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    Winner Takes All, and Liquidity Takers Win It does appear that speed is helpful in generating alpha. How is it helpful? Here there are two views, and the less HFT-friendly of these views has received some scholarly/empirical support.

    A new report stresses the extent to which the world of high-frequency trading is winner-take-all. Three scholars behind “Risk and Return in High Frequency Trading” together address the questions: how do HFT firms make money? And, what is the nature of their competition with one another? They start with some numbers: the median HFT firm has an enviable annualized Sharpe ratio of 4.3 and a four-factor annualized alpha of 22.02%. The “four factors” involved in the calculation of four-factor alpha are: CAPM; market capitalization, book-to-market value, and momentum. These numbers indicate a very strong performance, and (the authors add) in contrast to other strategies this firm-level performance for HFT firms is “strongly persistent over both days and months.” Speed and Liquidity Taking So it does appear that speed is helpful in generating risk-adjusted profit. How is it helpful? There are, speaking broadly, two answers to this theory in the academic literature. First, there is the view that HFTs are aggressive takers of liquidity who “pick off stale limit orders or trade ahead of others’ ...

Featured Post


One Ordinary Week in the Life of Climate Change


We thought it would be instructive to share with you links and the odd quote from recent press reports on the subject of climate change.  As a professional investor,  you no doubt want to be ahead of trends in the investment world.   Investment opportunities arise when there is a divergence of opinion, as is uniquely the case in the United States (unlike the other nations on Earth) on the subject of climate change.  The headlines of a few days tell ...


China’s Oil Giant At Center Of Corruption Probe

Oilprice.com's Ky Krauthamer looks at corruption in China's oil industry.

By Ky Krauthamer Grins were on the faces of China National Petroleum executives this week as they celebrated a blockbuster 30-year deal for Russian gas. It was a good day for CNPC, the state-owned colossus at the center of China’s oil and gas webs and one of Eurasia’s biggest energy investors. For some, however, those grins could soon turn to grimaces, because the deal comes against a backdrop of a series of high profile corruption investigations by the state, and CNPC has ...

Guest Posts


China’s Oil Giant At Center Of Corruption Probe
Oilprice.com's Ky Krauthamer looks at corruption in China's oil industry.

By Ky Krauthamer Grins were on the faces of China National Petroleum executives this week as they celebrated a blockbuster 30-year deal for Russian gas. It was a good day for CNPC, the state-owned colossus at the center of China’s oil and gas webs and one of Eurasia’s biggest energy investors. For some, however, those grins could soon turn to grimaces, because the deal comes against a backdrop of a series of high profile corruption investigations by the state, and CNPC has ...


Institutional Investing

Looking at the Future of World Wealth McKinsey-style
In Asia the high-net-worth population still consists largely of the first-generation wealthy. So: what are these Asian entrepreneurs looking for in their private banking services? That is one of the questions McKinsey considers.

McKinsey has published a Private Banking Survey, part of a series it initiated in 2002. The gist of this one is that growing pressure on private banks in the years to come “will continue to fuel industry consolidation,” as manifest in rising mergers and acquisition activity. On that thesis hangs a tour of the major private-banking world regions. McKinsey begins, then, with the following observations: The number of millionaires, McKinsey expects, will rise 30% by 2016, putting it at 16 million; 0ver the next four years Asia e-Japan will surpass other regions in ...

Currencies

Volcker: ‘The Kind of Stuff You’re Being Taught’
Paul Volcker is obviously entitled to express his concerns when he senses that the well-educated young people of today are taking economics courses full of the wrong lessons: specifically, that they are unaware of just how nasty a dragon inflation was in the U.S. in the 1970s.

Before he goes down in history books as the man behind the “Volcker rule,” that is, behind the effort to banish speculative activity from investment banks, let us recall that Paul Volcker was a critical figure in the monetary history of the United States due to his eventful 8-year tenure as Chairman of the Federal Reserve (1979 – 1987). He was surely one of the good guys. We should also recall (Volcker surely does) that before his appointment, indeed through the 1970s, the people of the United States had become accustomed ...

Regulatory

Regulatory reporting – key considerations for fund managers and service providers
Keeping track of the AIFMDs, FATCAs without drowning in the alphabet soup is hard work. A new paper from Grant Thornton offers some ideas on how to wade through the soup while you're looking for alpha.

The growth of numerous regulatory initiatives over the last few years has led to a number of new reporting requirements for fund managers globally. These include Form PF, AIFMD and EMIR. Fund managers and service providers are currently attempting to navigate their way through various operational and implementation challenges in order to comply with these new reporting requirements. In Europe the focus has mainly been on the Annex IV reporting required under the AIFMD regulations. This report is filed periodically, according to the AUM of the manager, with most large managers ...

Emerging markets

Why Yellen is Wrong on ‘Resilience’
The Chair of the Federal Reserve cannot with any plausibility look upon market bubbles as something exogenous, something that just happens to the earth, like a meteor shower, something from which she and others in her august circles can seek to protect us.

In her recent Michel Camdessus Central Banking Lecture, Federal Reserve Chair Janet L. Yellen stressed the importance of resilience in the financial system. Further, she believes she has advanced a new idea here, stressing that “much of the public discussion, which often concerns whether some particular asset class is experiencing a ‘bubble’ and whether policy makers should attempt to pop the bubble” misses the point, because “identification of bubbles [becomes] less critical” as resilience is achieved. Central bankers in general, she contends (and she cites with favor the Basel III regulatory ...

Regulatory

AIFMD Depositary: Developing an operating model
Much has been said about international regulation and its chilling effect on funds. Guest columnists Shane Brett and Alan Meaney look at set-ups and solutions.

*By Shane Brett of Global Perspectives and Alan Meaney of Fund Recs Depositary Lite vs. Full Depositary The role of the depositary breaks down into three areas defined under Article 21(7), (8), and (9) of the Directive; the safekeeping of assets held in custody; monitoring of cash flows and an oversight role. Full Depositary Only EU AIFM managing EU AIF’s are subject to the full depositary regime (Article 21), whereby a single depositary is required to perform the three ...

Technology

Deal Activity: Beer and Obamacare Both Factor In
Intralinks’ report suggests that “a handful of fundamental and positive shifts” are at work in the recent uptick in M&A activity. On a behavioral note: corporate confidence is returning, and presumably confident managements are more likely to seek out acquisition targets than are nervous managements.

The new Intralinks Deal Flow Indicator report merits study by alpha hunters who look for promising mergers & acquisitions. The Indicator shows a flat level, indeed a slightly negative level of early-stage activity in Q1 2014, compared to the last quarter of 2013. There is a good deal of variation by region in that QoQ number. The North America number in particular is -6%, whereas the EMEA number is +5%. Using this as a predictor of 3Q ...

Institutional Investing

Does the Defined-Contribution Broom Still Sweep All Before It?
Had the plan not received final IRS approval, the benefits part of the Times/Guild contract would have reverted to a DC plan, and this would have been yet another exhibition of how defined contributions is sweeping all before it. But the IRS did approve, and that broom is for now back in its closet.

“The New York Times froze the pension benefits for non-union employees, and we were determined that they would not do likewise for Guild employees.”   Those are the words of Bill O’Meara, President of The Newspaper Guild of New York. We were discussing the background of the labor negotiations between the Guild and The New York Times in 2012, and how the outcome of those talks, now ratified so to speak by the Internal Revenue Service, may be ...

Best Practices

Time for the Alternative Investment Industry to Grow Up
Guest columnist Bob Swarup, CAIA, looks at good governance and best practices and what the alternative investment industry needs to do to "grow up."

 By Bob Swarup, CAIA* The alternative fund industry is remarkably immature – a fact that can be put down to its astounding success in raising assets and generating performance in recent decades. This statement may seem fantastical, particularly in light of the success acknowledged above, but it is nonetheless true. When it comes to the thorny question of governance, the industry is a long way behind where it should be. For many managers, regulation is a tiresome intrusion ...