The topic of why I am not in “stocks” just won’t stop keep coming up. This is in-spite of the two blog posts that I have written about the topic.
I also wrote a blog about “How not to get shot in a room” last week which also illustrated my sentiment about being exposed to stocks right now. Read that post here.
I am going to use this blog post to talk about different kinds of algorithmic trading and why for what we do, we are more “Adam Sandler” than “Keanu Reaves”
70% of the market is controlled by Algorithmic trading. Not all of them are created equal though.
The ones that get a lot of attention are the high speed high frequency ones. They trade huge volumes every hour and use spotted “inefficiencies” in the market to make pennies on the dollar. When multiplied by volume, it does add up to a huge number. Key to succeed in this is reducing “latency”. You do that by putting servers in places where you get information milli-seconds before others. You make use of the differences between bid-ask prices to make some money quickly and get out. Consider these guys as the Keanu Reaves of trading. They move fast and are the ones trying to catch a flying bullet. They are fast and sexy and everyone wants to be like them.
Next come the day-trading algorithms. These are primarily driven by technicals and a typical transaction does not last more than a couple of days. Because of the number of trades again, the bid-ask prices are important and if the stocks that are being traded are not high-volume, your back-testing results may show fantastic results, but in reality you may make a fraction of that.
Next come the swing trading algorithm and the allocation driven algorithms. These algorithms typically hold position for a few days to weeks and hence are not as impacted by the bid-ask price difference. Also the volume of trades are not as much as in day-trading and significantly lower than high frequency trading. Consider these guys as the Adam Sandler of trading. They are slow to move and not what you would consider “sexy”!!
Unfortunately for you guys, our Risk Parity algorithms are more the “Adam Sandler” variety than the “Keanu Reaves”. Thanks to that however, our back-testing results are more reliable and our transaction costs significantly lower. Latency and Bid-Ask price differences don’t matter as much to us as the others.
Given however that we are slow and methodical, we cannot afford to be in the room catching the bullets. We prefer to be out of it. The stock market as of now is somewhat of a gun-fight. Action is fast and furious. You need to be nimble to play the game.
However we are making enough money by watching the action and sitting out of the room in gold and bonds. And our clients can attest to that!!
Being up by 50% for the YTD without a single penny of that coming from stocks…any stocks….isn’t that something?? Just Gold and Bonds….; you don’t have to be in the room to make money. I will leave that to others and let them worry about latency and validity of back-testing results etc.
Why the hell would you want me in the room? I am not built for that!! I am close to retirement!! 🙂
