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PostSubject: Algo trading Lehman Brothers    Algo trading Lehman Brothers  I_icon_minitimeFri Apr 12, 2019 11:07 pm

Written on 23rd of December 2018.
Ghost in the Shell is one of my favorite movies. I will not waste your time with philosophical digressions on AI and Conscience, cause “time is not a commodity”.
If the Central Banks have distorted all the principal rules dictating market movements, algorithmic trading is the new agent acting in nanosecond around the world into all asset classes.
When I was in JP Morgan Investment Bank at the beginning of this century, we were spending tens of millions per year to improve our capacity in algo trading. It was a race and Lehman Brothers was one of the best in this. Investment banks were not crazy to spend these gigantic amounts of money. After the blast of the Internet bubble, volumes dramatically raised with the dawn of the passive asset management reign. In addition, CTAs, Hybrid Funds and Risk Parity strategies finalised to form the cohort of Algo Trading fans.[/size]
Unfortunately for us, and for you now, Investment banks never stopped to develop their Algo trading capacities post the Subprime Crises. After 2008, volumes have collapsed but banks, asset manager, hedge funds deployed an army of machines able to manage a gigantic volumes that no more existed. At this stage, the complexity was not the main axe of development. The investments were focused to the speed.[/size]
After 2010, some Hedge Funds have started to use sniffers of algorithms. You know Star Wars? The game is the same. If you pilot at the speed of light, the other starships seems in slow motion. The war of the machines already started. The investment banks, or dedicated developers, built faster Algos (I name this, Alpha Algo) to some of Hedge Funds . In the same time, asset Managers already used Algos, but slower and something completely dumb (I name this, Beta Algo). In this war of the machines, the fastest and the smartest win. Some Sniffers (the Alphas) track and force to diverge the Betas to generate performances...
But the scariest is coming from Ghosts. To summarize, Algos are generating orders to populate order books, but this orders are mainly fake. And like ghost, they disappear when the light is on, and related to our subject, when an event increases the risk over the markets.
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