Poundstone

Nearly finished Fortune’s Formula. I recommend it very strongly. It’s central theme is the Kelly criterion. Thanks to jd long’s comment, I realise how much Poundstone has in common with Taleb. They both think that many current trading approaches ignore the Black Swan. Kelly is all about ensuring the Black Swan, or fat tail event, doesn’t wipe you out.

The stories they trade on…

Interesting post picking up on a point by Derman about evaluating traders in terms of the stories they trade on. Suspect this would horrify empirically minded traders like Taleb and Niederhoffer. For Taleb, stories are just noise, inductive reasoning straight out of Mediocristan. And for the Galton influenced Niederhoffer, counting is everything.

If we take a Taleb style epistemological perspective, Derman is putting too much focus on a priori reasoning.

Fortune’s Formula

I’m currently reading William Poundstone‘s Fortune’s Forumula. I’m only 90 pages in, and Poundstone has already introduced the Mob, illegal gambling in the US, Claude Shannon and his Information Theory, John Kelly, Ed Thorp, Norbert Wiener and the connections thereof.

If you’re at all interested in the intersection between maths, gambling, computing and markets, this is the book for you.

RFS vs RFQ

Waratah comments on LH’s use of RFS rather than the RFQ model used by Bloomberg, TradeWeb & BondVision. RFS is preferred because “the banks feel this is the fairest method for both sides of the market”. One can’t help suspecting a degree of self interest on the part of dealers in opting for RFS – surely it can’t all be for the benefit of the buy side ?

With an RFQ, a client is offered a firm, executable price that is good for the “wire time”: three seconds in the case of Bloomberg. If the client clicks hit/lift during the wire time, the trade is done at that price – no ifs and buts. With RFS, the client clicks on a price, which then goes back to the dealer for a last look. The dealer may reject the trade at that point. Does that favour the client or the dealer ?

Liquidity Hub

Finally, they have a place holder web site. There’s a lot I’d like to say about LH, but I’ll wait til they put some docs in the public domain.

Taleb at the RSA

Just got back from seeing Taleb speak at the RSA. I didn’t stay at the after talk drinks, being too tired from a very early start today. He’s not the most fluent public speaker, but he’s witty and charming, and the anecdotage is good. I scribbled some notes as he spoke…

• Evolution has wired us for “Mediocristan”: sequences of events that show relatively little variance. Example: out of 1000 people what proportion of the total weight is the heaviest man in the world ? Maybe 0.5%…
• But we live in a world constructed largely by ourselves, with events that show very high variance. Example: out of a 1000 people what proportion of the total wealth is the richest man in the world ? 99%. That’s “Extremistan”…
• We produce theories or narratives to explain events instinctively, and they blind us to the true nature of events, because those explanations are geared for Mediocristan.
• In some domains we can spot incompetence immediately: pilots, chefs, taxi drivers, dentists. In others it’s much harder: CEOs, traders, prime ministers.
• Volatility isn’t bad per se. What’s important is robustness. Italian govt is volatile but robust. Saudi govt is not volatile, but the regime is not robust.