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I thought the last crash basically trashed Quants and the idea you can model financial system :) If you are looking into getting into high frequency trading ta

I thought the last crash basically trashed Quants and the idea you can model financial system :) If you are looking into getting into high frequency trading take note that the world's exchanges are changing to crack down on some of the practices.

nhebb 15y ago
Disclaimer: I'm not a quant and don't know where to source data on this topic. But from what I'e read, the size of the derivatives market was approximately 5-6X global GDP in the mid 00's. Now, it's over 20X global GDP. If that market ever crashed, we'd be looking back at the crash of '08 as 'good times'.
- andylei 15y ago
  those numbers are really bad measures of risk. those are probably notionals on derivatives. if you're trading a swap, the notional may be 100B, but the amount actually at risk may be something like 10 bps, which is just 100MM. Also, its not like if the market crashed, all of the value of the derivatives go to zero. Derivative holdings always have counterparties. If you make 100MM, someone else loses 100MM and vice versa. this isn't foolproof, as there is counterparty risk, but it makes the system a lot more stable than your statistics make it seem. TLDR: The total risk of the derivative market is nowhere near 20X GDP.
  - nhebb 15y ago
    I'm not challenging you on this, but I still remember Buffet's comment from years ago that they were weapons of mass destruction. What is the risk and how do regulators ensure that any untoward risk is mitigated?
    - steve8918 15y ago
      Buffett makes a great deal of cash flow from writing options, so take what he says with a grain of salt. "The brilliance behind Buffett’s investment in Berkshire is astounding. He effectively used (and uses) Berkshire as the world’s largest option writing house. The premiums and cash flow from his insurance business created dividends that he could invest in other businesses. But Buffett wasn’t just buying Coca-Cola and Geico as many have been led to believe. Buffett was placing some (short-term AND long-term) complex bets in derivatives markets, options markets, and bond markets." http://pragcap.com/the-many-myths-of-warren-buffett http://pragcap.com/the-many-myths-of-warren-buffett
  - TDL 15y ago
    Below is a link describing the "netting" effect that occurs in the derivative markets. https://derivativedribble.wordpress.com/2008/10/24/netting-demystified/ https://derivativedribble.wordpress.com/2008/10/24/netting-d...
- justincormack 15y ago
  Thats kind of misleading. First those figures are probably notional underlying, which doesnt mean much. Second contracts have a buyer and a seller, so net value is zero. So it does not work like a stock market crash destroying (presumed) wealth. They should be teaching kids the basics of this stuff in schools...
  - steve8918 15y ago
    Don't forget about counterparty risk. This is something everyone forgot about during 2008 and ended up being one of the biggest problems. This is what happened with AIG, where people thought they were adequately hedged on their position because they bought a CDS with AIG, and then it turned out that AIG itself had written so many CDSs that it couldn't pay back its obligations, which exacerbated the entire financial crisis.
reverend_gonzo 15y ago
High frequency trading and quantitative trading aren't the same thing. High frequency is very basic math and a lot of technology to make trades happen as fast as possible. Low latency becomes difficult when you're running complex math on real time data. HFT is generally used by market makers. HFT is the next evolution of day-trading, since all trading is trying to react to news quicker. Quantitative finance is very complex math used to model and backtest data. It is used by hedge funds, long-term traders, and shops that analyze data to find securities that they believe are mispriced. (This is obviously a highly simplified description of the field.)
deleted 15y ago
[deleted]
paperwork 15y ago
The news blurbs I see make me think more and more exchanges around the world actually welcome HFT volume. Exchanges in Latin America, for example, are quickly modernizing to allow automated traders to come in. Remember, exchanges benefit from greater volume (more fees). With regards to the quants being trashed, you will always need people who can rigorously describe a system (I do realize that rigor and accuracy are different). The quants are not going anywhere :)
nvarsj 15y ago
Hardly... you still need quants to model risk-free valuation strategies (e.g. arbitrage) which is the majority of profits for HFT.
sambe 15y ago
I think in general it is governments and regulators who are (attempting/pretending to be) cracking down, not exchanges. Exchanges continue to get faster, and offer premium services to those who need it.

nhebb 15y ago

Disclaimer: I'm not a quant and don't know where to source data on this topic. But from what I'e read, the size of the derivatives market was approximately 5-6X global GDP in the mid 00's. Now, it's over 20X global GDP. If that market ever crashed, we'd be looking back at the crash of '08 as 'good times'.

andylei 15y ago
those numbers are really bad measures of risk. those are probably notionals on derivatives. if you're trading a swap, the notional may be 100B, but the amount actually at risk may be something like 10 bps, which is just 100MM. Also, its not like if the market crashed, all of the value of the derivatives go to zero. Derivative holdings always have counterparties. If you make 100MM, someone else loses 100MM and vice versa. this isn't foolproof, as there is counterparty risk, but it makes the system a lot more stable than your statistics make it seem. TLDR: The total risk of the derivative market is nowhere near 20X GDP.
- nhebb 15y ago
  I'm not challenging you on this, but I still remember Buffet's comment from years ago that they were weapons of mass destruction. What is the risk and how do regulators ensure that any untoward risk is mitigated?
  - steve8918 15y ago
    Buffett makes a great deal of cash flow from writing options, so take what he says with a grain of salt. "The brilliance behind Buffett’s investment in Berkshire is astounding. He effectively used (and uses) Berkshire as the world’s largest option writing house. The premiums and cash flow from his insurance business created dividends that he could invest in other businesses. But Buffett wasn’t just buying Coca-Cola and Geico as many have been led to believe. Buffett was placing some (short-term AND long-term) complex bets in derivatives markets, options markets, and bond markets." http://pragcap.com/the-many-myths-of-warren-buffett http://pragcap.com/the-many-myths-of-warren-buffett
- TDL 15y ago
  Below is a link describing the "netting" effect that occurs in the derivative markets. https://derivativedribble.wordpress.com/2008/10/24/netting-demystified/ https://derivativedribble.wordpress.com/2008/10/24/netting-d...
justincormack 15y ago
Thats kind of misleading. First those figures are probably notional underlying, which doesnt mean much. Second contracts have a buyer and a seller, so net value is zero. So it does not work like a stock market crash destroying (presumed) wealth. They should be teaching kids the basics of this stuff in schools...
- steve8918 15y ago
  Don't forget about counterparty risk. This is something everyone forgot about during 2008 and ended up being one of the biggest problems. This is what happened with AIG, where people thought they were adequately hedged on their position because they bought a CDS with AIG, and then it turned out that AIG itself had written so many CDSs that it couldn't pay back its obligations, which exacerbated the entire financial crisis.

reverend_gonzo 15y ago

High frequency trading and quantitative trading aren't the same thing. High frequency is very basic math and a lot of technology to make trades happen as fast as possible. Low latency becomes difficult when you're running complex math on real time data. HFT is generally used by market makers. HFT is the next evolution of day-trading, since all trading is trying to react to news quicker. Quantitative finance is very complex math used to model and backtest data. It is used by hedge funds, long-term traders, and shops that analyze data to find securities that they believe are mispriced. (This is obviously a highly simplified description of the field.)

deleted 15y ago

[deleted]

paperwork 15y ago

The news blurbs I see make me think more and more exchanges around the world actually welcome HFT volume. Exchanges in Latin America, for example, are quickly modernizing to allow automated traders to come in. Remember, exchanges benefit from greater volume (more fees). With regards to the quants being trashed, you will always need people who can rigorously describe a system (I do realize that rigor and accuracy are different). The quants are not going anywhere :)

nvarsj 15y ago

Hardly... you still need quants to model risk-free valuation strategies (e.g. arbitrage) which is the majority of profits for HFT.

sambe 15y ago

I think in general it is governments and regulators who are (attempting/pretending to be) cracking down, not exchanges. Exchanges continue to get faster, and offer premium services to those who need it.