Quantopian wants to Turn Stock Trading Algorithmic
forbes.com
forbes.com
First--there is an industry that makes pretty good money from practicing algorithmic trading. I work with some of them. Some of them do well. However, on the average, returns in that business are subpar. Then again, on the average, most people are idiots. On the average, most startups fail. "On the average" is usually not taken as a reason to not do something by this community (HN), at least allegedly.
Second--there are plenty of reasonable issues to raise whenever this comes up. For instance--your average investor is going to have a tough time of this--for starters due to transaction costs, taxes, etc. Then again, your average investor is going to have a tough time of the stock market in general. Again, the average, by definition, is not impressive and can never do any better than--well--average. But we don't want to be in the average. That's the whole point of much of what we do here. Except when it comes to exploiting financial markets, in which case the average is all that matters?
Point being--is it possible to have a reasonable discussion about statistical analysis of markets and what, if anything, might be done to exploit any regularities found? Is it really so difficult to believe that regularities in relative price movements exist? And yeah, I get it--there's something generally slimy about the whole industry, and there have been plenty of hucksters over the years (and in the present). Then again... isn't this true for the entire tech industry, more or less?
So, you don't have to take part in it, you don't have to learn about it, but can we PLEASE have a better response than "oh, backtesting, that doesn't work, dur"? I mean, yes, there's a fair amount of "lead into gold" type stuff there--but I really don't think it's an unbelievable stretch of the mind to say that regularities exist in markets. No doubt those regularities change, but wouldn't it be interesting to see how quickly and why? And maybe some people can be better at it than others (that doesn't happen anywhere else right?)
So yeah, don't get too excited, but then again, don't be so damned pessimistic. Markets are a system like any other, probably some of the most interesting systems around because they are so hard (some say impossible) to grasp.
You see, the real market is not the stock market (which I assume is already exploited at small and large scale for all conceivable regularities by now), the real market is in creating novel trading platform.
Kind of like the money is not attending a "how to get rich seminar" but in inventing, promoting and running "get rich seminars".
> So, you don't have to take part in it, you don't have to learn about it, but can we PLEASE have a better response than
In other areas perhaps that is the right approach, but I personally think when it comes to the stock market the position that there are profitably exploitable regularities by your average (or even slightly above average) individuals should be questioned.
Another anecdotal example, this is like the gold rush. Except at the tail end. When all the large chunks of gold has been mined but people are still coming. The best thing is to start selling food and tools to those people.
Hahahaha, yeah, I don't think so. If you guys are really interested in this sort of thing, the MOST important thing is to have a comprehensive database free of biases and errors. For example, survivorship bias is a huge deal, and I wouldn't trust any platform that isn't serious enough to have a historical dataset that is longer than 11 years long to be free of these kinds of things.
> The data includes all companies that were traded, including companies that have subsequently gone out of business. This is very important in order to avoid survivor bias. Without this complete data set, your algorithms would be be blind to the possibility of bankruptcy and the resulting losses.
The one elephant that jumps to mind is liquidity. The mechanisms by which liquidity in the markets affect the end results are absolutely key to how your algorithm's interactions with the data will pan out. With that in mind, the methods by which we come by liquidity have dramatically transformed over the years, and market makers from >10 years ago operated in an entirely different way. That's my $0.02, anyhow.
Anecdotal evidence: I have first-hard experience implementing algorithms that chugged along just fine with 10 years of data for backtesting.
You could ask the same question about many different regulatory changes, but Reg NMS is likely to be the biggest.
In any case, I believe the scarcity the parent was referring to was for the fundamental data, i.e. earnings, value/share, dividend yields, cash on hand, etc. This data is harder to come by compared to the standard open-high-low-close pricing data, which is what most algorithms use (although not necessarily the best algorithms ;-)
Good luck to all you momentum/technical types though, I'll be sitting in the corner reading 10k's.
Also, as a point aside from the one above, in the ideal world markets would be driven entirely by the real value underlying the securities being traded. But that's not the case. Markets are highly influenced by news, to give one example. So to say that only the fundamentals can be trusted is a little bit narrow minded (in the pure sense of the phrase, not meant as a shot at you). I think that particularly as the time horizons of your positions get longer, it becomes more and more critical to include fundamental data in your analysis.
Why fundamental data?
What areas of algorithmic trading are escaping the Great Chill?
And of course, the answer to your question about which algorithms are working, they are the ones on the opposite side of the trades of the ones that are losing. (Or, alternatively, the ones you can't read about in academic papers or books.)
Equilibrium is coming.
But that is Ok. Quants can go into material science and model new and useful materials by studying their higher dimensional black hole equivalents [1].
[1] https://www.simonsfoundation.org/features/science-news/signs...
So yields, returns, and inflation are finally stabilizing as the market matures and approaches its "true value"? Nope, because equilibrium is a concept which works well in the natural sciences, but quite erroneous as applied in economics. This is George Soros's argument in his books about the Principle of Reflexivity, which differentiates social systems from natural ones.
What is happening, is merely that trading volume/volatility has tapered off since the '08 crisis. That's expected; empirically, volatility continues to be clustered and autoregressive (a self-exciting process). Its a cycle that will pick up again (one can expect), eventually.
Actually, volatility is only clustered when measured in calendar time. Its much more constant when measured in event/transaction time (plot price against cumulative volume, rather than date/time).