
Quantopian wants to Turn Stock Trading Algorithmic - gusgordon
http://www.forbes.com/sites/petercohan/2013/07/01/quantopian-wants-to-turn-stock-trading-algorithmic/
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dave_sullivan
I'm going to say a couple of things about algorithmic trading and the knee
jerk reactionaries.

First--there is an industry that makes pretty good money from practicing
algorithmic trading. I work with some of them. Some of them do well. However,
on the average, returns in that business are subpar. Then again, on the
average, most people are idiots. On the average, most startups fail. "On the
average" is usually not taken as a reason to not do something by this
community (HN), at least allegedly.

Second--there are _plenty_ of reasonable issues to raise whenever this comes
up. For instance--your average investor is going to have a tough time of this
--for starters due to transaction costs, taxes, etc. Then again, your average
investor is going to have a tough time of the stock market in general. Again,
the average, by definition, is not impressive and can never do any better than
--well--average. But we don't want to be in the average. That's the whole
point of much of what we do here. Except when it comes to exploiting financial
markets, in which case the average is all that matters?

Point being--is it possible to have a reasonable discussion about statistical
analysis of _markets_ and what, if anything, might be done to exploit any
regularities found? Is it really so difficult to believe that regularities in
relative price movements exist? And yeah, I get it--there's something
generally slimy about the whole industry, and there have been plenty of
hucksters over the years (and in the present). Then again... isn't this true
for the entire tech industry, more or less?

So, you don't have to take part in it, you don't have to learn about it, but
can we PLEASE have a better response than "oh, backtesting, that doesn't work,
dur"? I mean, yes, there's a fair amount of "lead into gold" type stuff there
--but I really don't think it's an unbelievable stretch of the mind to say
that regularities exist in markets. No doubt those regularities change, but
wouldn't it be interesting to see how quickly and why? And maybe some people
can be better at it than others (that doesn't happen anywhere else right?)

So yeah, don't get too excited, but then again, don't be so damned
pessimistic. Markets are a system like any other, probably some of the most
interesting systems around because they are so hard (some say _impossible_ )
to grasp.

~~~
tunesmith
I dunno about average algorithmic traders being idiots. I think people have to
have a certain level of smartness to even grasp what algorithmic trading is,
let along attempt it. If the average return is subpar, then that's out of the
people that are smart enough to be in the business, grasp the concept, and try
it enough to qualify for whoever's doing the measuring.

~~~
Choronzon
Signal to noise ratio is very high,50x in some cases which makes this a very
hard (though interesting ) problem.

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dantiberian
A better title would be 'Quantopian wants to turn stock trading algorithmic
for everyday investors'. These techniques are used by quants already (as the
article states).

~~~
hkmurakami
Well it's a great way for the average investor to get destroyed by transaction
fees.

~~~
ramchip
Why would, say, a VWAP order cause more fees than the equivalent limit orders?

~~~
U2EF1
I guess his understanding is that trading algorithmically means trading a lot
(it doesn't); at low volumes transaction costs dominate.

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mililani
"Backtest your algorithm, for free, against our 11-year history"

Hahahaha, yeah, I don't think so. If you guys are really interested in this
sort of thing, the MOST important thing is to have a comprehensive database
free of biases and errors. For example, survivorship bias is a huge deal, and
I wouldn't trust any platform that isn't serious enough to have a historical
dataset that is longer than 11 years long to be free of these kinds of things.

~~~
nether
[https://www.quantopian.com/faq](https://www.quantopian.com/faq)

> The data includes all companies that were traded, including companies that
> have subsequently gone out of business. This is very important in order to
> avoid survivor bias. Without this complete data set, your algorithms would
> be be blind to the possibility of bankruptcy and the resulting losses.

~~~
mililani
Good to see at least that. Personally, 11 years is not enough time to see
enough things to Black Monday or the tech crash. Hell, it's not enough time to
see a REAL bear monster bear market. Also, what else is included in the
database? So far, it just seems that prices are the only thing included. I
looked through their documentation, and I can't find things like valuations
and accounting data.

~~~
anywhichway
I understand that the limited amount of data can make for some easy false
positives on trading algorithms, but how relevant do you really think market
movements from over 11 years ago really apply to today?

~~~
kyzyl
I hear a lot of people talk about needing more than 10yr of data for
backtesting, and this is something that is often overlooked. The driving
forces behind market data are unobserved and extremely complex, so you simply
can't control for all the variables. If you can control for at least _most_ of
them, then you are in a situation where more data is NOT always better.

The one elephant that jumps to mind is liquidity. The mechanisms by which
liquidity in the markets affect the end results are absolutely key to how your
algorithm's interactions with the data will pan out. With that in mind, the
methods by which we come by liquidity have _dramatically_ transformed over the
years, and market makers from >10 years ago operated in an entirely different
way. That's my $0.02, anyhow.

Anecdotal evidence: I have first-hard experience implementing algorithms that
chugged along just fine with 10 years of data for backtesting.

~~~
theorique
Exactly. After Reg NMS and other massive regulatory changes, it's an open
question as to whether the post-2007 market system is the same as it was
before.

You could ask the same question about many different regulatory changes, but
Reg NMS is likely to be the biggest.

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gfodor
Honestly the only type of algorithmic trading I would trust is algorithmic
trading based at least partially on fundamental data, of which Quantopian has
none.

Good luck to all you momentum/technical types though, I'll be sitting in the
corner reading 10k's.

~~~
kyzyl
I'm not aware of any quantopian algorithms that make use of fundamentals, but
that doesn't mean they aren't there. There are lots of fundamentals that are
available as processed variables (P/E ratios, etc.) which can be used as an
indicators of financial health. Now, certainly that doesn't replace roping off
an afternoon and diving into the last 5 years of 10K's to get a real
understanding of what's happening with that company, but it doesn't mean that
algorithmic trading can't include fundamentals. Indeed, considerable effort
has been expended trying to intelligently scrape+process 10K's, which are all
available from the SEC, in an (semi-)automated way.

Also, as a point aside from the one above, in the ideal world markets would be
driven entirely by the real value underlying the securities being traded. But
that's not the case. Markets are highly influenced by news, to give one
example. So to say that only the fundamentals can be trusted is a little bit
narrow minded (in the pure sense of the phrase, not meant as a shot at you). I
think that particularly as the time horizons of your positions get longer, it
becomes more and more critical to include fundamental data in your analysis.

~~~
gfodor
I never said algorithmic trading can't include fundamentals, quite the
opposite, I just said that until Quantopian includes fundamental data, it's
not all that interesting to me. P/E barely scratches the surface, I'm talking
about all the data revealed in standard financial statements. If I were ever
to trust my money to a security selection algorithm, it would have to analyze
more than just price movements.

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clavalle
So, is this an effort by more sophisticated players to plant the seeds for a
new market to reap? You know, since algorithmic trading is starting to dwindle
as a cash cow.

~~~
balbeit
I think you may be mistaken. High-frequency trading is becoming less
profitable as an industry, but algorithmic trading in general is most
definitely not.

~~~
clavalle
Really? As I understand it the world is quickly becoming saturated and major
players are starting to take their chips and leave the table. The risk is
quickly catching up to the reward and consolidation into a type of commodity
equilibrium is inevitable.

What areas of algorithmic trading are escaping the Great Chill?

~~~
gfodor
"Algorithmic trading" is just a broad umbrella that encompasses any trading
system where a computer algorithm is making the trades based upon pre-defined
rules. Buying the S&P every Tuesday can be considered "algorithmic trading."

And of course, the answer to your question about which algorithms are working,
they are the ones on the opposite side of the trades of the ones that are
losing. (Or, alternatively, the ones you can't read about in academic papers
or books.)

~~~
clavalle
I am not talking about 'warehouse picking order' style algorithmic trades that
are designed to make transactions cheaper or more automated merely for
convenience.

Equilibrium is coming.

But that is Ok. Quants can go into material science and model new and useful
materials by studying their higher dimensional black hole equivalents [1].

[1] [https://www.simonsfoundation.org/features/science-
news/signs...](https://www.simonsfoundation.org/features/science-news/signs-
of-a-stranger-deeper-side-to-natures-building-blocks/)

~~~
kylebrown
> _Equilibrium is coming._

So yields, returns, and inflation are finally stabilizing as the market
matures and approaches its "true value"? Nope, because equilibrium is a
concept which works well in the natural sciences, but quite erroneous as
applied in economics. This is George Soros's argument in his books about the
Principle of Reflexivity, which differentiates social systems from natural
ones.

What _is_ happening, is merely that trading volume/volatility has tapered off
since the '08 crisis. That's expected; empirically, volatility continues to be
clustered and autoregressive (a self-exciting process). Its a cycle that will
pick up again (one can expect), eventually.

~~~
clavalle
But I am not talking about the level of social systems. Of course the market
itself is not approaching equilibrium. But the liquidity enhancement market
is. There will always be money to be made there but not the bonanza that's
existed up to about two years ago.

~~~
kylebrown
But that's mostly due to the much lower volume and volatility (rather than
more competition). When its low, so is the demand for liquidity provision. But
that demand will come back with the next volatility cycle.

Actually, volatility is only clustered when measured in calendar time. Its
much more constant when measured in event/transaction time (plot price against
cumulative volume, rather than date/time).

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triplux
A friend of mine is working on something remarkably similar at
[http://QuantConnect.com](http://QuantConnect.com)

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pavel_lishin
Can't wait for Economics 2.0 to harvest the inner solar system.

