Real work on MT5 NDD - page 17
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I have already given the example of people who believed in the stability of arbitrage on the quadruple forum. LTCM is called (assets at the time of the 100 billion collapse, if anything, were rescued by the world). There have been several reports of smaller collapses as well. There are a bunch of reports like we were arbitrating here, but suddenly the opportunities ran out, so we switched. So, it convinces me that things are not as great as they seem.
As for 50ms - there are thicker ones, but it's not my profile, and it's a completely different technology. The picture is shown only for the purpose of making sure that these three characters are moving in a coherent way, and they shouldn't, in general.
When I said no classic arbitrage on NASDAQ I meant Ask < Bid. On exchanges it is impossible in principle because of pricing rules identical to ECN. On the FOREX, there is STP - a feature that none of the stock exchanges have. I myself have not traded on exchanges, but logically there positive slippage at pre-existing limits should be absent as a class.
Look at the multi-month flat on the EURCHF. After the New Year it has become quite narrow. What is the nature and stability? Tales about the Swiss Central Bank can of course be told. But just imagine how it is possible to implement such a rigid peg to EUR at all. What kind of turnover and calibrated algorithms are needed for that. How much more time will be given to milking the supposedly dumb Swiss pegging algorithm? Or is it not dumb?
I incline to the opinion that the CHF is pegged by entirely non-market methods. For example, to peg GBP to EUR you will need a colossal infusion as the stat arbitrage practitioners will chew everything from you. Any giant bank will gladly gobble up your naive attempts at pegging. So one has to talk about the nature of stat arbitrage and its stability only in a hypothetical sense.
LTCM is an econometric ram, i.e. the most primitive (quantum) notion of statistical arbitrage.
Statistical arbitrage is certainly not a grail and carries quite tangible risks.
Just a hypothesis: The Swiss Central Bank has asked (pays regularly a considerable amount), probably through someone, the giant banks to disable the "market" pricing algorithm of the EURCHF or USDCHF. But at the same time leaving minimal fluctuations in order to maintain the appearance of a market-driven process. The giants have accepted, because their EURCHF-pricing algorithm brings commensurate (with the Swiss premium) profit.
The size of artificial fluctuations is such that one can squeeze relatively little from EURCHF - a million or two per month. The guys, of course, do not give a stupid cointegrated fluctuation, but with thick tails (so that the statistical arbitrageurs do not lose their fear).
For example, if Russian Central Bank asks for something similar to the ruble, it will not work for a long time like it did with CHF. Because unlike Switzerland, Russia has huge exports of liquid energy resources. This means that not only the USDRUB has to be controlled, but also the same oil and gas prices.
Although, it's a rather primitive way of looking at things. I may be wrong. And again it is all chatterboxes. Algorithms are more useful.
Look at the multi-month flat on the EURCHF. After the New Year it has become quite narrow. What is the nature and stability? Tales about the Swiss Central Bank can of course be told. But just imagine how such a rigid peg to the EUR is even possible. What kind of turnovers and verified algorithms are needed for that. How much more time will be given to milking the supposedly dumb Swiss pegging algorithm? Or is it not dumb?
I lean towards the point of view that the CHF is pegged by completely non-market methods. For example, to peg GBP to EUR you would need a colossal infusion, as stat arbitrage practitioners would eat everything away from you. Any giant bank will gladly gobble up your naive attempts at pegging. This is why it is only hypothetical to talk about the nature of statistical arbitrage and its stability.
The Swiss have expressed their concern and displeasure with the actions of speculators against their favourite currency six months ago. They promised they would crack down, etc. This is the result. It seems that the story of George Soros who dropped the pound does not bother them much. They know about it, that's for sure. Let's wait and see how it ends with the Swiss.
In general, it is quite interesting, though a separate topic, legal methods of market manipulation. Among all sorts of reports that it is difficult, expensive, etc., there are some that say that it is not at all, not so, it is possible to manipulate (influence the market) with much smaller resources. The way some financial instruments move with generally not very big volumes makes you think there is something to it.
LTCM is an econometric ram, i.e. the most primitive (quantum) notion of statistical arbitrage.
Statistical arbitrage is certainly not a grail and carries quite tangible risks.
I disagree, LTCMs are not as simple guys as they are used to thinking. There are several studies on the subject, up to and including descriptions of their biographies etc. They're just caught up in the risks that are in arbitrage. And they arbitrated (statistically and spatially and calendar-wise and God knows what else) on everything. Shares, share futures, options, bonds, indices, index futures, currencies, etc., up to exotics (Russian gco). I.e. the widest diversification, and this at a time when markets were not so globalized, arbitrage, very favorable links with sources of money for operations and low costs, the smartest people, besides Nobels there was a very strong team of a couple of hundred people - and this is the result.
The collapse of LTCM is of course not the classic collapse, with figureheads jumping out of the window, they were not allowed to die completely (the consequences would have been frightening, like the collapse of Lamont Brothers), but they were bought out, reorganized and made to win back where they could, but as an example of course frightening.
HideYourRichess:
Looking at how some financial instruments move in generally not very large volumes, you start to think there is something to it.
Just a hypothesis: The Swiss Central Bank has asked (pays regularly a considerable amount), probably through someone, the giant banks to disable the "market" pricing algorithm of the EURCHF or USDCHF. But at the same time leaving minimal fluctuations in order to maintain the appearance of a market-driven process. The giants banks have been accommodating, because their EURCHF pricing algorithm was generating commensurate (with the Swiss' payoff) profits.
The size of artificial fluctuations is such that one can squeeze relatively little from EURCHF - a million or two per month. Having said that, of course, the guys do not give a stupid cointegrated fluctuation, but with thick tails (so that stat. arbitrageurs don't lose their fear completely).
hrenfx:
For example, if the Russian Central Bank asks for something similar to the ruble, it won't last as long as with the CHF. Because unlike Switzerland, Russia has huge liquid energy exports. This means that not only the USDRUB has to be controlled, but also the same oil and gas prices.
hrenfx:
Yes, and again it is all chatter. Algorithms are more useful.
Exchange-listed low-value products - maybe.
Stat arbitrage carries less risk the closer you get to the noise. Haven't studied (don't see the point yet) the history of LTCM, but something tells me they were extremely far from HFT. Made up long market-neutral portfolios and traded them. That's huge risk, but also huge liquidity. Diversification has nothing to do with it. Moreover, even the flip side of diversification could have turned around here - the market interrelationship used in one place breaks down, which in chain breaks the interrelationship in another. I.e. a chain reorganisation of the whole market. Yet HFT is much less risky in this sense.
Diversification is a very good thing. It is hard to overestimate its importance for overall risk management. But, in this case, even that didn't help. The thing is, no market linkage broke there. Just some instruments went very coherently against LTCM, after that a kind of margin call came to them, in the form of banks and government agencies. Do you get the idea? Maybe some stupid statistical equations of mathematicians are showing something different, but that's the problem of mathematicians, in the market correlations are not going anywhere.
HFT is not a panacea. It only seems that the less in the market, the safer. But, there are cases when HFTs have crashed, not as spectacular as LTCM. This is not yesterday's topic, it is at least 20 years old. The same Schwager has essentially high-speed mages among the mages, for those times of course.
OK, really, it's not like we're talking about sacks.