebuilt an ability to protect capital irrespective of market conditions is paramount. Considering portfolio diversification is clearly important, but protecting against systemic risk can be an entirely separate matter. This research shows that gold protects against tail risk events, but equally in more positive times reduces the volatility of a portfolio without sacrificing expected returns,” Investment Research Manager Juan Carlos Artigas at the World Gold Council, and author of
the research report, says in a statement.

The analysis also suggests that even relatively small allocations to gold, ranging from 2.3% to 9.0%, can have a positive impact.

On average, such allocations can reduce the Value at Risk (VaR) while maintaining a similar return profile to equivalent portfolios which do not include gold.

Conceptually, VaR is a way of measuring the maximum amount an investor could expect to lose in a given period of time, with a certain degree of confidence, in the case of an unlikely, yet possible, event occurring.

“We now inhabit a world characterised by greater volatility and higher levels of investment risk. Robust asset allocation strategies are central to a return to financial stability. Gold’s ability to move independently of most assets usually held by institutions and individuals, and to hedge against inflation and currency fluctuations, all mean that it is highly effective as a preserver of long term wealth and should form a foundation of any long term investment portfolio. This report sets out how gold can protect against negative events, which are not easy to predict but can substantially erode wealth,” managing director Marcus Grubb at WGC says.

Here’s a copy of the full report: Gold Investment Digest October 2010.

Press release.

See also: Positive Long-Term Gold Price Trend Underpinned By Appetite For Gold’s Wealth Preservation Properties.

 

“Artificial Intelligence” To Be Implemented In HFT

In Financial Markets, International Econnomic Politics, National Economic Politics on 20.09.10 at 17:41

The increasingly fast electronic trading systems have become too fast for humans to handle. We are now seeing a wave of  investment firms turning to the science of artificial intelligence to make investment decisions. Unlike most Wall Street actors, the trading robots are capable of learning from their mistakes.

“No human could do this. Your head would blow off.”

Michael Kearns

With artificial intelligence, programmers don’t just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt. Investors using the approach are implementing “machine learning”  – a branch of artificial intelligence in which a computers analyzes huge chunks of data to make predictions about the future.

The following post is based on an article by Scott Patterson, journalist with The Wall Street Journal, one of the few mainstream reporters who really understand the HFT business.

Scott Patterson

The original article was published in July this year, but have until recently only been available to WSJ’s subscribers.

According to Patterson, there’s a new wave of firms using machine learning to trade.

With artificial intelligence, programmers don’t just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt.

Most investors trying the approach are using “machine learning,” a branch of artificial intelligence in which a computer program analyzes huge chunks of data and makes predictions about the future.

It is used by tech companies such as Google to match Web searches with results and NetFlix to predict which movies users are likely to rent.

Young Geeks In Action

Rebellion Research

One of the new upstart in the AI race on Wall Street is Rebellion Research, a tiny New York hedge fund with about $7 million in capital that has been using a machine-learning program it developed to invest in stocks.

Run by a small team of twenty-something math and computer whizzes, Rebellion has a solid track record, topping the Standard & Poor’s 500 stock index by an average of 10% a year, after fees, since its 2007 launch through June, according to people familiar with the fund.

Like many hedge funds, its goal is to beat the broader market year after year.

“It’s pretty clear that human beings aren’t improving,” says Spencer Greenberg, 27 years old and the brains behind Rebellion’s AI system. Adding:  “But computers and algorithms are only getting faster and more robust.”

Some sophisticated hedge funds such as New York based Renaissance Technologies LLC are said to already have deployed AI to their investing programs.

For years, these firms were the exceptions. But not anymore.

The Rise of The Machines

Rebellion is part of a new wave of firms using machine learning to trade. Cerebellum Capital, a San Francisco hedge fund with $10 million in assets, started using machine learning to invest in 2009, according to Patterson and The Wall Street Journal.

A number of high-frequency trading firms, such as RGM Advisors LLC in Austin, Texas, and Getco LLC in Chicago, are using machine learning to help their computer systems trade in and out of stocks efficiently, says people familiar with the firms.

The programs are effective, advocates say, because they can crunch huge amounts of data in short periods, “learn” what works, and adjust their strategies on the fly.

In contrast, the typical quantitative approach may employ a single strategy or even a combination of strategies at once, but may not move between them or modify them based on what the program determines works best.

Will Blow Your Head Off

“No human could do this,” says computer scientist, Professor Michael Kearns, at the University of Pennsylvania who has used AI to invest at firms such as Lehman Brothers Holdings Inc. “Your head would blow off.”

Rebellion has struggled to raise money, in part because investors since the credit crisis are dubious of opaque math-based strategies.

The firm has attracted at least one long-time “quant” skeptic: famed value investor Jean-Marie Eveillard, who recently invested several hundred thousand dollars of his own money into Rebellion.

“My cup of tea is not quantitative investing,” he says. “But I think they are serious investors, and I’m impressed by the fact that they don’t have a high turnover…and don’t use leverage.”

Read the full post at The Swapper:

Related by the Econotwist:

The Ultimate Trading Weapon

Survey: Market Surprised By Negative Derivative Perception

Testimony Of A High Frequency Trader

The Rise Of The New Market Makers

Flight to Mystery

May 6. 2010: “The Black Thursday”

Wall Street Collapse: Did Somebody See It Coming?

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“Artificial Intelligence” To Be Implemented In HFT

In Financial Engeneering, High Frequency Trading, Learning, Natural science, Quantitative Finance, Technology, Trading software on 20.09.10 at 17:11

The increasingly fast electronic trading systems have become too fast for humans to handle. We are now seeing a wave of  investment firms turning to the science of artificial intelligence to make investment decisions. Unlike most Wall Street actors, the trading robots are capable of learning from their mistakes.

“No human could do this. Your head would blow off.”

Michael Kearns


With artificial intelligence, programmers don’t just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt. Investors using the approach are implementing “machine learning”  – a branch of artificial intelligence in which a computers analyzes huge chunks of data to make predictions about the future.

The following post is based on an article by Scott Patterson, journalist with The Wall Street Journal, one of the few mainstream reporters who really understand the HFT business.

Scott Patterson

The original article was published in July this year, but have until recently only been available to WSJ’s subscribers.

According to Patterson, there’s a new wave of firms using machine learning to trade.

With artificial intelligence, programmers don’t just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt.

Most investors trying the approach are using “machine learning,” a branch of artificial intelligence in which a computer program analyzes huge chunks of data and makes predictions about the future.

It is used by tech companies such as Google to match Web searches with results and NetFlix to predict which movies users are likely to rent.

Young Geeks In Action

Rebellion Research

One of the new upstart in the AI race on Wall Street is Rebellion Research, a tiny New York hedge fund with about $7 million in capital that has been using a machine-learning program it developed to invest in stocks.

Run by a small team of twenty-something math and computer whizzes, Rebellion has a solid track record, topping the Standard & Poor’s 500 stock index by an average of 10% a year, after fees, since its 2007 launch through June, according to people familiar with the fund.

Like many hedge funds, its goal is to beat the broader market year after year.

“It’s pretty clear that human beings aren’t improving,” says Spencer Greenberg, 27 years old and the brains behind Rebellion’s AI system. Adding:  “But computers and algorithms are only getting faster and more robust.”

Some sophisticated hedge funds such as New York based Renaissance Technologies LLC are said to already have deployed AI to their investing programs.

For years, these firms were the exceptions. But not anymore.

The Rise of The Machines

Rebellion is part of a new wave of firms using machine learning to trade. Cerebellum Capital, a San Francisco hedge fund with $10 million in assets, started using machine learning to invest in 2009, according to Patterson and The Wall Street Journal.

A number of high-frequency trading firms, such as RGM Advisors LLC in Austin, Texas, and Getco LLC in Chicago, are using machine learning to help their computer systems trade in and out of stocks efficiently, says people familiar with the firms.

The programs are effective, advocates say, because they can crunch huge amounts of data in short periods, “learn” what works, and adjust their strategies on the fly.

In contrast, the typical quantitative approach may employ a single strategy or even a combination of strategies at once, but may not move between them or modify them based on what the program determines works best.

Will Blow Your Head Off

“No human could do this,” says computer scientist, Professor Michael Kearns, at the University of Pennsylvania who has used AI to invest at firms such as Lehman Brothers Holdings Inc. “Your head would blow off.”

Rebellion has struggled to raise money, in part because investors since the credit crisis are dubious of opaque math-based strategies.

The firm has attracted at least one long-time “quant” skeptic: famed value investor Jean-Marie Eveillard, who recently invested several hundred thousand dollars of his own money into Rebellion.

“My cup of tea is not quantitative investing,” he says. “But I think they are serious investors, and I’m impressed by the fact that they don’t have a high turnover…and don’t use leverage.”

TradingSolutions is one of the systems using AI. Click the pic if you want to try it, or some of the others platforms available.

Rebel With Tradition

Rebellion’s Spencer Greenberg is no stranger to the investing world.

His father, Glenn Greenberg, is an iconoclastic value investor and manager of Brave Warrior Advisors, who recently split from his partners at Chieftain Capital Management Inc.

Spencer Greenberg

His grandfather, legendary baseball slugger “Hammerin’ Hank” Greenberg, played for the Detroit Tigers in the 1930s and ’40s.

But past success doesn’t mean Rebellion will continue to beat the market. As with many quantitative strategies, its system could stop working if market fundamentals change in ways that trip up its computer program, known as “Star.”

What makes Star intelligent, says Mr. Greenberg, is its ability to adjust its strategy based on shifting dynamics in the market and broader economy.

The program isn’t wed to any single investing approach. Under certain conditions, the fund will buy cheap stocks, in others it will favor stocks with swiftly rising prices—or both at the same time.

Long Term – No Leverage

Unlike the high-frequency funds that use artificial intelligence to aid rapid trading, Rebellion tends to hold stocks for long periods—on average four months but in some instances more than two years.

It also doesn’t short stocks or use leverage, or borrowed money, which can amplify returns but also boost risks.

The program monitors about 30 factors that can affect a stock’s performance, such as price-to-earnings ratios or interest rates.

The program regularly crunches more than a decade of historical market data and the latest market action to size up whether to buy or sell a stock.

When certain strategies stop working, the program automatically incorporates that information, “learns,” and adjusts the portfolio.

For instance, it may detect data indicating stocks with low price-to-earning ratios are likely to rise and load up on those stocks. Then, if the program later finds that the strategy is likely to lose steam, based on shifts in the factors it tracks, it will dump those stocks and buy stocks it deems more favorable.

A  Star Is Born

Every morning, Star recommends a list of stocks to buy or sell—often it offers no changes at all. A human trader implements the moves.

The firm says it never overrules the computer program, which is largely the same system they started with in 2007, with a few nips and tucks.

Rebellion typically holds about 60 to 70 stocks at any time.

Mr. Greenberg started designing Star in mid-2005, soon after he graduated from Columbia University with an engineering degree. He was joined by Alexander Fleiss, a high-school friend with a background in finance and math, as well as Jonathan Sturges, who has a master’s degree in music composition, and Jeremy Newton, a mathematician who helped design the AI program.

In January 2007, with $2 million in capital, the program started picking stocks. That spring, it started moving into defensive positions such as utilities. Rebellion gained 17% in 2007, compared with the 6.4% gain by the Dow Jones Industrial Average, according to people familiar with the fund.

It stayed defensive throughout most of 2008, holding gold, oil and utility stocks. Still, it lost money like most investors, sliding 26% but topping the 34% decline by the Dow industrials.

In early 2009, Star started to buy beaten-down stocks such as banks and insurers, which would benefit from a recovery.

“He just loaded up on value stocks,” says Mr. Fleiss, referring to the AI program. The fund gained 41% in 2009, more than doubling the Dow’s 19% gain.

The firm’s current portfolio is largely defensive. One of its biggest positions is in gold stocks, according to people familiar with the fund.

The defensive move at first worried Mr. Fleiss, who had grown bullish. But it has proven a smart move so far. “I’ve learned not to question the AI,” he says.

“Wall Street is notorious for not learning from its mistakes. Maybe machines can do better,” Scott Patterson writes.

However, personally, I’d like to point out that even the highest level of artificial intelligence is no match for natural human stupidity…

Related by The Swapper:

The Ultimate Trading Weapon

Survey: Market Surprised By Negative Derivative Perception

Testimony Of A High Frequency Trader

The Rise Of The New Market Makers

Flight to Mystery

May 6. 2010: “The Black Thursday”

Wall Street Collapse: Did Somebody See It Coming?

*

The Ultimate Trading Weapon

In Financial Engeneering, High Frequency Trading, Learning, Quantitative Finance, Technology, Trading software on 20.09.10 at 00:35

For the last two years internet veteran James Barksdale have been working in secrecy, digging a gopher hole from Chicago to New York, setting up the fastest trading system ever built. Spread Networks’ one inch thick fiber optic cable can execute orders between Chicago and New York in 13,3 milliseconds. It is today’s  ultimate trading weapon.

“Anybody pinging both markets has to be on this line, or they’re dead.”

Jon A. Najarian


In March 2009 Spread Networks had 125 construction crews working at once. Some dug ditches next to state roads while others bore tiny tunnels beneath streams and rivers. In the Allegheny Mountains of Pennsylvania, crews ran rock saws until they glowed white in the winter air. Late this summer the they fired up their weapon for the first time.

The last splice came in July, according to Forbes.

Worried that competitors might build their own version, Spread ran on stealth until near completion.

“We kept a lid on things by staying away from the big investment banks until late,” says David Barksdale, son of James Barksdale and CEO of Spread Networks.

Today, James Barksdale, the former controversial Netscape boss, in addition to his business interests, serves on the following public and private boards:

  • Time Warner Inc. (March 1999 to present)
  • FedEx Corp. (September 1999 to present)
  • Sun Microsystems, Inc. (April 1999 to January 2010)
  • Mayo Clinic (February 2001 to present, served as chairman 2006 – 2010)
  • In-Q-Tel (June 2003 to present)
  • Dick Clark Productions, Inc. (April 2008 to present)
  • Kleiner Perkins Caufield and Byers (special limited partner – January 2006 to present)
  • WWII Museum (June 2003 to present)

On June 22th this year Spread Networks made the formal launch.

Press release.

On August 16th they fired up the full network.

Press release.

Still Secrecy

Spread won’t disclose the costs.

However, Jason Cohen, chief operating officer of Allied Fiber, which is building a nationwide network, says laying cable through easy terrain runs $200,000 per mile.

But half of Spread’s route is going through tough, rocky and untouched terrain.

Forbes estimate the cost of building the ultra fast connection close to $300 million.

Jim Barksdale put up most of the capital, except for $75 million, financed by outside investors.

Spread Networks won’t talk about its pricing or clients, but say it “hasn’t sold out yet.”


Ultimate Trading Weapon

Spread’s one-inch cable is the latest weapon in the technology arms race among Wall Street houses that use algorithms to make lightning-fast trades.

The trading is now practically speaking conducted at the speed of light.

The High Frequency Trading is said to make up about 70% of the total trading in the US stock markets.

“Anybody pinging both markets has to be on this line, or they’re dead,” says Jon A. Najarian, co-founder of OptionMonster, which tracks high frequency trading.

Spread’s advantage lies in its route, which makes nearly a straight line from a data center in Chicago’s South Loop to a building across the street from Nasdaq’s servers.

Older routes largely follow railroad rights-of-way through Indiana, Ohio and Pennsylvania.

At 825 miles and 13.3 milliseconds, Spread’s circuit shaves 100 miles and 3 milliseconds off of the previous route of lowest latency – financial/technical engineers expression of the length of delay from data are sent to it’s received by the other server.

Three milliseconds is three one-thousandths of a second.

However, that’s “close to an eternity in automated trading,” according to professor Ben Van Vliet at the Illinois Institute of Technology.

Adding: “This is all about picking gold coins up off the floor – only the fastest person is going to get the coins.”

Can Charge What They Want

The company is currently holding the title as “The Low Latency King”.

That means they can charge eight to ten times the going rate, according to telecom analyst Donna Jaegers  at D.A. Davidson & Co.

Allied Fiber charges $1.2 million for a 20-year Chicago-to-New York lease plus $235,000 a year for server space and maintenance.

The big algorithmic traders have to pay up, no matter the cost.

Chicago proprietary houses such as Getco, Wolverine and Citadel are undoubtedly amongst the customers of Spread Networks, according to Jon A. Najarian at OptionMonster.

He reckons that the New York banks with their own algorithmic trading desks, such as UBS, Goldman Sachs and Morgan Stanley are using the same Spread Networks, too.

The Greed For Speed

Two years ago, hotshot trader Daniel Spivey approached James Barksdale looking for money for a rather “quixotic” venture:

To dig, from scratch, a super fast fiber cable route for sending trades beteen Chicago and New York.

It would be nearly as straight as the crow flies and create a new critical link for speed-obsessed traders.

James Barksdale

“At first I said, Come on, you’re pulling my leg,” he recalls, wondering how you would plunge through mountains at a reasonable cost.

But as he pondered it he realized, “If it wasn’t a tough problem, somebody else would have already done it.”

Daniel Spivey had earned his trading chops at the Chicago Board Options Exchange.

He became one of the exchange’s first remote market-makers in 2005 when he set up shop in his hometown of Jackson to trade options for the s&p 500 index.

In 2007 Spivey contracted with a New York hedge fund to devise a low-latency arbitrage strategy, wherein the fund would search out tiny discrepancies between futures contracts in Chicago and their underlying equities in New York.

Controls The Dark

Such popular arbitrage strategies demand screaming speed between Chicago and New York on what’s called “dark fiber,” the industry term for unused fiber-optic strands that can be sold or leased.

The entirety of the strand’s bandwidth belongs to the leaser, who supplies his own lasers, which can cost more than $5 million, to light the line and transmit information.

Spivey composed the program for the hedge fund, but he couldn’t execute it.

But he needed the market’s lowest latency path, on which no space was available.

Spivey spent ten months researching the feasibility of building a new and faster line before he approached Jim Barksdale.

David Barksdale

Spivey and David Barksdale immediately set out on a series of road trips, meeting with county boards, state highway commissions and private landowners.

Barksdale helped finance the company and became chairman. Barksdale’s son, David, a mergers-and-acquisitions lawyer, became chief executive.

The result was Spread Networks of Ridgeland – the ultimate trading weapon.

Spread Networks says on their website:

“We trenched a new route-a direct route with microseconds in mind-to provide firms with the necessary infrastructure to;”

  • Take control of New York to Chicago telecommunications.
  • Operate enterprise networks free of typical telecommunications drag.
  • Run at the fastest possible speed on the shortest possible route.

“The best way to maintain consistent low latency is to control your own network by operating on a private dark fiber system. Controlling a private network allows you to eliminate excess drag by choosing the most appropriate hardware solutions to fit your specific needs,” Spread says.

“Spread Networks offers financial firms a fresh supply of dark fiber on a completely new route-the shortest possible route from New York to Chicago.

However, there is one web hoax that would have a path even faster than Spread’s:

A straight tunnel, through the earth, from Chicago to New York, avoiding the planet’s pesky curvature.

My guess is that someone is probably already working on it…

Related by The Swapper:

Testimony Of A High Frequency Trader

The Rise Of The New Market Makers

Flight to Mystery

May 6. 2010: “The Black Thursday”

Wall Street Collapse: Did Somebody See It Coming?

U.S. Stock Crash Compels Further Investigation of Wall Street Scam

Big Banks Block OTC Clearing in “Proxy War”

Living In A Derivative World

Survey: Market Surprised By Negative Derivative Perception

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