A couple of things stand right out here: a) There's almost no time horizon here, so it's basically day trading. It's not enough to know what happens, everyone else needs to "do the right thing" in a short time horizon. As the article says, that doesn't happen a lot. b) WSJ isn't as good a new source as it used to be, which makes the game harder. Though occasionally, something big will happen and a one day lookback would be helpful. (Say, shorting airline stocks before 9/11...)
> WSJ isn't as good a new source as it used to be, which makes the game harder.
You don't think the front page of the WSJ would contain a decent summary of the day's business news?
The WSJ is such a shallow shell of its former self that no, I don’t trust it as far as I can throw a paper airplane made out of it. Somewhere along the line (and I have my hypothesis as many do…) our news sources stopped being objective, stopped seeking truth, stopped being sourced for bringing real information to the consuming public, and instead became a kind of echo chamber for dogmatic ideology of one kind or another. I have no idea what to read any more, because it’s devolved into sick “entertainment” rather than insightful reporting. Even my beloved NPR seems on the brink of falling into this as they seek to kowtow, presumably to save their funding.
All you can do now is to go to the source data.
If you want long term trend data, it’s easy to get good data for free. It’ll be boring and most trends will be positive (thank our lucky stars we live in the technological era). Unless you have a real passion, you’ll most likely not visit one of these sources twice (World Bank, IMF, FRED in the USA, tradingeconomics.com, the SEC)
If you want short term, real-time data, you’ll likely have to pay for it. The downside is that there’s a deluge of data and almost all of it is useless (unless you care about up-to-the-minute prices for beans in China or whatever).
The job of journalists is to mine all this info for something sensational or, failing that, spin some short term data bump into a big story.
Way back in the 1940’s, there was so little data out there that the WSJ could simply print all the current market events and call it a newspaper. There was so little entertainment out there, that people bought and read that paper!
Information dissemination remains an unsolved problem.
I'd have to agree. It doesn't matter WSJ, NYT, WaPo, LAT, Trib, all garbage. When I started to see grammar mistakes and typos in the NYT, I knew it was over. They were optimizing for clicks not correctness. The infotainment that started on TV and the destruction of revenue by aggregation has created an environment where largescale news as it was is not profitable (enough), but clickbait is. There may be individual journalists who care, but not a single senior editor that does. We have achieved post truth media. The news cycle is literally about UFOs.
edit: I will say that's a profit opportunity both for those who can spread fake meme news and for those who can bother to see through it, but for the vast middle it is idocracy.
Yep, in simple terms they all became tabloids. They do still hire a few real journalists to keep up appearances, but sensationalism is what sells so that’s what gets the most real estate.
I wouldn't really say the WSJ is a good summary. If I look at the front page today, most of it is topical, but generic and not really actionable information in any way:
- The Drugs Young Bankers Use to Get Through the Day—and Night
- CEOs Want Trump to Change Course on Tariffs. He Isn’t Budging.
- Untangling America’s Love-Hate Relationship With Corporate Power
Etc, it doesn't really tell you much anything about what's going on in the market. Yahoo Finance on the other hand is a great overview, the upcoming fed meeting is front and center, there's a market overview on the right, highlights of specific big movers, etc.
To be fair it’s also Sunday. Silly season for newspapers generally, the business newspaper in particular.
> You don't think the front page of the WSJ would contain a decent summary of the day's business news?
Not anymore?
Take front page today, first "Opinion" title: "The Trans Double-Mastectomy Lawsuit" (not sure what their stance is here: they went full woke but they're toning wokism down now that Trump won). First big headline: "The drugs young bankers use to get through the day". "America's love/hate relationship with corporate power".
"How an Ivy League Police Commissioner Hunted an Ivy League Murder Suspect"
Facepalm. I mean, sure, if I was reading The Guardian in the UK or something.
But how the fuck has anything of that to do with business and/or finance?
That's what I see first, front page.
Funnily enough the first title related to business or finance is one HN won't like: "These 5 Wall Street Titans Thought Bitcoin Was a Fad. Here’s What They Say Now".
People are making fun of the WJS, calling it the "Woke Street Journal". They've been more interested in pushing the ESG ideology (the one were banks in the US [and the EU] are secretly assigning scores to every US individuals depending on how "ESG friendly" they are), including solar (not that there's everything wrong with solar) and most of all running an anti-Trump / anti-Musk campaign, being sure Harris would won, then running actual news about Wall Street and businesses.
They just lost the plot.
When I was a subscriber (about 7 years ago) it seemed the news was left-leaning and the opinion section was heavily right-leaning.
Interesting observation. I’ve mostly seen opinions that is has moved to moderately conservative since Murdoch acquired it. E.g. https://www.nytimes.com/2009/12/14/business/media/14carr.htm...
reality tends to have a left-leaning bias
too bad it doesn't vote
People think the WSJ is left-wing now? Good lord. The Overton window is in pieces.
WSJ is left-wing in the sense a bunch of corporate types looked at the Occupy Wall Street movement and thought "Huh, it seems certain aspects of their ideology hinder their ability to organize labor effectively... I wonder what would happen if we amplify those aspects above all else."
Hard to take the phrase "full woke" seriously...
It does not. It's a sort of ideological rag at this point for the right wing of Wall Street (see the NYT for the left wing rag). Give them Bloomberg or the AP a day ahead and they will make much better bets.
I think they will still trade with too much leverage and poor asset allocation, though.
The NY Times isn't a left wing rag (I'm excluding the Opinion section, which is a very mixed bag). It's the mouthpiece of the establishment.
It's the ideological rag for the left wing of Wall Street which is very different than the left wing in general. Both papers are "establishment."
I'm unconvinced that, as you say, reacting to specific short-term events is especially interesting. There may be specific cases where OMG, the stock market is going to fall, is fairly predictable. But the more interesting trends are decade-long+.
This. And even knowing the long-term trend isn't a guarantee that you'll make money. Look at the late 90s: knowing the internet was going to be a huge thing was obvious, but it didn't necessarily translate to knowing who the winners and losers would be long term. You have to both understand the long-term trends AND be smart about the here-and-now.
You could know the market was going to go silly with stocks like Yahoo in the late 90s. But you also had to pick the right time to dump everything.
You could have also “known” that bitcoin was a massive bubble and going to zero back when that was a popular sentiment.
It’s not just timing the bubble that is tricky. Sometimes the “obvious” bubble never ends up popping.
Markets can stay irrational longer can you can stay solvent and all that. But you could have done pretty well with bitcoin if you got in early so long as you didn't jump out too early (or get scammed).
You may be ignoring that at the time of the bubble, many investors, and even regular people, though the internet wasn't that big a deal. Sure email meant we wouldn't send snail mail anymore, but the majority of people were still in the "it isn't safe to use my credit card online" world.
> it's basically day trading
In my understanding day trading is mostly about looking for pretty patterns in lines and ascribing meaning to them, as well as attempting to trade on public information that HFTs and 3,000 well-paid and professional traders at GS have already priced in
What you are talking about (looking for pretty patterns in lines and ascribing meaning to them) isn’t day trading, it is called technical analysis. I mostly agree with your take on its usefulness though, there is a reason it is getting memed as astrology for finance bros.
I understand they're different topics, but my understanding is also that amateur day traders go wild for technical analysis over most other signals, so in practice much day trading consists of it...
I think in the blog post they say they have pulled from Washington Post articles randomly over the last 15 years. When do you think the paper went bad? You can also skip days. If I understand the blog post correctly, maybe you could check your hunch (b) by playing the game and skipping any days after your “WaPo went bad” date.
9/11 is a great example here because even if you knew it would happen a day in advance, trading on that would gain you nothing in this experiment - the markets didnt open that day.
Markets in other parts of the world did, and you could have traded those airline stocks.
That said, COVID would have been a better example for airline and hotel stocks.
[Also IMO, PUT options are safer than shorts. Do your own research.]
One of the problems is that you mostly need money to make money.
There's an SF book called Replay that imagines a guy reliving his life from his fifties or so to his teens or so. One of the clever plot points (not really a spoiler) is that he just happens to remember a highly improbable sports result around the time of his replay which, with the help of some friends and family loans, makes him very wealthy. The book would have been a lot less interesting if the main characterer was just starting out as a poor college student over and over again.
Sure, I could have made money in dot-com/bomb (and maybe bitcoin) but I still would have needed a fair bit of capital to have made life-altering gains.
To the point of the article, predicting how most specific company or economic outcomes will affect stock prices is pretty much a sucker bet. Perhaps excluding some specific events like 9/11--but even that effect wasn't that great.
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Bitcoin is not a good example for your argument. The first bitcoin transaction for a physical good was in 2010 where 10K of bitcoin was used to buy a couple pizzas.
Even the poorest American could probably have scraped enough together to own that much bitcoin back then. If they held onto it until now, they would be a billionaire!
If you really knew Bitcoin was going to be big with certainty/high probability, you could have mined it or done a dark alley transaction early on. Assuming you didn't get scammed out of or simply lost your wallet at some point, I agree, it's an exception where you could have made a fortune from basically nothing. (Though not in a day which is the actual experiment in question.)
The more interesting experiment to me would be if you gave me a week's worth (say) of the WSJ from ten years hence, what could I do with it?
I was replying to the comment that stated that you need a significant amount of capital in order to make life altering gains, even if you had a crystal ball.
I was arguing that with the right information, you could turn a few bucks into a massive fortune (bitcoin being a single example).
Rags to Riches and all that given a sufficiently long time horizon and the right drive and savvy, and luck. I do think there are relatively few cases where you can just drop someone in the right place at the right time with a few dollars and expect them to succeed, especially in the short-term.
Of course MOST rags to riches stories are accumulated over decades of hard work with some luck sprinkled in; but almost every day you hear of a few turning a few bucks into a fortune overnight. Lottery winners, meme stock traders, and sports betting are just a few examples.
Everyone knows it can happen. That is why get-rich-quick schemes work.
Sure, if I know the Powerball winner or some weird meme stock spike a day in advance, but that's getting a bit off the topic of seeing the front page of a major news source a day earlier for the most part. (And even the meme stock takes money to really take advantage of)
Don't look at the front page, go to the Market Digest and look up yesterday's changes in currency exchange rates or CME futures. Bet on those with 100x leverage and voilà!
Buying a number of puts on airlines and calls on defense contractors would have worked.
The trick for most people is don't trade ever until you have great insight. Better to SP500 it until that happens. Don't data mine.
A good headline for trading is rare, think disasters, election wins maybe. Interest rate changes.
Better would be insider info (not insider trading). You work somewhere so you sussed out their sauce but to the market it is yet another company. Pre or soon after IPO is best.
Seth Klarman, in Margin of Safety, is refreshingly clear on this. The aim is always to buy something worth a dollar, for less than a dollar. You, not the market, must determine what the asset is worth. That generally requires a significant amount of investigation.
If you are not up for that, Klarman explicitly notes that index investing will be fine, but not spectacular, and in particular the index will trade in stocks for no good (investment) reason but simply because they have to keep the index balanced.
Trading on news and events is essentially gambling, although you can use other people's reaction to news to time investments so long as you've already decided to invest and were simply waiting for the price to meet your criteria to make the trade.
> Seth Klarman, in Margin of Safety...
May I ask where / how you came about your copy? I've seen it mentioned several times but have found it difficult to locate. (For example, the used copy on Amazon is selling for $2000!)
There are various scans online, eg [1]. Deeply ironic that the book goes for thousands of dollars today to collectors even as Klarman, in the text, warns that collectibles are a mug's game.
[1] https://www.gyroscopicinvesting.com/forum/viewtopic.php?t=13...
Anna's Archive looks like it has ebook copies in several languages.
Not the person you’re responding to, but my email is in my profile
> I've seen it mentioned several times but have found it difficult to locate.
It's famously difficult to buy. The author is an investing billionaire so he has little financial motivation to release an updated version and many demands on his time preventing it.
Pirate it.
Keeping the index balanced is a good reason to trade stocks.
“The deal is made on the buy” with most asset classes.
The article goes into that when seasoned traders were given the same test and had 60-130% gains, compare to the single digit gains and losses of the students
The seasoned traders:
> They did not bet at all on about 1/3 of the trading opportunities
This has always stood out to me about these trading challenges. They make it seem like you must always be invested and a lot of lay people fall for that.
in most cases, soon after IPO is a bad idea to sell, since insiders and first-salers
its a good entry point, id say - though IPO trading in general is a huge risk, rather pick stable/established ticker items
The point is to buy at a good price. If you know it is a good price at IPO then why not?
I am not advocating IPO trading.
I am saying join unicorn X, see of they have a good plan, if the company is well run etc.
You can tell because you are working there. Then if it is a good buy buy it, otherwise don't.
It is a bit like a hunter "tracking" their deer for 2 days rather than walking around shaking trees.
Unfortunately that's not enough to guarantee success. Even the most well run company can still fail to find product market fit, just be at the wrong time, or just get screwed over by external factors or even other internal factors. Conversely, a poorly run company with a toxic culture can succeed despite problems a rank and file employee might see.
If you've joined unicorn X pre-IPO, you've hopefully got a decent amount of pre-IPO options, at which point might I suggest diversifying in case the market doesn't share your confidence in the company.
I know people that trade headlines full time that also at one point had a step count that averaged less than 200 steps a day. They do make good returns though.
I would have figured algorithmic trading bots got all the wins there before a human could.
Relatively defined events yes, i.e probably wouldn't try to click through FOMC (is number better/worse than FedWatch) but take something like BTC ETF getting approval:
- you aren't sure where the announcement will come from first, i.e will it leak via journalist
- there will be plenty of false announcements
- the official SEC twitter account got hacked and posted it was approved (Phone number taken over, no 2FA enabled lolol)
- there will be volatility around fake announcements as others are running bots
- LLMs interpretation of "BTC ETF approved" vs "With BTC ETF approval" can cause you to start eating lot of transaction costs
You can still (presently...) come out on top as a bag of meat. Is it worth the hours and cortisol vs half decent tech job? going to say entirely dependent on the scorecard afterwards and if you value doing something with actual purpose.
The fastest way to see news for a binary event is the just watch the stock price of the underlying.
For something like GDP numbers, the price moves within milliseconds of the print, before your browser can even refresh and minutes before the numbers even show up on twitter.
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I am going to take advantage of this arbitrage opportunity to start a newspaper :)
Humans can be much smarter than any algo trading bots. The algorithms for trading are really primitive price action stuff - not fundamental information about the business, products, customers...
Wouldn't an LLM be able to do that kind of analysis?
A LLM all by itself? No, I really don't think so. From my personal trading history - I knew to invest into AMD when it was at $5 because I tried their products and am intimately familiar with computers. LLM won't be able to do that for a long time. But - it helps me.
The quote from Margin Call is used a lot, but the more I look at the world, the more I believe it's a naive take. There are three ways to make a living in this business: be first, be smarter, or cheat.
That statement has the wrong boolean operator: the implicit OR in place of commas should be replaced with AND operators. The reason is simple - if you are not willing to cheat, you are leaving an edge to those who do.
>if you are not willing to cheat, you are leaving an edge to those who do.
You don’t have to be the best player or to cheat on the poker table for +ev
You have to be better than the bad players, and know when to fold against a better player
You will make less profit than cheats. But, you won’t have to cheat
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> You have to be better than the bad players
That is easier with fair opponents. Cheating could help the worse poker player to win.
In a field of apple tree, the best/fast/cheater climbers got the most apples but eventually everyone showing up can pick one or patient for the next season.
Pocket and finance needs at the very least one looser for the others to win something. Others cheating and you not, does lower your chances to win.
Depends what you mean by cheat? Break a law? And putting ethics aside - risk and consequences of getting caught.
Based on DOJ fines cheating is required!
BUT!!
Cheating is only strictly required in the trio when everyone is doing the same thing (olympic 100m) vs. different things (trading).
(In the olympics the prize is honour, achievement, etc. so most people wont cheat for that reason.)
Worked for Renaissance Technologies: https://www.ft.com/content/8cef8c70-5d02-4762-9100-2d92d0c76...
That tax case didn't concern their alpha. It was a result of the ruling body deciding that they had inaccurately grouped short term profits with long term profits, through the use of basket options. The ruling in this case was simply the short term gains that were grouped into basket options weren't able to be taxed like the long term gains they were construing them as.
We agree. The case was about Renaissance breaking the law. The best lawyers their money could buy lost and did not avail themselves of their right to appeal. The ruling body found they were tax cheats.
Philanthropic work is great way to get shills to come out of the woodworks.
They didn't exactly cheat. According to the rules as written, what they did was acceptable. Others who were slightly less blatant about it were permitted, and continue to be permitted, to do the same thing.
To „make a living in this business“, the OR will suffice.
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Followed your advice. Invested in SP500 every slide of the game, irrespective of the news (with 10x leverage).
Lost 52%.
The S&P 500 is down less than 1% below its all-time high. It’s mathematically impossible to lose 52% following that advice.
I think “with 10% leverage” deserves a lot more than a parenthetical here.
If fully invested in just the S&P 500 with 10x leverage, it seems less mathematically possible to have lost just 52% unless it was an very short time horizon. If fully invested, A 5.2% decrease in the value of the S&P 500, with 10x leverage, would lead to a 52% fund draw down, given no margin call during the 5.2% S&P draw down. In most years, the S&P experiences at least one short-term draw down off the years peak of at least 10%, which would lead to a complete loss of capital, given that they hadn't already experienced a forced liquidation due to a margin call on the previously 10x levered assets, which would now be levered higher given a loss in the capital base.
Try it yourself, the game is not randomized. You should receive exactly the same result.
10x leverage is just crazy for individual stock investment. The lesson you should learn from this is not "don't invest SP500" but "don't use 10x leverage".
If the days selected were purely random, investing in SP500 would be wise (though not with 10x leverage).
In this experiment only 1/3 of days were random, with another third in employment report days and the last third in fed announcement days.
When I did this with -10x SP500 every day the result was a +36% return, which is surely not what you would expect if the trading days were purely random.
Is there a strategy here?
Get a better broker :-) my SP50 (yes 50, dont ask!) index is doing alwite.
Get a better reading comprehension tutor.
what you describe as "not insider trading" is insider trading
he's pointing out the technical definitions of the terms; you're insisting on the imprecise/wrong popular usage.
"insider trading", when insiders trade, say the CEO sells his stock bonus, is regulated (has to announce in advance, follow a plan) but completely legal. Some investors track how much insiders are trading in order to judge confidence in a stock.
"trading on inside information" (whether you are an insider or not) is not legal.
I may have been ambiguous but I am saying if you work somewhere (pre IPO) and you can see their killing it, on fire, and are seeing a truth other companies can't see then you know (perhaps doing some more research on public info) that it is a good buy.
Also for private companies you often get an all hands with financials, sales info, strategy etc.
The bet here is: this company isn't just lucky they have a killer system. You would get shares privately if possible. Even at IPO at a higher price, knowing they are kickass you can buy then.
That's illegal insider trading...
It's an interesting article but if you had five extremely experienced traders and you used historical events (and supplying them with enormous memory prompting by giving them headlines from financially important events like CPI, interest rate releases), chances are they can remember a huge amount of the results.
Exactly! They're evaluating the model using the training data
The study is saying people couldn’t turn the information into a reliable advantage and your arguing why information leakage might explain why there would be a reliable advantage.
Did you read the article?
It says that the experienced traders did make money. The OP above is saying that one possible explanation is that the experienced traders simply remembered what happened. As a professional trader myself this seems very reasonable
'Buy the rumor sell the news'. I'd expect most people to not know that advice but pros would. that is pros would know that before most major announcements people had alread guessed based on other indicators and so the announcement is priced in already.
if you could find an alien civialization with a stock market I'd expect pros to do similiarly well just based on that.
amature traders in the real world tend to be more in tune to rumors and thus more likely to get it right since they had already traded by this sime. (or so I would guess)
Well, I mean an LLM can’t make any decisions unless it pulls things into context (into memory). So yeah, it’s true for machines too. You need to remember to even be on the right track.
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For anyone worried about markets being at all-time highs, and have cash sitting on the side lines waiting for a dip to jump in, it's better that you enter the market rather than waiting—and this is true even if you had a crystal ball and knew when the dip would occur:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
Well that was kinda fun. Turned $1M into $4.5M, mostly just from a few big bets then playing it safe otherwise. Of course in real life I’m 100% index funds since unfortunately I don’t get tomorrows news.
Which index funds?
Stocks:
VBTLX VFIDX VFSUX VTI VXUS
Bonds: BND BNDX
Buy and forget if you just want to play it safe
Pretty much, for me it’s mostly VTI and BND. In about a 70/30 ratio right now, although I vary it a bit based on market conditions and interest rates.
What is your algorithm for adjustment?
Wait, so in the challenge, you don't get to know what date it is? It's an odd challenge as I'm playing it right now and I don't know the zeitgeist of the time.
I'm currently looking at a front page and am just wondering: is it 2008?
Purely having knowledge from a day in advance without any other context, yea that's hard. IRL, we also have context.
If you knew the exact date, it would make it too easy to remember some big stock drop that happened on a specific date. Although there were enough clues in many of them to narrow it down to a week or two.
I tried this game multiple times, but it kept bugging: I made 2.3 M after a few trades, but then the "trade" button just stopped working. I'm on Vivaldi, so maybe that affected something.
The title and opening conclusions are misleading, and the true conclusion is straightforward: *Financial news is mostly noise.* You would need a good filter to make use of it.
A crystal ball showing slightly+ reliable price data, at a reasonable interval in the future. (E.g, minutes+) would make a competent person astoundingly wealthy.
I don't trade so my comment is low value speculation, but it's more about what a crystal ball is.
revealing the future doesn't give free insight into the dynamics that produced it, and you don't need to know the future to identify where a dynamic among factors or parties may be in play.
Yea the study is not that useful or is misleading considering it defines a crystal ball to mean something which does not actually provide clairvoyance. It's like, yeah, you can see the future but minus the actual pertinent information. Then it's not a crystal ball.
“Perhaps this overuse of leverage is explained by” it’s explained by it being a silly little toy game. This experiment goes way differently if you use the one page business section of The Economist. WSJ front page is going to be literal clickbait.
This is a fun read!
I think something interesting about the news and its supposedly predictive power is that the market already discount the news.
If you look at the daily and weekly charts for SP500, it has been on a bill run, for a bunch of unknowable factors but I suspect one of them is the expected rate cut from the fed. Now, if the cut was, for example 50 bsp, instead of 25 that would be news indeed, but the again, last rate cut the prices jump sharply exactly at 1 PM EST, meaning that computers, not humans, read the report and placed hundreds of orders in milliseconds after the report was released.
IMHO knowing the future 1 day ahead is not enough because in that timeframe the market has already discounted the news.
I saw many times something like this:
1. rate cut
2. S&P rises, financial press writes "market rise because of the rate cut"
3. later during the same day, S&P reverses and drops below price when rate cut was announced, financial press writes new article "market drops because of the rate cut"
rinse & repeat. they literally are reacting and correlating price movement with whatever big news happened.
The market isn't some kind of oracle. It's driven by sentiment.
And the bond market controls rates.
The bond market controls rates, but the fed sets the floor.
For example, if you believe we would had decades of a near zero federal funds rate, you might be willing to accept a 2% yield on a 30 year bond. But if you thought the long term federal funds rate was going to be 2%, you might want 4% or more on the long bond.
The fed follows the market rates - their control is an illusion.
https://www.elliottwave.com/articles/fed-rate-cut-interest-r...
I did a similar proctored digital coin toss type experiment at uni back in the dark ages.
In the proctored experiment the best rate of pay was achieved by those who just skipped trading for each of the 15 days and left after 2 minutes with $50 in their back pocket.
I would like to see the payout distribution graph with random trades for comparison against the students.
One thing I don't see anyone mentioning, is that there is a big consensus factor at play too, which adds a bunch of randomness to news outcomes.
Take interest rates for example: Lowering rates means that money will be cheaper (good!) but that the fed see's slower economic times ahead(bad!). So now you need to put the decision on context, which adds a whole host of assumptions and estimates. Both sides have a strong logical argument for stocks moving up or down.
So you end up with traders voting with their dollars once the news drops, and it is not (practically) possible to know which group has more firing power going into the print.
It's also not uncommon for a stock to tank the moment the news drops, and then skyrocket seconds later (or the inverse). Competing theories and the winner is whoever has more money to move the stock.
Elliott Wave Theory one of the most used/followed technical market tools posits that price movements are determined by social mood and not by news. So it should be hard to win based on front page fundamentals. That said I came through the game with a 50% profit overall by mostly going long stocks and long bonds with consistent 5x leverage. If you have a winning edge then you can use Kelly betting to size bets and maximize gains, but it's easy to overbet and go bust. One approach is to increase leverage after a win and reduce it after a loss, and you end up near the optimum leverage.
Played the game (from 1M to 2.3M, a batting (?) average of 63.64%). Played big three times: one a big loss, twice a big win. Takeaway from the game: feels a bit like lottery (although I was relatively confident thrice, I was wrong one of those).
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Could this mostly be due to a “sell on the news” phenomenon?
Stocks go up on rumors but don’t do much or go down a little when something is confirmed.
Seems clickbaity: the selected dates are pretty weird. If you just maintain 1x long, you end up down ~5% overall. Obviously, there's hefty volatility in the days they selected, but I'm surprised that the vol averages out down given that the last decade was quite positive on average.
Read the post. It said that people trade in the wrong direction the majority of the time. So played the game with the strategy that I’d go 50x leverage long or short in the opposite direction to my initial hunch upon reading the headlines.
Ended up with a 1000% return. Just need a time machine now.
What you need is a crystal ball for price (which Citadel etc has), not crystal ball for other information.
How do Citadel have a crystal ball for price?
High-frequency trading, which lets them frontrun orders.
How do you fontrun orders? You can only take action after you see the order. Am I missing anything?
Michael Lewis wrote a book called Flashboys all about it. If your network speed and processing power are faster than the competitors, then you can move faster than them on any trade. Really interesting stuff
Flash Boys is essentially fiction. You might also enjoy "Flash Boys: Not So Fast," which attempts to debunk it.
> How do you fontrun orders? You can only take action after you see the order.
PFOF:
PFOF does not frontrun — it wouldn't even make sense to frontrun. Retail orders tend to be bad; it makes no sense to frontrun a bad order, especially if you're the market maker who's fulfilling it too.
Let's imagine a bustling farmer's market where market makers are savvy fruit stand owners, and regular traders are shoppers. Here's how the market makers might "front run" orders to make arbitrage profits:
## The Fruit Stand Scenario
Imagine you're at a large farmer's market with numerous fruit stands. You're looking to buy a crate of apples, and you ask a friendly fruit stand owner, Citadel, for the price.
*The Setup:* - You want to buy a crate of apples - Citadel’s stand is selling apples for $50 per crate - There's another stand nearby selling for $48, but it's not immediately visible
*The Front-Running Process:*
1. *Information Advantage:* Citadel, being a regular at the market, knows about the nearby stand selling apples for $48.
2. *Customer's Intent:* When you ask Citadel for the price, they realizes you're likely to buy a crate.
3. *Quick Action:* Before quoting you a price, Citadel quickly sends his assistant to buy a crate from the $48 stand.
4. *Price Quote:* Citadel then tells you his price is $50 per crate, which you accept.
5. *Fulfillment:* Citadel’s assistant returns with the $48 crate, which Citadel then sells to you for $50.
6. *Profit:* Citadel pockets the $2 difference as profit, without ever risking his own inventory.
## The Market Making Parallel
In the financial markets, this process happens at lightning speed:
1. Market makers see incoming orders before they're fully processed.
2. They quickly buy or sell ahead of large orders on other exchanges.
3. They then fulfill the original order at a slightly worse price.
4. The profit comes from the price difference between exchanges.
This practice, while controversial, is often justified by market makers as providing liquidity and tighter spreads. However, it can be seen as unfair to traders who may not get the best possible price for their orders.
Not following this. 1. Aren’t everybody seeing the book at the same time? The exchange do not publish the same data to everybody? 2. The “information advantage example” does not make sense to me. If there is an order for 48$, that is top of book and everyone has seen that order, how come the new participant not know it?
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Why would it be legal for market makers to use order info like that?
Nice write up! Can you flesh out your example a little bit with more specifics about how the stock market version works? In particular, are the front-runners actually taking a risk by buying before they have a committed order? Or are they committing to sell before they buy from the cheaper source on the assumption it will still be available? And is selling order flow something different, or the same thing here?
Selling order flow is a related but distinct practice:
- Order Flow Sales: This involves brokers selling information about their customers’ orders to interested parties.
- Potential for Front-Running: While not inherently front-running, selling order flow can enable it if the buyers use this information to trade ahead of customer orders.
- Payment for Order Flow: This practice allows some brokers to offer commission-free trades, as they make money by routing orders to specific market makers.
Front-runners do take on some risk, but it’s typically minimal:
- Speed: Modern front-running often occurs using high-frequency trading algorithms, minimizing the time between the front-runner’s trade and the large order execution.
- Committed Orders: Front-runners act on knowledge of committed orders, not mere possibilities. They have an informational advantage.
latency arbitrage is a thing
Why is there no time horizon and why only trade the S&P? What is the trading time? What are you using?
This is clickbait to harvest emails. I don't see anything to suggest it is correct. Show price histories next to the headlines.
Note that this article is written by a company selling an index-fund alternative, and thus, they carry an incentive to diminish active investing. However, this thought experiment is still enjoyable.
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The reason this is the case is that in most cases, simply knowing the direction of some news event is not enough to predict the reaction in a stock. If only it was so simple, linear and one dimensional.
Generally the reaction of a stock has about a dozen inputs ranging from other market participants expectations, macro/rates, broader market, politics, etc.
On other participants expectations alone..
You might see a news story like "Apple ships record number of iPads" and go wow great, I should have bought Apple yesterday. But you don't know what other participants expected in terms of number of iPads shipped.
Further, you don't know what metric of Apples earnings report that other participants were tracking most closely. What if it was gross margin on iPads sold, and while the units sold went up.. it was all in a newer lower end priced model that dragged down overall margin in the segment?
Further what other news did you miss - what if in some parallel dimension of this game, there was a news story on page 5 about MSFT/GOOG shipping a truly competent iPad competitor.
Or what if what other investors respond to is some aside comment made on the earnings call regarding an expected slowdown in services revenue?
either we hugged it to death or the future doesn't work in firefox
a real world version of this experiment: from time to time there is a hacking case where a criminal group steals earnings reports from companies before they are made public. some of these conspiracies have been quite profitable, but i believe all of them had at least a few trades go against them.
a more extreme "crystal ball" were certain life insurance policies written by the French insurance company Aviva. They allowed customers to purchase shares today at last week's prices. This sounds incredibly stupid, but that's what the contract said, although the insurance company would like to get out of it. The legal battles have dragged on for a couple decades at this point.
What in the world?!
> The average payout was just $51.62 (a gain of just 3.2%), which is statistically indistinguishable from breaking even.
Yeah, it's not statistically significant because (1) the experiment was stupid small: "118 young adults" And (2) the participants didn't have to care: "each participant $50". With (3) no choice of instruments "trading the S&P 500 stock market index and a 30-year US Treasury bond futures contract". And (4) randomly chosen 15 days.
Still furthermore the experiment was made stupid tough: (5) the participants are students and (6) had to allocate bets for 15 events and up to 50 times leverage - and that is very difficult to do equally for newcomers and established investors who have not deliberately worked on the issue of bet size and allocation. (See The missing billionaires - A guide to better financial decisions, Victor Haghani and James White, 2023 - excellent book on that topic)
What in the world?? That's a lot of trouble to go to for one cheap marketing headline. With zero applicability to the real world (except as cheap marketing headline and also: studying bet size / allocation is good advice for would be investor.)
Indeed, they themselves recognize the thing in their conclusion: more thoughtful and experienced people did great - although perhaps still not significant because they managed to ask only 5 of them...
So if I understand it
First you must be right.
Second you must be right while others are wrong (or no-one will take the other side).
Third you must believe enough to bet big.
Fourth you must bet big.
Fifth, you must have been right at step one.
And if you get lucky this way enough times in a row, you'll start believing yourself a genius who deserved the extraordinary success. Journalists will call you up to hear your excitingly contrarian views on topics you know nothing about.
As you grow older and observe the world from your suburban mansion, you grow increasingly irate that people didn't listen to you. You made your own fortune, but so many people just ask for handouts nowadays. Time to get involved. If you donate enough money to the other rich guy who is running for office, he'll make you ambassador to Italy, at least...
>As you grow older and observe the world from your suburban mansion, you grow increasingly irate that people didn't listen to you.
I wonder why these successful people don't pick people and pay them to do a strategy. It can be a win-win. I know why they don't - deep down they know that luck was a major factor.
( I'm aware of one such situation - I think it was called called the turtle trading or something, that was done in the 80s)
But also never forget:
"Markets can remain irrational longer than you can remain solvent" - John Maynard Keynes
that quote has been attributed to many over the years. I can find an origional surce.
Yes, the missing point is that you need to have the timing right as well.
Even if you are correct about the direction and magnitude of price movement, if you are wrong about how long it will take you can lose money. This is true for both short and long positions.
Sound similar to how one needs to succeed as an entrepreneur:
First you have to be smart, an IQ of less than 100 won't do
Second you have to pick the right product/service.
Third you have to persevere long enough. One cannot give up too soon, But persevering too much would be a case of sunken case fallacy.
Forth you have to time your product/service. Too early or too late, it will affect your parents.
etc...
>Fourth you must bet big
Big blunder. Killing every profitable trade. You have to account for the fact that loosing hurts comparatively more than winning. Keyword is "log optimal".
So this is the Kelly criteria etc (https://en.m.wikipedia.org/wiki/Kelly_criterion).
Yes I get it - but take the example on the page - 60% chance of a win and get back same bet size, I guess most people would be reluctant to bet 1/5 of their bankroll each time.
Esp if you are not sure about the 60%.
I think most people would see 1/5 as betting big. Is what I am saying.
If you see it as betting small, maybe I would like to understand
> So if I understand it
This is not what TFA says at all. Especially this one:
> Fourth you must bet big.
is explicitly listed as a common mistake all the involved students exhibited.
> Fourth you must bet big.
No. You must bet right - and it depends on how right you are. Look up the Kelly criterion. Bet 1 - 2*probablity of losing of your current pot - will maximize expected return (but is a bit volatile for some tastes)
It is pretty well agreed upon that the Kelly criterion strongly overestimates bet sizes for continuous bets where accurate probabilities are hard to determine, like the stock market. It has given rise to many variations such as Half-Kelly, Kelly minus constant, etc, which is a pretty good tell that it's an inaccurate approximation. Using Kelly to invest in the stock market is roughly like using half the Black-Scholes formula to invest in options. You'll get good results when the market agrees with your direction, but spectacular failures when it doesn't.
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The point of the market is not for you to do better than anyone else. The point is to price things right so that the market as a whole makes money. By picking stocks, you're either a gambling monkey or a more conservative gambling monkey.
True, though right now, the markets are set up such that anyone with positive net worth and consistent income can easily do vastly better than anyone with negative net worth. The more positive your net worth, the more leverage and risk you can safely afford, and you get rewarded for that.
The rich can afford the risks associated with leveraged crypto and AI stocks, the poor can only afford VOO or (worse) Treasury bonds because their life would be on the line if they lost money.
If you actually have money to throw away, you'd be an idiot to not have a pile of BTC right now. If you don't have money to throw away, BTC is dangerous as fuck.
The markets are designed to continually widen the gap between rich and poor.
There are a variety of simple market simulations one can come up with where--despite every participant being equally skilled--the final outcome is always one rich guy and everyone else poor.
When you combine some of these simple models with an adjustable "redistributed back by tax" function, you get results which resemble the various countries of the world.
http://www.scientificamerican.com/article/is-inequality-inev...
> you'd be an idiot to not have a pile of BTC right now
I do agree with your overall take that there is a recent trend towards de-democratization of investment opportunities. The invention of the stock market was a huge deal because it massively moved the needle towards democratization.
BTC ain't it, however. Good luck proving the hypothesis that BTC is not tulips.
Personally, I see two major outcome sets. Either Russia "conquers the planet" or it doesn't. If it does, BTC is no longer any use to Russian-aligned oligarchs to bypass sanctions. If it doesn't, the West will eventually wisen up and hamper BTC transactions to the point that the alternatives win out.
Those are two likely crashpoints. There are 10000 possible others. Musical chairs always ends, it's just a matter of when.
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It should be fairly simple to feed an AI all WSJ headlines/articles and day-to-day stock values for the last 20 years, and have it recommend trades each morning.
I expect it would does better than average.
I also expect similar thing are already running.
> I expect it would does better than average.
> I also expect similar thing are already running.
Only 1 of these 2 statements can be true.
But why bother when it's just as simple to feed an AI the last few decades of rocket research and put SpaceX out of business?