Jasmina Hasanhodzic at AlphaSimplex, an investment strategy company in Cambridge, Mass, and Andrew Lo at MIT’s Sloan School of Management, who founded AlphaSimplex and Emanuele Viola at NorthEastern University, have devised a experiment to see if people can tell the difference between random and real financial data. What is their conclusion?

“The results provide overwhelming statistical evidence (p-values of at most 0.5%) that humans can quickly learn to distinguish actual price series from randomly generated ones,” say Hasanhodzic and co.

You can sign up and play the game here.

via arxiv blog

Supposedly this provides stress feedback for day traders, to help avoid rash decisions.

I think wearing these caps for trading will help us compete against the computers:

I don’t have a lot of time these days, and I have cut back to read only the best blogs and newsletters to keep up with other opinions about the stock market. Two that I highly recommend are the Highchartpatterns newsletter and Maoxian’s newsletter.
They both also have great blogs that you can read here:

Highchartpatterns blog
Maoxian’s blog

I don’t think you need much more if you want to know what the best traders are looking at. They are both run by really smart, good people with a great sense of humor.

The new issue of h+ magazine has an interesting article on the role that AI played in the current global financial crisis.

…My feeling as an AI expert is that these sorts of problems we’ve seen recently are merely hiccups on the path to super-efficient financial markets based on advanced AI.

I’ve said many times before that the days of the unaided human trader are numbered. It is just going to get more and more difficult for you. Unless you start building your own computer programs that can do the trading for you. Or if you can somehow use technology to trade at the same level as these computers.

h+ is pretty cool – other articles include “Nanobots in the Bloodstream,” “Is Anti-Aging Medicine Coming to the Mainstream?” “Things to do with your body while you wait for immortality,” etc…

This is the kind of stuff you read about in old Jesse Livermore books. Porcshe played it pretty slick – cornered the market in VW shares, plundered a couple of hedge funds to the tune of billions and billions of dollars, and made Volkswagen the world’s most valuable company for a few days.

At the time Porsche dismissed these musings as a “fairy-tale�. But on October 26th it executed a handbrake turn, saying that it owned nearly 43% of VW’s shares outright and had derivative contracts on nearly 32% more. That meant it had tied up almost all of the freely available shares (the rest are held by the state government and index funds). Hedge funds quickly did the maths, concluding that they could be caught in an “infinite squeeze� in which they were forced to buy shares at any price.

NYU Professor Nouriel Roubini says we have reached a situation of “sheer panic” in the markets. “There will be massive dumping of assets” and “hundreds of hedge funds are going to go bust.”

“Systemic risk has become bigger and bigger,” Roubini said at the Hedge 2008 conference. “We’re seeing the beginning of a run on a big chunk of the hedge funds,” and “don’t be surprised if policy makers need to close down markets for a week or two in coming days,” he said…

“Things are getting very ugly also in the emerging markets,” Roubini said. “The usual saying is when the U.S. sneezes, the rest of the world catches a cold. Unfortunately, this time around the U.S. is not just sneezing, it has a severe case of chronic and persistent pneumonia. It’s becoming a mess in emerging markets.”

I agree with Buffet – it has to be a good time to buy. I wouldn’t buy it all at once, but I’d start buying in chunks over a period of months.
For day traders, it is no problem (unless they shut down the markets!) – just buy and short as usual, except with greater volatility, which can be nice.
If they shut down the markets, I’m sure the volume would surge on Intrade – there will always be a market to trade somewhere.

Even though the number-crunching team at fivethirtyeight.com gives Obama a 92.5% chance of winning the presidential election, John McCain had consistently out-priced Obama by as much as 10% had been consistently 10% higher on Intrade.com than on similar exchanges (Obama is currently leading 84.3 to 15.4). There were some wild swings the last couple of weeks as an “Institutional” trading firm was trying to corner the market:

Actually, I guess they were taking large positions to “manage certain risks” (whatever that means) From the CEO of Intrade.com:

We are satisfied that they are using our markets in good faith and in the ordinary course of their business and that there has been no contravention of our Exchange Rules. Our investigations lead us to believe that the member is using increased depth in these markets to manage certain risks.

Further, it is apparent that the cost of time in accumulating the desired positions by those “institutional” members responsible for moving the McCain market up and the Obama market down differs fundamentally to loyal “retail” members that Intrade relies on.

The Exchange views this unusual activity as an indication of the increased relevance and traction of Intrade markets as risk management tools coupled with the yet maturing state of the prediction market industry as a whole.

What I want to know is who is bidding 1.1 on Hilary Clinton for President? Why not short it down to zero? Or is this basically the market’s price for the probability that 1) Obama somehow drops out or doesn’t survive until the election, and 2) Hilary runs and wins? I’d still wager to short it down to 0.1 at least.
Are any of you guys trading on intrade? I’ve noticed they have an API.
Check out this guy who has created his own automated market maker on Intrade, using this algorithm. Complete with a log of his trades (updated four times a day). I don’t have enough time to add it all up, but I wonder if he’s making any money?

For the first two of those contracts, the market maker will enter bids and asks of 38 contracts, and can lose a maximum of $5193.84 on each contract. For the other four contracts, the market maker will enter bids and asks of 115 contracts, and can lose a maximum of $7906.25 on each contract. The orders may not always show as many contracts as the market maker enters because it doesn’t update orders in response to partial executions. The market maker is designed to maintain a spread of about 2.5 points or less between the bid and ask (unless the price would drop below 0.1 or rise above 99.9, in which case it only maintains an ask or a bid, not both), and it should place new orders within a second or two after one of its orders is completely executed.

There’s probably some good info about the API and market making on the bulletin boards, also.

He had recently bought about $224,000,000 worth of DIA puts, which he just sold for a huge gain. Now he’s going long:

One thing I know is that starting tomorrow the shorts can get back in the market. I love shorts. Short create a foundation of demand for their positions. If a good company gets shorted, whether as a hedge, or because someone thinks the company will underperform, that short will need to be covered at some point. If the company outperforms, or the demand for the stock exceeds the supply, the price of the stock, like any baseball card, iwll go up. Which will provide incentive for the shorts to cover sooner than later. When that happens, the stocks go up. Shorts are good for the market. They make good companies go up in price.

This article about the success of some website traders is interesting.

Davis says he generally holds on to websites for at least a few months before flipping them. Sometimes, though, the process is much quicker like the time he bought a forum about day-care centres for $US1500 and sold it six hours later for $US3500.

“I used to make my own websites and sell them, but then I realised, hey, this is much easier than making them,” he says. “It’s as simple as buying a website from someone and making it more attractive. It’s about creating value where there was none.”