More fish in the pool

August 17th, 2008 by Peter

The London Stock Exchange is rapidly losing market share in equity trading to the nascent dark pools:  on some recent days as much as 20% of trading in LSE’s own equities was not on LSE, but on Chi-X, according to yesterday’s FT

“Turquoise yesterday became the second platform to start offering trading after Chi-X launched 14 months ago. Both are tiny compared with the LSE in budget and staff numbers. However, they have heavyweight backers in some big-name investment banks and already Chi-X has made its competitive presence felt. At one point this week, Chi-X captured more than 20 per cent of all trading in FTSE 100 stocks.

Both Chi-X and Turquoise emerged in the wake of rules enacted last year by Brussels that have broken the monopolies of Europe’s established exchanges.

The rules, known as Mifid, require brokers to find “best execution” when a stock is being traded. The move was an invitation to set up new trading venues, spur competition and lower trading fees.

Investment banks poun-ced. Turquoise and Chi-X are not only cheaper than the LSE, but have ultra-fast trading systems that are suited to the high-volume trading strategies of many hedge funds and other institutional investors.

. . .

But the LSE has been on the offensive.  This month, it changed its fee structure, cut prices and tilted its fee incentives towards the new breed of electronic traders that are flocking to the new platforms.

These traders are often little more than complex computer programs run by investment banks, involving little human intervention. Such “algorithmic” trading thrives off tiny shifts in data or economic news, sending orders electronically to be matched in a matter of milliseconds.

Martin Graham, director of markets at the LSE, said the exchange recognises that this type of trading is a “huge structural shift”. He dismissed the notion that the LSE has been slow in adapting.

“We have been living in a competitive environment for a long time at the LSE. Competition was inevitable and planned for,” he said.

The LSE has also unveiled plans for a “dark pool” - a kind of trading venue popular among large institutions. It offers anonymous trading of large blocks of shares, away from the exchange’s publicly visible order book.

In a clever marketing twist, the LSE named the venture Baikal, after the world’s deepest freshwater lake.

Finally, the LSE has been upgrading its TradElect electronic trading system, equipping it for faster trading times and much greater capacity.”

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Viewing CAT

July 30th, 2008 by Peter

For this year’s Market Design Tournament, we commissioned a new game web-interface, showing the progress of the game. Several teams have asked us for a copy of this interface for their own internal games, so we have just uploaded it to the CAT sourceforge page.    Thank you to Ronan Bouichet and Benjamin Broix for their work in designing and implementing this web-viewer.

2008 CAT Tournament winners

July 17th, 2008 by Peter

The 2008 TAC Market Design (or CAT) Tournament is now complete, and the winners are:

    First Place:        PersianCAT from Shiraz University, Iran
    Second Place:   MANX, from University of Michigan, USA
    Third Place:      jackaroo, from University of Western Sydney, Australia
    Prize for most successful new entrant: 

       DOG, from King’s College London, UK.

Congratulations to these four winners and to all the 2008 participants for a most successful tournament.

A full list of scores is available here.  Details of the 2008 CAT Tournament will be posted here later in 2008 or early in 2009.

 

The Tao of Black-Scholes

July 16th, 2008 by Peter

Australia’s only Fields Medallist, Terry Tao, has a post about the Black-Scholes equation, here.

POSTSCRIPT:  Portfolio magazine carried an article critical of Black-Scholes earlier this year:

“Good theory. The glitch was discovered only after the fact: When a market is crashing and no one is willing to buy, it’s impossible to sell short. If too many investors are trying to unload stocks as a market falls, they create the very disaster they are seeking to avoid. Their desire to sell drives the market lower, triggering an even greater desire to sell and, ultimately, sending the market into a bottomless free fall. That’s what happened on October 19, 1987, when the sweet logic of Black-Scholes was shown to be irrelevant in the real world of crashes and panics. Even the biggest portfolio insurance firm, Leland O’Brien Rubinstein Associates (co-founded and run by the same finance professors who invented portfolio insurance), tried to sell as the market crashed and couldn’t.

Oddly, this failure of financial theory didn’t lead Wall Street to question Black-Scholes in general. “If you try to attack it,” says one longtime trader of abstruse financial options, “you’re making a case for your own unintelligence.” The math was too advanced, the theorists too smart; the debate, for anyone without a degree in mathematics, was bound to end badly. But after the crash of 1987, individual traders at big Wall Street firms who sold financial-disaster insurance must have smelled a rat. Across markets—in stocks, currencies, and bonds—the price of insuring yourself against financial disaster rose. This rise in prices and the break with Black-Scholes reflected two new beliefs: one, that huge price jumps were more probable and likely to be more extreme than the Black-Scholes model assumed; and two, that you can’t manufacture an option on the stock market by selling and buying the market itself, because that market will never allow it. When you most need to sell—or to buy—is exactly when everyone else is selling or buying, in effect canceling out any advantage you once might have had.

“No one believes the original assumptions anymore,” says John Seo, who co-manages Fermat Capital, a $2 billion-plus hedge fund that invests in catastrophe bonds—essentially bonds with put options that are triggered by such natural catastrophes as hurricanes and earthquakes. “It’s hard to believe that anyone—yes, including me—ever believed it. It’s like trying to replicate a fire-insurance policy by dynamically increasing or decreasing your coverage as fire conditions wax and wane. One day, bam, your house is on fire, and you call for more coverage?” “

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Putting the “Tea” in IT

July 11th, 2008 by Peter

Students of computer history will know that the company which pioneered business applications of the new computer technology in the early 1950s was not a hardware manufacturer, but a lead user, Lyons Tea Shops, a nationwide chain of tea shops in Britain.   Lyons specified, designed, built and deployed their own computers, under the name of Leo (Lyons Electronic Office).  Leo were also the first to conceive and deploy many of the business applications which we now take for granted, such as automated payroll systems and logistics management systems.    One of the leaders in that effort, David Caminer, has recently died at the age of 92.  

LEO was later part of ICL, itself later purchased by Fujitsu.  

 

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2008 TAC Market Design Tournament

July 9th, 2008 by Peter

The 2008 TAC Market Design (or CAT) Tournament will take place at AAAI 2008 in Chicago, IL USA next Monday - Wednesday, 14 - 16 July 2008.   Eleven teams from Australia, Croatia, Egypt, Greece, Iran, the UK and the USA qualified for the final games.  

The aim of this tournament is to encourage research in automated mechanism design, and research papers on the CAT game have already been published in prestigious refereed academic conferences such as AAMAS and ECAI, and the Trading Agent Design and Analysis (TADA) Workshop.   The game is supported by the MBC Project (sponsor of this blog), itself funded by the UK EPSRC as part of a programme applying methods and metaphors from biology, economics and other disciplines to the design and management of complex computer sytems.  The MBC project is using ideas from economics for the specification, design, creation and control of distributed computer systems.  

You will be able to watch the results of three final 2008 CAT games as they proceed, here.

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MBC2008 Workshop - Liverpool

July 8th, 2008 by Peter

Registration is now open for the First International Workshop on Market-Based Control (MBC2008), to be held in Liverpool, UK, on 1-2 September 2008.  See here for details.

Quantifying the Landing Reaction of Cockroaches

July 7th, 2008 by Peter

From a call for research proposals just issued by the European Space Agency:

“Planetary exploration missions include an entry-descent-landing phase, where the spacecraft descends on a relatively steep trajectory to the surface. In order to minimize the loads during landing, a deceleration system is employed, consisting essentially of some or a combination of parachutes, retrorockets and airbags. Due to the communication round-trip delay time between spacecraft and ground control, external supervision of the descent is limited. As a consequence, a landing device is desired that can autonomously stabilize the descent and guide the spacecraft to a safe landing place.

In the research field of unmanned autonomous vehicles, animal models have become intensively studied models for potential technological transfer. Inspiration is drawn from various aspects such as neuronal control, aerodynamics, material properties, and actuators. Studying the neuronal control (biocybernetics) of insect flight is appealing for a number of reasons. First, in insects neurons can be addressed individually and hence, their function can be well determined. Secondly, flight control is realized in a fly-by-wire manner: Sensory data is acquired and processed in a way that only one individual steering signal for each flight situation is generated and sent downstream to the motor control. From this single signal, the appropriate motor reactions are generated. The present study aims at a ‘technological transfer’ of the neuronal architecture involved in triggering the landing reaction of steeply descending cockroaches.

Cockroaches obtain flying capacities of robustly designed wings but are rarely observed to fly. From observations of scientists we know that cockroaches use their wings mostly in emergency situations, i.e. when forced to jump off elevated spots. Once air born, the cockroaches quickly deploy their wings and use them to glide to the ground, controlling their trajectory and choosing a landing site. This task requires fast reactions and quick decisional strategies. The cockroaches’ flight system is therefore assumed to be tuned specifically towards fast landing and not to e.g. flying or take-off. In consequence, it is assumed that the cockroach model – compared to other potentially flying insects – is simpler in its neuronal architecture and hence faster in its reaction and hence displays a potential model for a biomimetic transfer to an engineered landing system. Proposing universities and research centres are encouraged to include in their proposals relevant additional scientific information or a critical analysis of these assumptions.”

 

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