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Crystal Ball Trading Game

254 points by EvgeniyZh 2y ago

bilsbie 2y ago
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.
russelmarilyn 2y ago
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wisdomalfred 2y ago
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liamgrayson 2y ago
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rolandthomas 2y ago
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ADAM111 2y ago
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kassandraryan60 2y ago
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Chengdavid 2y ago
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lizzas 2y ago
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.
- ta12653421 2y ago
  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
  - lizzas 2y ago
    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.
    - fragmede 2y ago
      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.
- bostik 2y ago
  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.
  - curiousObject 2y ago
    >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
mettamage 2y ago
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.
- sgerenser 2y ago
  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.
InkCanon 2y ago
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.
- alexmolas 2y ago
  Exactly! They're evaluating the model using the training data
- gklitz 2y ago
  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.
  - jjallen 2y ago
    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
    - bloomingkales 2y ago
      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.
    - bluGill 2y ago
      '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)
nextworddev 2y ago
What you need is a crystal ball for price (which Citadel etc has), not crystal ball for other information.
- mghfreud 2y ago
  How do Citadel have a crystal ball for price?
  - teractiveodular 2y ago
    High-frequency trading, which lets them frontrun orders.
    - mghfreud 2y ago
      How do you fontrun orders? You can only take action after you see the order. Am I missing anything?
      - Yiin 2y ago
        latency arbitrage is a thing
      - goblinux 2y ago
        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
        loeg 2y ago
        Flash Boys is essentially fiction. You might also enjoy "Flash Boys: Not So Fast," which attempts to debunk it.
      - hckrnrd 2y ago
        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.
lifeisstillgood 2y ago
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.
- pavlov 2y ago
  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...
  - dennis_jeeves2 2y ago
    >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)
- TimMurnaghan 2y ago
  > 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)
  - Etheryte 2y ago
    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.
_benj 2y ago
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.
- cabby 2y ago
  The market isn't some kind of oracle. It's driven by sentiment. And the bond market controls rates.
  - ac29 2y ago
    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.
    - dave333 2y ago
      The fed follows the market rates - their control is an illusion. https://www.elliottwave.com/articles/fed-rate-cut-interest-rates-lead-and-the-fed-follows/ https://www.elliottwave.com/articles/fed-rate-cut-interest-r...
- dist-epoch 2y ago
  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.
bakudanen 2y ago
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throw0101b 2y ago
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-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
sgerenser 2y ago
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.
- brcmthrowaway 2y ago
  Which index funds?
  - bdangubic 2y ago
    Stocks: VBTLX VFIDX VFSUX VTI VXUS Bonds: BND BNDX Buy and forget if you just want to play it safe
    - sgerenser 2y ago
      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.
      - brcmthrowaway 2y ago
        What is your algorithm for adjustment?
plank 2y ago
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).
- deleted 2y ago
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throw4321 2y ago
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.
- dheera 2y ago
  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.
  - Terr_ 2y ago
    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-inevitable/ http://www.scientificamerican.com/article/is-inequality-inev...
  - throw4321 2y ago
    > 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.
eschneider 2y ago
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...)
- petesergeant 2y ago
  > 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
  - filoleg 2y ago
    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.
    - petesergeant 2y ago
      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...
- ac29 2y ago
  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.
  - dheera 2y ago
stavros 2y ago
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.
BurningFrog 2y ago
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.
- cj 2y ago
  > 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.
- c22 2y ago
  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?
sahmeepee 2y ago
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.
the__alchemist 2y ago
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.
motohagiography 2y ago
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.
- paulpauper 2y ago
  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.
deleted 2y ago
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currymj 2y ago
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.
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Workaccount2 2y ago
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.
fullsend 2y ago
“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.
awinter-py 2y ago
either we hugged it to death or the future doesn't work in firefox
creer 2y ago
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...
orobinson 2y ago
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.
FactKnower69 2y ago
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steveBK123 2y ago
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?
nobodywillobsrv 2y ago
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.
dave333 2y ago
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. https://www.elliottwave.com/education/ https://www.elliottwave.com/education/
strstr 2y ago
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.
citadel_melon 2y ago
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.

254 points by EvgeniyZh 2y ago

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.

russelmarilyn 2y ago

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wisdomalfred 2y ago

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liamgrayson 2y ago

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rolandthomas 2y ago

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ADAM111 2y ago

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kassandraryan60 2y ago

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Chengdavid 2y ago

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lizzas 2y ago

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.

ta12653421 2y ago
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
- lizzas 2y ago
  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.
  - fragmede 2y ago
    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.
bostik 2y ago
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.
- curiousObject 2y ago
  >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

mettamage 2y ago

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.

sgerenser 2y ago
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.

InkCanon 2y ago

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.

alexmolas 2y ago
Exactly! They're evaluating the model using the training data
gklitz 2y ago
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.
- jjallen 2y ago
  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
  - bloomingkales 2y ago
    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.
  - bluGill 2y ago
    '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)

nextworddev 2y ago

What you need is a crystal ball for price (which Citadel etc has), not crystal ball for other information.

mghfreud 2y ago
How do Citadel have a crystal ball for price?
- teractiveodular 2y ago
  High-frequency trading, which lets them frontrun orders.
  - mghfreud 2y ago
    How do you fontrun orders? You can only take action after you see the order. Am I missing anything?
    - Yiin 2y ago
      latency arbitrage is a thing
    - goblinux 2y ago
      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
      - loeg 2y ago
        Flash Boys is essentially fiction. You might also enjoy "Flash Boys: Not So Fast," which attempts to debunk it.
    - hckrnrd 2y ago
      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.

lifeisstillgood 2y ago

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.

pavlov 2y ago
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...
- dennis_jeeves2 2y ago
  >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)
TimMurnaghan 2y ago
> 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)
- Etheryte 2y ago
  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.

_benj 2y ago

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.

cabby 2y ago
The market isn't some kind of oracle. It's driven by sentiment. And the bond market controls rates.
- ac29 2y ago
  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.
  - dave333 2y ago
    The fed follows the market rates - their control is an illusion. https://www.elliottwave.com/articles/fed-rate-cut-interest-rates-lead-and-the-fed-follows/ https://www.elliottwave.com/articles/fed-rate-cut-interest-r...
dist-epoch 2y ago
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.

bakudanen 2y ago

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throw0101b 2y ago

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-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...

sgerenser 2y ago

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.

brcmthrowaway 2y ago
Which index funds?
- bdangubic 2y ago
  Stocks: VBTLX VFIDX VFSUX VTI VXUS Bonds: BND BNDX Buy and forget if you just want to play it safe
  - sgerenser 2y ago
    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.
    - brcmthrowaway 2y ago
      What is your algorithm for adjustment?

plank 2y ago

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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throw4321 2y ago

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.

dheera 2y ago
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.
- Terr_ 2y ago
  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-inevitable/ http://www.scientificamerican.com/article/is-inequality-inev...
- throw4321 2y ago
  > 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.

eschneider 2y ago

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...)

petesergeant 2y ago
> 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
- filoleg 2y ago
  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.
  - petesergeant 2y ago
    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...
ac29 2y ago
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.
- dheera 2y ago

stavros 2y ago

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.

BurningFrog 2y ago

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.

cj 2y ago
> 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.
c22 2y ago
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?

sahmeepee 2y ago

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.

the__alchemist 2y ago

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.

motohagiography 2y ago

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.

paulpauper 2y ago
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.

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currymj 2y ago

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.

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Workaccount2 2y ago

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.

fullsend 2y ago

“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.

awinter-py 2y ago

either we hugged it to death or the future doesn't work in firefox

creer 2y ago

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...

orobinson 2y ago

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.

FactKnower69 2y ago

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steveBK123 2y ago

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?

nobodywillobsrv 2y ago

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.

dave333 2y ago

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. https://www.elliottwave.com/education/ https://www.elliottwave.com/education/

strstr 2y ago

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.

citadel_melon 2y ago

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.