The future of automated trading: round two - page 15
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Gorez:
everything will end when currencies have a fixed exchange rate in the market :) ... But that's "utopia" :)
timbo:
The conversation is not about currencies but more broadly. Robots increase market efficiency ...
And the increased efficiency of the financial market will only allow them to be better detected. So there will be patterns and short/medium/long term features that can and should be used in trading. And here, "mass" is no longer the answer. The capacity of an individual with his MS is quite sufficient.
Do you know what exactly is meant when they talk about market efficiency?
If the efficiency of the market increases, then no "features" can be used for speculative gain. The higher the efficiency, the fewer opportunities in the market to make money beyond a blunt investment in an index.
Do you know what exactly is meant when they talk about market efficiency?
If market efficiency increases, no "features" can be used to make speculative profits. The higher the efficiency, the fewer opportunities in the market to make money beyond a stupid investment in an index.
Why just a link, you can get a quote too:
The efficient market hypothesis
The efficient markethypothesis (EMH) is a hypothesis, according to which all essential information is immediately and fully reflected in the market value of securities. A distinction is made between weak, medium and strong forms of the efficient market hypothesis.
The efficient market hypothesis can be formulated as follows: a market is efficient with respect to some information, if it is immediately and fully reflected in the price of the asset. Which makes this information useless for super profits.
The efficient market hypothesis is often regarded as one of the central ideas of modern finance theory.
Three forms of market efficiency
It is accepted to distinguish three forms of market efficiency:
- A weak form of efficiency if the value of a marketable asset fully reflects past information concerning the asset (currently publicly available information about past market conditions, primarily on the price movements and trading volumes of the financial asset);
- a medium form of effectiveness if the value of a market asset fully reflects not only past information, but also public information (current information that is publicly available at the moment, provided in the current press, company reports, speeches of public officials, analytical forecasts, etc.)
- a strong form of efficiency if the value of a marketable asset fully reflects all information - past, public and inside (insider information that is known to a narrow circle of people due to official position, or other circumstances).
So where does it say you can't "use it for speculative gain"?Mate, are you just winding the public up or are you really manic? :)
Yes, systems based on arbitrage will die out, there is no need to compete with monsters in chasing cents either. But who says that this is the whole list of TSs. We should not forget that tool rates are only a reflection of the real economy. And it develops according to its own laws. And the increased efficiency of the financial market will only allow them to be better detected. Therefore, regularities and short/medium/long term peculiarities will appear, which can and should be used in trading. And here, "mass" will no longer crush it. The capacity of an individual with his MS is quite sufficient.
Let me give you an example. It's one minute to the nonfarm. The macroeconomics you're talking about. Going forward, we know that the figures for the quid are much worse than expected, leading to a 140 pt rise in the euro.
So we have a few seconds left. You may even have a pay-per-view newsgroup on your system, where you will see the news figures in a blink of an eye (bad for the EUR). So you have the number, you analyze it.
and in a couple of seconds you hit "buy at any price". but you already lost ( got less) 30 p. in the old price, because the Ask got 30 p. higher in milliseconds. Suppose you do not analyze the news, just wait for the first movement
and follow the market. But when the bad news hit, the fast and powerful do not sell, no one is stupid to sell, the first fool sits 30 pips up with a small volume, the second has another 5 points,
and you are not the first in line to buy, after 50 pips there are lots of fools with big volumes and your bid is satisfied, but it's possible that at this price they are not fools at all.
In the long term as Timbo talks about, the first "fools" will appear at the top of the pullback. And if there are risky bouncers along the way, their bids will go to the fastest ones.
Why just a link, you can get a quote:
So where is the "no use for speculative gain" in this?I gave a link to an English-language article on the theory of efficient markets. Russian-language wikipedia is a concrete must die when it comes to finance, so don't read it, much less quote it.
Inweak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earnedin the long run by using investment strategies based on historical share prices or other historical data.Technical analysis techniques will not be able to consistently produce excess returns, although some forms offundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no "patterns" to asset prices. This implies that future price movements are determined entirely by information not contained in the price series. Hence, prices must follow a random walk. This 'soft' EMH does not require that prices remain at or near equilibrium, but only that market participants will not be able tosystematically profit from market'inefficiencies'. However, while EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock markets to trend over time periods of weeks or longer[ 15] and that, moreover, there is a positive correlation between degree of trending and length of time period studied[ 16](but note that over long time periods, the trending issinusoidal in appearance). Various explanations for such large and apparently non-random price movements have been promulgated.
The problem of algorithmically constructing prices which reflect all available information has been studied extensively in the field of computer science[ 17][ 18]. For example, the complexity of finding the arbitrage opportunities in pair betting markets has been shown to beNP-hard.[ 19].
Insemi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. Semi-strong-form efficiency implies that neitherfundamental analysis nortechnical analysis techniques will be able to reliably produce excess returns. To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner.
Instrong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns. If there are legal barriers to private information becoming public, as with insider trading laws, strong-form efficiency is impossible, except in the case where the laws are universally ignored. To test for strong-form efficiency, a market needs to exist where investors cannot consistently earn excess returns over a long period of time. Even if some money managers are consistently observed to beat the market, no refutation even of strong-form efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of returns (as efficiency predicts) should be expected to produce a few dozen "star" performers.
1. that too. Even today, arbitrage is impossible for individual investors. Not because it doesn't exist, but because any arbitrage opportunities that arise are being eaten up by large companies. Manual scalping is also disappearing from the scene, as the robots of large companies are faster and more accurate. For individual investors, trading is always more expensive than for large companies, i.e. their robots. Robots do not shy away from one cent returns, and for an individual it is not enough to cover the commission.
2. Is it impossible? How many of them are really profitable strategies? And Google knows them all!
Another important point is that the market behavior changes due to robot activity, and this is not a fantasy, but a fixed fact for many markets. In other words, all those strategies that were profitable yesterday will not be.
1. I totally agree that the arbitrage fields are a struggle ground for robots. But these fields are first and foremost human found, human creative talent. I doubt there is or has ever been a robot capable of finding these very arbitration fields, as this is a creative search for exceptions in an ever-renewing environment. First of all, a person points his/her finger at an arbitrage place, and then a highly specialised trade arbitrage robot is written for this place, for this market, for this specific feature. The best thing this robot can do is to check its efficiency and existence of arbitrage conditions, so it stops working in time.
2. It is possible that there are no profitable non-arbitrage strategies. In any case, in my opinion, it will be possible for a robot to decipher this strategy after robots have learned how to create these most profitable strategies. Until then they copy human orders a few milliseconds before they are executed.
For me the existence of non-arbitrage trading robots is highly questionable. Unfortunately, the secrecy and mystery surrounding the issue allows speculation on the subject as it were. So, to assess "what can modern robots do?", I turn to areas with the same challenge of replacing humans with a computer program. Take an air traffic controller. The whole set of regulatory information about aircraft and the space in front of him. The number of participants is relatively small. All participants, in general, adhere to strict and well-known rules. Billions of dollars have been spent on developing a robotic air traffic controller. But, duh. Super-class algorithms on super-class computers crash planes more often than humans. No robot is yet able to learn faster than a human and think creatively. It is because of this difference that the billions thrown into the development of the robot controller have not yet yielded better results than a human. The huge money and resources of big companies have not helped with a task, in my opinion, simpler than a non-arbitrage robot trader.
I completely agree that the nature of the market is changing and that profitable strategies, including robots, are constantly dying out. And all the time human creativity creates new ones. And again the nature changes. And again new strategies and human-created robots are created. The cycle is just like that, but not robots deciphering manual trading and thus killing the human strategy, after which a new one has to be invented. Human creativity, new strategies (arbitrage and not, manual and auto), kill previous manual strategies, but not robots decrypt manual strategies. Whether this is true or not, in any case, as long as human creativity works better than a robot and the nature of the market changes, as long as the human will have somewhere to put his hand in the market, despite his yawning, tiredness, slowness, etc. I hope I have been able to explain what allows me to believe that robots cannot survive a human from a non-arbitrage market.
I gave a link to an English-language article on the theory of efficient markets. Russian-language wikipedia is a concrete must die when it comes to finance, so don't read it, much less quote it.
Insemi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information.Semi-strong-form efficiency implies that neitherfundamental analysis nortechnical analysis techniques will be able to reliably produce excess returns.Do you know what exactly is meant when they talk about market efficiency?
If market efficiency increases, no "features" can be used to make speculative profits. The higher the efficiency, the fewer opportunities in the market to make money beyond a blunt investment in an index.
For ease of testing, the hypothesis of market efficiency has been formulated in three forms: weak, medium and strong.
1. Weak form: current asset prices take into account all information about past actions of market participants. i.e. history of transaction prices, quotations, trading volumes - in general all information related to asset trading is taken into account. It is believed that the developed markets are poorly efficient. This implies the meaninglessness of using technical analysis - after all, it is based solely on market history.
2. The medium form: all publicly available information is taken into account in the current asset prices. The medium form includes the weak form - because market information is publicly available. In addition, information on the production and financial performance of the companies issuing the securities and on the general political and economic environment is taken into account. That is, all information about the political structure, economic statistics and forecasts, corporate profits and dividends - everything that can be gleaned from publicly available sources of information - is taken into account. The average form of GER implies that investment decisions are not made on the basis of new information that has become available (e.g., the publication of a company's next quarterly financial statements) - this information is factored into prices as soon as it has become publicly available.
3. Strong form: all information from both public and non-public sources is taken into account in the current asset prices. In addition to publicly available information, non-public (insider) information is also taken into account, for example, available from the managers of some company regarding the prospects of this company. A strong form includes both a weak and a medium form. A market that is effective in its strongest form can be called perfect - it is assumed that all information is publicly available, free of charge, and reaches all investors at the same time. In such a market, it is meaningless to make investment decisions even on the basis of insider information.
Much effort has been put into testing the fairness of each form of ERG. Most of the research was done on stocks traded on the New York Stock Exchange (NYSE). Moreover, they chose stocks with a complete trading history, i.e. liquid stocks. And the higher the liquidity of a particular stock, the more reason to expect the market for it to be efficient. How to conduct similar studies on illiquid assets is not very clear, and the question remains open here. The results of the studies may therefore be skewed in favour of supporting GERs.
The possibility of obtaining a statistically significant gain compared to simply buying an asset at the beginning of the study period and selling it at the end (a "buy and hold" strategy) was investigated. Transaction costs - commissions and slippage (or the difference between the dealer prices of buying and selling an asset) were also taken into account.
Where asset selection or market slices across assets were investigated, a risk adjustment (beta) was made to ensure that the excess return was not achieved by simply increasing risk. Here the excess return was defined as the difference between the actual investment return and the return predicted based on the CAPM adjusted for the beta of a particular stock. For example, in the period under study, the market fell by 10% and the beta of the stock is 1.5. Then the projected CAPM-based return is -15%. If the actual return was -12%, then the excess return is +3%.
Once again it should be clarified that market efficiency is assumed to be on average - by time or by a cross-section of assets. That's why the efficiency test was done on time periods longer than a few economic cycles. There are many investment and trading strategies that provide large gains at a certain point in a business cycle, especially during an upturn. In a crisis or stagnation, however, these same strategies may generate losses. If there is a one-off sampling for a particular parameter, then it has been conducted on as many assets as possible.
I apologise for quoting Russian-language materials on this subject, but let's just say that's roughly what I understood from Google's translation.
Here is what is strange to me - From what I have read I cannot understand how mechanical systems increase the efficiency of the market?
In my opinion they should, on the contrary, reduce it by making it more difficult for the entire trade, if it is considered in terms of maximum efficiency. Isn't that right?
I gave a link to an English-language article on the theory of efficient markets. Russian-language wikipedia is a concrete must die when it comes to finance, so don't read it, much less quote it.
Can someone show the logic of how full awareness of all agents of the market leads to the inability to earn money?
The maximum efficiency of the markets is purely theoretical in my view. Let's start with the information - that - but INSIGHTER information is not handed out on every corner.
And there are a lot of reservations about public information, which I think is essential.