Thursday, July 14, 2011

... And Conforms to the Theory

In the same article, there was this:
Increasingly, they [HFT firms] are investing in technology that enables them to to try to predict where markets will move. Cameron Smith, general counsel at Quantlab, a proprietary trading firm says: “The reality is you need to have some sort of model that sees something that other don't”.
You have heard ad nauseam how technology revolutionized finance. The statement is repeated so often that it is now an article of faith.

But that is getting the cause and effect exactly backwards. It was finance, in the form of speculative capital that, in search of profits, revolutionized technology. I had a front row seat to the revolution in the early 1980s, being paid exorbitant sums to develop trading systems. Cause and effect was there for everyone willing to look.

Capital has no reason to move from one place to another without the possibility of realizing a profit. Long before there was any trading system, there was Western Union. In the U.S., you could send money anywhere in the country in 15 minutes. If you are over 40, you probably remember the ads.

But there must a be a reason for sending $10,000,000 from New York to say, Boston. Without it, the exercise borders on madness.

When speculative capital rises and discovers the arbitrage opportunities in different locations then — and only then — does the need arise for “getting there” fast before the others. Hence, capital is poured in and technology is revolutionized.

In Critique of Dialectical Reasoning, Jean Paul Sartre asks: “Are there regions of reality where [dialectics] is the norm?”. He does not answer the question. My answer is, Yes Mr. Sartre, the realm of economics/finance is one such region. Observe:

Having destroyed the arbitrage opportunities on sight, speculative capital fancies that it can somehow “replace” them with sheer speed; it moves to substitute the speed for arbitrage opportunities. Hence the rise of HFT.

But that is a fantasy. It is the finance equivalent of fancying that you can generate profits without production. So, back to square one and the need for something that could detect a profit opportunity.

But the point that we are in now, looking for a model, is not the same point we were in during the 1980s, looking for a model. That phase created the quants, hedge funds and derivatives.

Today, quants are discredited, hedge funds are institutionalized and derivatives are the indispensable part of the capital markets landscape.

That is dialectics par excellence. A better example of “immediate” going out of itself, becoming “intermediate” and returning to become “immediate” again, but on a qualitatively different level, could not be found.

Come to think of it, I know things about options and options trading that are not common knowledge; if you have read Vol. 3 you know what I mean. Maybe I should take up again what I left decades ago. Imagine a predictive engine for the HFT guys. Imagine the potential. Imagine the riches!