3 ms·

This is the reality of Wall Street, any time you tie your self to a certain predictable future behaviour, people will figure that out and figure out a way to ex

by hristov 16y ago

This is the reality of Wall Street, any time you tie your self to a certain predictable future behaviour, people will figure that out and figure out a way to exploit you. Those exchange traded funds screwed themselves because they committed themselves to buying contracts at a specific time. So other traders knew about it and made sure the prices of the contracts at that time were extra high. And it does not seem like there is a good answer. On one hand you can have the ETFs stop their requirements to buy or sell at a particular time. Thus you would entrust the managers of those funds to find good times to buy and/or sell. But then again can you trust the managers? There is a huge incentive for the managers to take bribes from another trader to buy or sell at times that are bad for the fund but good for the other trader. Or, maybe the managers simply are not very good and choose bad times. In a way you have an agency problem, and ETFs were invented in order to remove any agency issues. That is, the whole philosophy behind ETFs is for them to be automatic so you do not have to trust the judgement of some manager to buy them. I think the only answer is for investors is to buy the contracts directly and not to go through ETFs. Of course that is a bit dangerous, because if you do not clear your position in a timely manner, you always risk somebody actually delivering a thousand barrels of oil on your front lawn, but hey that is a risk you have to take if you want to be commodities investor.

leelin 16y ago
This is a very interesting problem. Basically the algorithm for when to roll needs to be: 1.) Random and hard to predict before-the-fact 2.) Totally verifiable after-the-fact by the public (or by an uninterested authority the public trusts) That means a randomized algorithm whose seed is something the ETF manager knows before the general public, but which everyone else can verify once they publicize the info. Quick brainstorming: 1.) They seed based on a hash of their total AUM or PNL on a certain date, down to the penny, which is almost impossible for outsider's to predict but which they know internally and can publicize in the next quarterly statement. 2.) They tell the SEC a list of state-run lotteries in secret, then the seed is the winning lottery number on a particular night. The public can never know which lottery is the one that matters until after-the-fact. 3.) Seed based off a hash of the concatenation of every employee's birthday or social security number, which is never public, but if there was ever a serious investigation or audit, they could verify to authorities that they followed the rules.
gwern 16y ago
> This is the reality of Wall Street, any time you tie your self to a certain predictable future behaviour, people will figure that out and figure out a way to exploit you. Markets are anti-inductive? http://lesswrong.com/lw/yv/markets_are_antiinductive/ http://lesswrong.com/lw/yv/markets_are_antiinductive/

by hristov 16y ago

leelin 16y ago

This is a very interesting problem. Basically the algorithm for when to roll needs to be: 1.) Random and hard to predict before-the-fact 2.) Totally verifiable after-the-fact by the public (or by an uninterested authority the public trusts) That means a randomized algorithm whose seed is something the ETF manager knows before the general public, but which everyone else can verify once they publicize the info. Quick brainstorming: 1.) They seed based on a hash of their total AUM or PNL on a certain date, down to the penny, which is almost impossible for outsider's to predict but which they know internally and can publicize in the next quarterly statement. 2.) They tell the SEC a list of state-run lotteries in secret, then the seed is the winning lottery number on a particular night. The public can never know which lottery is the one that matters until after-the-fact. 3.) Seed based off a hash of the concatenation of every employee's birthday or social security number, which is never public, but if there was ever a serious investigation or audit, they could verify to authorities that they followed the rules.

gwern 16y ago

> This is the reality of Wall Street, any time you tie your self to a certain predictable future behaviour, people will figure that out and figure out a way to exploit you. Markets are anti-inductive? http://lesswrong.com/lw/yv/markets_are_antiinductive/ http://lesswrong.com/lw/yv/markets_are_antiinductive/