ECN terminals, WebICE & Web 2.0 UIs

I had a look at the WebICE demo today, and was impressed. All of the dealer to client fixed income ECNs my employer trades on have fat client GUIs. Bloomberg, TradeWeb & BondVision all need to be installed on a trader’s PC. The WebICE demo appears to be just a Flash movie, but gives the impression of a rich but lightweight Web 2.0 GUI. For some time I’ve been wondering when an ECN would launch a Web 2.0 GUI based on OpenLaszlo or Flex. IT departments at banks would welcome it as it would avoid the packaging and installation hassles of heavyweight client apps, and it would be good for the ECNs as client onboarding would be eased.

I’m expecting to see one of the dealers adopt a Web 2.0 GUI soon with their proprietary single dealer platforms. JPMorganExpress and DRKWRevolution and the other proprietary platforms all seem to have been built with Java.

Popperian Traders

I’m reading Steve Fuller’s Kuhn vs. Popper to limber up for Taleb’s lecture next week. Popper has a couple of famous trading adherents: Soros and Taleb. Popper’s key idea is that science proceeds by falsification, not verification. For example, the observation of a single black swan falsifies the hypothesis that “all swans are white”. Falsifiability is what distinguishes scientific conjecture from other disciplines that merely claim to be scientific. Kuhn, in the Structure of Scientific Revolutions, points out that many other factors beyond falsification, including social ones, determine which theories scientists advocate.

It’s not surprising that Popper appeals to traders with a philosophical & scientific outlook. If you have a hypothesis about the market that conjecture becomes directly open to falsification when you put a trade on. If the trade loses money, your hypothesis is falsified.

And it’s also not surprising that the Kuhnian viewpoint, with its social explications, isn’t advocated by philosophically minded traders with a strong empirical bent, like Taleb and Niederhoffer. However, I would expect it to be sympathetic for market theorists who adress human factors more directly, as per behavioural economics. And I’d expect Feyerabend’s epistemological anarchism to be appealing to philosophically minded traders who are agnostic about styles and methods. After all Feyerabend tells us there can be no rules for conducting scientific investigation, falsifiability or otherwise. The only possible rule is “anything goes!” Translated into trading that means we can entertain technical analysis, growth, value, momentum, contrarian or Niederhoffer’s ever changing cycles. Anything goes – the only thing that counts is what makes money.

The Black Swan

Taleb is giving his new book a UK launch at the RSA on Tues 1 May: book here. See you there…

Hedgehogging

Having finished Traders, Guns & Money, I’ve moved on to Barton Biggs‘ Hedgehogging. Hedgehogging is quite different from TGM. TGM is a mixture of anecdote, industry history and entry level tutorial on product structure. I learnt a lot, especially about products I’m unfamiliar with, like credit derivatives. Hedgehogging is all story telling, but no poorer for that, as the prose quality is very high, and at times very funny. Not many books about investment management can make me laugh out loud on the Northern Line at 6.45am !  I guess the closest comparison would be with Niederhoffer‘s EdSpec.

Hedging with Treasuries

Many thanks to Accrued for this excellent review of why bond fund managers – “real money” in dealer jargon – trade so much. Very illuminating, especially since I work for a Euro govy (EGB) dealer. I particularly enjoyed the explanation at the end of the use of credit spread trading to lock in profits, whatever happens in the Treasury market. It reminded me of some figures that I saw in Avinash Persaud‘s paper on the recently much discussed MTS “monopoly”. Table 2 in that paper shows daily turnover in govies by country for March 2006. Euro zone countries have turnover ranging from 1.2% of outstanding daily (FR,DE) to 10.7% (IT) and 13.3% (PT). The US daily turnover was 138.9%. I was initially startled by that figure til I remembered someone mentioning to me how heavily Treasuries are used for hedging in US markets. So thanks to Accrued for giving such a great example of that hedging.

In the Euro markets, if a trader wants to hedge against EGB price movement, he takes the opposite position in the relevant EurexFutures contracts – Schatz (2Y), Bobl (5Y), Bund (10Y) or Buxl (30Y). The contracts are highly liquid, net supply isn’t constrained, and capital requirements are low: it’s a contract, not a cash instrument, so a trader only needs to post margin on big moves.

By contrast, using cash govt bonds to hedge must tie up a lot of capital. I’m guessing there’s no Treasury futures market that would support cheaper hedging. If so, why not ?  Shouldn’t CME be doing this ?

Traders, Guns & Money

I’m about 80 pages in to Satyajit Das’ Traders, Guns & Money, and I’m really enjoying it. It’s up there with Liar’s Poker and FIASCO. A great mixture of trading anecdotes and derivatives history it gives a good feel of how ruthless, outrageous, funny, degenerate, exciting and remunerative the industry can be.

At bonus time…

Read “At Bonus Time, No-one Can Hear You Scream” at the weekend. It’s a first person fictional narrative about an investment banker in the weeks leading up to comp day. And it’s a nasty little book. The few good guys get turned over, and so do many of the devious, amoral slime merchants too. It may be an accurate picture of the worst aspects of trading floor culture, but it’s neither amusing nor edifying.