Another research project - the Bund

Thanksgiving Day, so no trading in one of our main markets, but enough vol in the others to make it just about worthwhile to trade. With the latest tiny tweak to our systems, the actual management of trades has really improved, so there isn't the rather frantic, closely-spaced activity that used to characterise our trading throughout the day. This suggests that we have time in our daily routine to add another major market sector - usually I look at Crude Oil for this, but this time I have decided to look at the German Bund again, if only because it is in the news today following a failure of a 10 year auction this week.

And the initial prognosis is very good. True I have only processed about a dozen days of trades, but high Sharpe ratio systems don't need much data. By Sunday I'll have about 50 days which should be enough. Jerome is already talking of adding the Bund from next Monday! Average daily profit is 27 pts but volatility is low at 52 pts for a Sharpe ratio of 8.3. Adding this to our current portfolio and setting a position size via the relative Vol (rather than correlation at this stage), and daily profit is up 50% while daily vol at the portfolio level is only up 10%. Now that is a major positive!

The Bund Dec 2011 contract - could this produce another huge jump in our Sharpe Ratio?

Videos of The Acid Mothers Temple in Oxford

When I was at the Acid Mothers Temple show the other day, there was a guy standing to my right leaning against the wall and with quite a fancy camera set up. On a single pole, he had an SLR camera, a small digital camera and what looked like a microphone or possible another camera of some sort.

And in the last couple of days, two videos have appeared on Youtube which were clearly taken by him. I have to say, they are extremely good. I have a programme called "youtube downloader" so I can copy videos to my PC and have really enjoyed the 30 minutes he has made available so far. Hope the rest of the shows eventually appears.

Part 1 - the first 30 minutes

http://www.youtube.com/?v=jMTjxXIywm4&feature=related

Part 2 - Pink Lady Lemonade

http://www.youtube.com/?v=qZdvvZ4iPhI

I am standing about 5 yards to the tapers left, directly in front of the ultra-cool guitar-synth player.

Yet more amazing music - Grouper

The current issue of Wire Magazine (how often do I write that?) has a feature on someone called Liz Harris, who performs via her solo project, Grouper. The article isn't very clear what her music actually sounds like, but it is intriging enough to spark my interest. It is my monthly renewal date with emusic.com, and basically all her releases are available for download, so I now have A I A: Alien Observer and Dream loss, Dragging a Dead Deer up a Hill, Cover the Windows and the Walls, two singles and a shared CD with Inca Ore

Once again, a truly amazing artist. Similar in some ways to the Hildur Gudnadottir music that I have been listening to for the past month or so, but this time a guitar plus effects, rather than a cello. But the overall sound is very similar - lo-fi, sludgy noise, etc. I am completely captivated by it.

Lots of live clips on Youtube - I am really taken by one clip called "Grouper - Untitled (live in Seoul)"

Liz Harris as Grouper - amazing music

Post-data-bash work

The data bash took me about 10 hours a day, 7 days a week for 3 months to complete, and with its completion, I suddenly have quite a lot of time free. My initial reading has been Francois L'Habitant's Hedge Funds - Quantatative Insights, which was ok, but didn't give me much incremental knowledge. Next up has been Andrew Lo's Hedge Funds - An Analytic Perspective. This is actually quite interesting - especially the chapter on the replication of hedge fund performance by principal factor analysis. Also the chapter on August 2007 is very good.

Next up will be a new book - Emanual Derman's Models Behaving Badly. I am actually really excited about this book, only recently bought and due to arrive tomorrow.

Then other books lurking on the horizon include re-reading Taleb's Fooled by Randomness and (possibly) The Black Swan. Then also re-reading Narang's Inside the Black Box.

Finally I need to look again at the various articles I have on the Kelly Criterion. I am slowly building a position sizing model which incorporates a projection model for the next two years. If we carry on as we have been doing, we will be very happy with the result!!

Kidney Stones??

I am woken, early Sunday morning, with a pain in my right flank - the area above my hips but below my waist. I think it might be kidney related pain, perhaps due to dehydration after having had a few drinks last night. On a scale of 1 to 10, the pain is about 1-2.

But half an hour or so later, things have taken a marked change. The pain level is excruciating, maybe a 6-7. Indeed I can't remember the last time I had such a pain. Then, in the space of 5 minutes, it disappears completely.

I am reminded of a former work colleague from years ago, who had a similar experience at work one time, also over in 3-45 mins. A quick look on Wikipedia suggests that a kidney stone would be the perfect explanation for location, intensity and duration.

The pain is gone completely now and I am not sure what I should do next. In the short term, I am following some advice on the website and am drinking more - with bitter lemon replacing coke. Perhaps if it happens again I will consider seeing the doctor - which would be my first trip to our doctor in 15 years.

The new Kate Bush CD

The new Kate Bush album - 50 Words for Snow - is out unofficially on the internet and given the reviews in today's paper, I have succumbed to temptation and downloaded it. I should also note that I have bought a copy as well, due to arrive on Monday.

I have now had a chance to hear it through twice and it is a quite extraordinary record. But if you were to write down what it is about, as if you were pitching an idea to a record company, it would sound totally absurd. That is the genius of Kate Bush - to take these ideas and turn them into something astonishing. And astonishing is definitely the word for it.

I suspect I will be listening to this record repeatedly over the coming weeks (along side the Acid Mothers Temple, of course!)

Is this the cd cover? Not sure yet

Cool hats!

Acid Mothers Temple play a show in Oxford!!!

In Blackwells with Daughter on Sunday I happened to see an advert for an Oxford show by the Acid Mothers Temple. Now there is something I had never expected to happen. I am able to get a ticket online and so it is off to a pub in Jerico to see one of my all time favourite bands. Some searching through the study and I discover that I actually have, in one format or another, over 60 AMT recordings.

When I arrived, the band were actually all sitting at the back of the room upstairs at a small merchandising table, signing copies of their latest CD, The Ripper at the heavens Gates of Dark. What an off bunch they are. You don't really think of their being Japanese hippies in their fifties, but there most definitely are!

They set up their equipment themselves on a tiny stage about the same size as the one in our village hall, then it is off into two hours of psychedelic guitar freakery. Perhaps surprisingly, they play two tracks I know - La Novia and Lady Pink lemonade. Stependous stuff all round and well appreciated by the 400 or so people there.

A guy to my right was videoing or recording the show. I shall be on various download websites in the next week or two to see if I can find this.

Japanese hippies - yeah!

How the Acid Mothers Temple appeared when I first came across them - a huge hippie tribe!

Bert Jansch and Pentangle

I have been slowly reading through piles of press cuttings while doing the trading and have just come across the many obituaries of Bert Jansch. So today has been an intensive listening day to the early Bert Jansch albums I have and to Pentangle, who I have a couple of albums of, but which I have never really listened to seriously. I must say, I have enjoyed Pentangle much more than ever in the past - somehow I just didn't give them the serious listen they deserved. Of particular note was the album Cruel Sister, the title track of which has become a firm favourite today.

Pentangle - an early picture and a recent one from a show in london a year or two ago

The VIX - a new research programme

The data bash is finished and the main statistical analysis is now done - all that remains is to write up the results. Then I will be studying portfolio management and position sizing, with the aim of letting leverage rise to perhaps 3 x the current level, with my exposure representing 75% of the days P/L.

In the meantime, I have been thinking about one category of trades that we always seem to come back to - what we refer to as "Taleb trades", trades deliberately set up with the aim of "bleeding" a small amount each day in return for an occasional huge win. This has lead me back to the VIX, the S&P Volatility Index, or the "Fear Index" as it is often referred as in the recent Robert Harris book

When the VIX is examined intra-day, it is a pretty unusual market. A typical current reading is around the 30 level, but a typical day's range can be 6-8 full points, or about 25% of the value of the index. And it has large discontinuities between the close of one day and the open of the next. My first look at trading this was based on applying out intra-day systems to daily VIX data. This was hugely profitable over the period initially tested - Oct 15 to Nov 5 - making around 1500 pts or over 50% unleveraged. However it was also hugely volatile. A whipsaw could cost 400 pts. You could be long at the close and the next day the market could open up 500 or down 500. So the mark to market was very volatile.

So despite a return of 50% in three weeks, the Sharpe ratio is only about 4.0, which is low compared to our current trading. I did try considering just the long trades, but while that did improve the Sharpe ratio a little, it was still not good enough. Maybe I will be led back to intra-day trading?

A typical one week VIX, with a high of 21 and a low of 17, with large discontinuities between close and the next opening.

Also there is a more subtle problem, which is the high correlation between the VIX trading and our trading of US equities - in other words, we already do well on the sorts of days that cause the VIX to rise or fall lots.

Finally, short term trading of the VIX is not really a "Taleb trade" at all. Maybe we should be looking at VIX options, maybe buying 30 calls whenever the VIX falls below 25, or buying the future when it is below 25 and selling it when it goes above 35.

So for the moment, I shall be looking elsewhere for a possible Taleb Trade

Julian Cope's Krautrock book

I have been dipping into Julian Cope's book, Krautrocksampler over the last couople of days, following the long article in the current issue of Wire Magazine on Manuel Gottsching and the creation of the album "E2-E4". Cope is such an enthusiast! By the end of 50 pages, I am digging through my CDs for Amon Duul II's Yeti, Can's Tago Mago, a couple of CDs of early Ash Ra Tempel and the first Neu record.

I have also found my copy of Cope's equivalent book, Japrocksampler. A current version of this might cover my favourite band, Boris, but the book actually focuses on earlier bands I've never heard of. But this is always the problem - reading Wire, or books like Cope's just set me off again on a wild chase for obscure music.

And that reminds me, I was much surprised to discover that Japanese Psychedelic band, The Acid Mothers Temple, are playing in Oxford this week. I have acquired a ticket and will be among the chosen few at the tiny Jerico Tavern on Wednesday. The current tour has been featuring the epic 30 minute freak out that is Pink Lady Lemonade - hope that play that one when I see them.


Amon Duul II Cds

Can's magnificent Tago Mago, due out again soon in a new edition

Ash Ra Tempel - Manuel Gottsching on the left below

Neu - also very cool. I remember hearing John Peel play Hallogallo years ago. Excellent stuff.

Daughter home for the weekend

For the first time in a while, daughter is home for a weekend visit. Picked up from Didcot after work on Friday and just time for a quick change before we head off for the pub in the village. As usual, Emma has lots of pending things going on in her life, but things generally seem to be going well. Her new-found non-vegentarianism continues to develop, and tonight she has a beef burger for perhaps the first time ever.

She has a lie in on Saturday till mid morning and then it is off to Oxford for brunch at the French cafe and an afternoon's shopping with Linda. I had originally intended to stay in with them for the afternoon, but they seemed keen to come home together on the bus. Sure enough, they are loaded down with stuff when I meet them off the bus later.

Our evening is focused around me cooking a nice meal - salmon and prawns in a cream and paprika sauce for starter, followed by a dish I have done for years - fillet steak with a cream, onion, mushroom and whiskey sauce. We sit out in the sun room which is nice. Afterwards, we watch Unstoppable, eat Ben and Jerry's Phish food with added malteasers, and generally have a very nice evening.

Sunday is a father-daughter trip to Oxford for lunch together and an hour looking at books in Blackwells.

But I am noticing again that the two of us have moved a long way apart over the past few years. Things we would have talked about in detail in the past are now dismissed as uninteresting. So much of our relationship in the past was taken up with academic issues, that post-Cambridge, we have struggled a bit to re-define our relationship. By contrast, Linda and Emma are much closer now they don't live together and the issues that Emma faces are more likely to be ones that Linda can best address.

I note also that Emma's holiday planning for next year already includes about a week away with Linda, while talk of she and I doing something together has dropped away. As before, I am left with a rather melancholic feeling from the weekend.

Nancy Goldstone's Trading Up

When I graduated from University in 1984, my first job was with one the the "big 8" accounting firms - their standard three year contract to become a Chartered Accountant. I still lived in the East End of London (Leytonstone) and so was allocated to jobs like Coral Bookmakers based in Barking (where I learnt more about risk management that on any other job). And I also got a sprinkling of City banks. I was on the 1986 audit of BCCI which found the huge option losses incurred in the US T-Bond market. And I used to do part of Midland bank, based in their rather nice blue office on Lower Thames Street. One Friday I remember being there when a huge cheer went up at exactly 1:30pm. Some US economic data had come out and Midland were the right way round for its impact on the dollar. Much money was made that afternoon.

I finished my training contract in Oct 1987 and immediately set about trying to get a job in the Square Mile. I was interviewed a number of times at BZW, the trading part of Barclays, for a job on the futures and options desk. I would have been hopeless at that. As it was, my last interview, when I was supposed to be offered my contract was on the Monday of the Stock market crash and recruitment had been frozen, pending the dust settling. So I didn't get that job.

Some months later I was interviewed at Morgan Stanley for a job on their swaps desk, but I seemed keener to talk about the trading than perhaps they wanted - the position was an accountancy one. But the trading bug had taken hold and of course that is what I do now.

Into 1988 and the appearance in one of the bookshops I used to frequent that had a big investment section of Nancy Goldstone's Trading Up, her account of her rapid rise to head of options trading at a major US bank, despite knowing little or nothing about options. I had helped a partner write our firm's guide to auditing currency options and knew far more about them than she did. Yet here she was, head of options trading at 27. The book is wonderful, I have read it four times, and in the immediate aftermath of the completion of the big data bash, I have decided to read it again. I expect it to be great fun

A year or so ago I bought a book about the adventures of a couple of book collectors, and was surprised to discover that it was written by the same Nancy Golstone. And that book was pretty good too.

Otis Kaye's The Stock Market

Friday's Independent features Otis Kaye's picture from 1937 called The Stock Market in its Great Works feature. This is a trompe l'oeil work (an ultra-realistic painting technique which gives the illusion of three dimensions) in which dollar bills, government bonds and various other bits of financial paraphernalia appear to be tacked to, or propped up against a three drawer desk. The path of the dollar bills marks out the progess of the Dow Jones Industrial Average between 1929 and 1937, the bear market of the great depression when the DJIA fell from a 1929 high of around 370 to a low of 36.

Kaye was born in Dresden in 1885 and emigrated to the USA where he worked as an engineer. Late in life, during the Cold War, he returned to East Germany. He apparently sold just two paintings in his life and his art was focused on the subject of money.

I am rather taken with this work

The "data bash" is finished

For the past three months I have been working on a huge data processing project in which a number of variations of our current trading strategy have been thoroughly "blind" tested against six months of old data (from around January 2010 onwards). The aim of this was to produce a final selection from the various methids we have been using with the view of then to trade just this going forward.

The trading systems are too complex to programme into a standard testing package and so each day has to be processed manually. It takes me about 20 minutes to process one day for one market and I have been able to process about 5 days per day for each market we have been looking at. But there have also been many diversions, off into other systems, or other models, where we seemed to have seen something of interest only to have the effect disappear as we process more days of data.

In the past week I have been finally coming to the end of this process. On Monday I still had 56 day to go, by Wednesday it was down to 27, then to 15 by Friday and then at around 10:00 on Sunday morning the last day was done - August 15th 2011, joining the old data from the blind test to the data we have processed in real time. Yet from this process has come the broad family of systems which we will use going forward. No longer will I get a message asking me something like "have we looked at what happends when . . . . .". Instead the focus is on the actually process of complying with the exact models. No more data bashing . . . .

I suspect that last statement will be wrong, but at least i am sure that the issues will be quite small ones to look at - for instance, our methodology for taking our first trades of the day needs looking at in more detail. And so it will go on . . .

But the broad thrust is now done. I am almost overcome with joy!


The last day processed - August 15th 2011

Books I have been reading recently

While I spend most of my time of trading-related data bashing, I have still been able to do a little bit of other reading over the past month or so.

First up, Joe Ambrose's Gimme Danger: The Story of Iggy Pop. The early account of the Stooges and the Bowie years in the 1970s were the best sections of this, but then the story is at its best then as well. He was surprisingly positive about many of Iggy's rather poor 1980s albums (Party may be one of the worst albums ever made by any one), even Avenue B, which sold only 30,000 copies but which I rather like. The book finishes with the early Stooges reunion prior to Ron Asheton's recent death and so doesn't cover the James Williamson Stooges that we saw In Carcassonne. Ambrose is also not above making the odd snide comment about Iggy, which seems well deserved.

More seriously, I have ploughed through Anthony Beevor's Berlin - his account of the Red Army's attack on the city at the end of WWII. I read his book on Stalingrad a few years back and have been slowly re-watching the tv series The World at War, so this has fitted in with a general theme of the last couple of months. I didn't know much about this aspect of the war until now

Les serious is Pamela Des Barres' Let's spend the night together and Chelsea Handler's My Horizontal Life, neither of which are great works but have provided a certain light-heartedness after a long day of work, when I haven't fancied anything else. Groupies have not figured much in my career, it must be said.

Then onto Grace Lee Whitney's The Longest Trek: my tour of the Galaxy. What is there not to like about this? She was the first girl I ever had a real crush on and Yeoman Rand remains one of the great Star Trek characters.

One of the sexiest tv characters ever in my view!

And my current reading? Beevor's Stalingrad.

The World at War

When I was about 11 years old, there was something of a Sunday ritual in our house. I went to Church in the morning at the ultra modern methodist church in town. We methodists are a strange bunch, taken to listening to services and singing hymns in fields. But usually we were at the church.

Then we would have the traditional Sunday roast. Then, in the early afternoon, I would watch The World at War and the ITV football highlights.

I now realise what an amazing programme The World at War was, but at the time no doubt I just thought it was a standard show. It was the first programme were I ever saw a real dead person. I remember the dramatic films of German warplanes bombing - especially the Stukas with their sirens. But mainly, I remember the shows title and end sequence. the opening sequence with the flames and the dramatic music and the high contrast photographs which would seem to burn away. And the little boy in the sequence who looked a lot like my brother, Christopher, who had died a little while before.

I am currently re-watching the entire series, three or four episodes a week and have so far reached about episode 15, Home Fires (Britain 1940-1944). And just a few episodes away is episode 20, Genocide (1941-1945), one of the most amazing things I have ever seen on tv. Aged 11 or so, I had little idea about these events, but that episode has stuck in my mind ever since. How will it be, seeing it again after more than 30 years?

Conditional probabilities & evidence in court

A Dutch guy has been found guilty of murdering a girl in Bristol - and today's papers are full of the fact that the Jury were not allowed to hear that he frequented a series of quite-violent websites. Even Linda was appalled that this had not been allowed in court.

But the reason why this isn't allowed is entirely sound and is based on the fact that people are unable to distinguish between two, very-different conditional probabilities, and tend to believe the wrong one of the two when they do see them both. Actually, the fact that he had seen such website has very little effect on whether he is guilty or not.

Suppose there are 20m adult males in the UK, one of whom is her killer and suppose that 100,000 have seen the websites in question. Then suppose that there are, out of the 20m adult males, 100 potential psychopaths who might be actually willing to kill someone and that 80 of these have seen the website (a much higher proportion than of the general population because they have actively sought out such material). Then you can obtain the following conditional probabilities.

Firstly, the probability that you are a psychopath given that you have seen the website - in this case 80 / 100,000 or 1 in 12,500, 0.0008.

Secondly, the probability that you have seen the website given that you are a psychopath - in this case, 80 / 100 or "5 to 4 on", 0.8, 10,000 times the first probability.

The second probability is not relevant since you don't know that the accused is a psychopathic killer (you only know this when he is convicted - or when he confessed). And the first probability is too small to be relevant. In each case, the website evidence is not relevent.

The website in question was featured in Bizarre Magazine a year or two back and so it is not exactly secret, and quite a few of its scenes are available on the download site that I get stuff off. The few I have seen have been rather cleverly put together I thought. The girls are interviewed before the scene and their willingness to partake is clear cut. Then they are interviewed afterwards as well and again it seems clearcut that they were quite happy with what has occured. Presumably these precautions are to ensure that it is clear that the scenes are consensual. Nontheless, the scenes are very rough it seemed to me.
Typical "before" and "after" pictures. What surprises me more than the contents of the website is that a very pretty 20 year old seems so keen to be featured on it.