The Volume Clock
That is the title of a new paper by David Easley, Marcos M. Lopez de Prado, and Maureen O’Hara:
Abstract:
Over the last two centuries, technological advantages have allowed some traders to be faster than others. We argue that, contrary to popular perception, speed is not the defining characteristic that sets High Frequency Trading (HFT) apart. HFT is the natural evolution of a new trading paradigm that is characterized by strategic decisions made in a volume-clock metric. Even if the speed advantage disappears, HFT will evolve to continue exploiting Low Frequency Trading’s (LFT) structural weaknesses. However, LFT practitioners are not defenseless against HFT players, and we offer options that can help them survive and adapt to this new environment.
The paper has many interesting bits, such as this:
Databases with trillions of observations are now commonplace in financial firms. Machine learning methods, such as Nearest Neighbor or Multivariate Embedding algorithms search for patterns within a library of recorded events. This ability to process and learn from what is known as “big data” only reinforces the advantages of HFT’s “event-time” paradigm, very much like how “Deep Blue” could assign probabilities to Kasparov’s next 20 moves, based on hundreds of thousands of past games (or more recently, why Watson could outplay his Jeopardy opponents).
The upshot is that speed makes HFTs more effective, but slowing them down won’t change their basic behavior: Strategic sequential trading in event time.
One message of the paper is that sequential strategic behavior will occur at any speed. I liked this sentence:
As we have seen, HFT algos can easily detect when there is a human in the trading room, and take advantage.
And the ending bit is this:
There is a natural balance between HFTs and LFTs. Just as in nature the number of predators is limited by the available prey, the number of HFTs is constrained by the available LFT flows. Rather than seeking “endangered species” status for LFTs (by virtue of legislative action like a Tobin tax or speed limit), it seems more efficient and less intrusive to starve some HFTs by making LFTs smarter. Carrier pigeons or dedicated fiber optic cable notwithstanding, the market still operates to provide liquidity and price discovery – only now it does it very quickly and strategically.
We are not as wealthy as we thought we were
The Census Bureau has released new data on wealth:
The recent financial crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said on Monday.
The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010, down from $126,400 in 2007, the Fed said. The crash of housing prices explained three-quarters of the loss.
This vast loss of wealth was compounded by a loss of income, as the earnings of the median family fell by 7.7 percent over the same period.
The story is here. Matt adds comment and posts a good chart.
What is college for?
Here is an excellent post by Noah Smith, excerpt:
There are three extremely important forms of human capital that you can’t acquire on the job:
1) Motivation,
2) Perspective, and
3) Human networks.
These, I believe, are the types of capital that college is designed to build, both in Japan and in the United States.
Read the whole thing.
Assorted links
1. Japanese video of the speech jammer.
2. Italy’s take on baseball for the blind.
3. What is it like being shot in the head?
4. Ryan Avent on whether we still tolerate innovation, and smart bed makes itself (Spanish export by the way).
Let the Tacocopters Fly!
Very good piece by Ryan Avent at the Economist:
Consider the tacocopter. The tacocopter is a not-quite-real-not-quite-a-joke business idea that became a brief internet sensation back in March. The concept is stunningly simple: order tacos on your iPhone and a quadracopter drone will deliver them to your doorstep. As you can read here, the plan would face technical and (especially) regulatory hurdles if implemented today. Yet the potential, for this or similar experiments, is obvious. Cheap, agile drone technology is available now. Building apps is trivially easy. Mapping and location technology and data are getting better all the time. If not drone copters, perhaps 3D printers or autonomous vehicles. It’s a short leap from the ridiculous to the transformative. And the ideas needed to transfer these technologies to everyday life are increasingly the domain of entrepreneurs rather than academics. One doesn’t need 20 years of study to spot profit opportunities.
…I’m most inclined to think that its the pace of societal evolution that is most binding: growth proceeds at the fastest pace that legal and social institutions can tolerate.
Think of the challenges that would face the would-be tacocopter entrepreneurs. Consider that issues surrounding liability and law, rather than technology, now appear to be the biggest obstacle to autonomous vehicles. Look at the legal struggles faced by innovative services like Uber and Airbnb. Disruptive innovations are bumping against a broad array of regulatory hurdles that built up during a very different era of economic growth.
As I argued in Launching our regulatory system has gotten so large and complex that its main effects are now unintended. In short, the product of the regulatory system is a result of human action but not of human design.
The fiscal cliff, a reader request, and which new states will there be?
Celestus, a loyal MR reader, asks:
A couple suggestions:
(a) The “fiscal cliff.” Whether it should be avoided, and how it should be avoided assuming that politics requires it be so. [I did a search for “fiscal cliff” with no results; apologies if it has been covered using more generic language].
(b) Name the 51st through 55th U.S. states, including Gingrich Moon Colony or N/A as necessary.
The fiscal cliff has a few quite different components, ranging from expiration of the Bush tax cuts to the AMT to automatic spending cuts, and each year you can toss in the Medicare doc fix as well. Most economists agree the best solution is no fiscal contraction now, but fiscal consolidation later on. That said, most economists should recognize (but often do not) that “fiscal consolidation later” is very often a myth. If it were “now or never” should we do fiscal contraction and cause a recession but restore some fiscal sanity? The correct answer will boil down to your probability forecast for “fiscal contraction later.” It’s tricky, though, because for a low enough probability of “fiscal contraction later” you end up believing that “fiscal contraction now” isn’t possible either, and then what is the original question about anyway? The original question appears to be straightforwardly normative, but it embodies hidden assumptions about which counterfactuals one is willing to entertain. It’s the counterfactuals assumptions which are often doing the work in generating the fiscal policy recommendation. Many people writing on this topic don’t make that clear.
Ideally we should bring more and more taxpayers under AMT-like rules. As for the Medicare doc fix, I would cut reimbursement rates whenever I could, and without fear of much fiscal contraction. The health care sector is growing in any case and full of price discrimination and other price oddities.
I don’t think we will have extra states, but the most likely candidates are the obvious, starting with Puerto Rico (a very clear first choice), Alberta, and the Maritime Provinces. I would bet against all or any of those becoming states, if only because of the extreme status quo bias when it comes to sovereignty. Why give it up? Even bankrupt countries are reluctant to give it up.
Luigi Zingales defends Glass-Steagall
Last but not least, Glass-Steagall helped restrain the political power of banks. Under the old regime, commercial banks, investment banks and insurance companies had different agendas, so their lobbying efforts tended to offset one another. But after the restrictions ended, the interests of all the major players were aligned. This gave the industry disproportionate power in shaping the political agenda. This excessive power has damaged not only the economy but the financial sector itself. One way to combat this excessive power, if only partially, is to bring Glass-Steagall back.
There is much more at the link (“Why I was won over by Glass-Steagall”), interesting throughout. An ungated version is here.
The cultures that is Europe
All from last week:
Greece’s health minister appealed to panicked patients struggling to secure medical treatment to remain calm after pharmacists continued their boycott of the country’s largest state health-care provider by refusing to extend credit to patients, in another sign of a credit squeeze taking hold of the economy.
Here is that article. There is also:
Even as many European countries tighten their belts in response to the sovereign-debt crisis, French President François Hollande granted more generous pension benefits to some workers, delivering on a campaign promise ahead of legislative elections.
Here is that article. Furthermore:
The French government approved a measure Wednesday that will restore the retirement age of 60 for some workers, partly reversing unpopular 2010 pension reforms made by former president Nicolas Sarkozy that raised the retirement age to 62 as he sought to cut state deficits.
Europe’s troubles look daunting enough already, but another crisis looms.
Most European Union countries owe more than twice their annual gross domestic product in pensions promised to current workers and retirees. As governments scale back benefits, companies and individuals face a rising burden. But saving for old age could prove a crushing blow to growth.
And so the clock ticks.
Assorted links
1. How fast can you translate to the Finnish?
2. Two hundred years of hospital costs and mortality, as seen through the lens of one hospital.
3. Can Spain and Italy pursue an export-led recovery?
What is the correct Bayesian inference from this British message?
I found a little card in my bathroom, perched above the toilet and near the shower:
This bath has a non slip surface in part. If you would like a rubber bath mat in addition please contact housekeeping.
And so what does that mean? Here are some options:
1. The part without the non slip surface is really, really slippery. Watch out!
2. We are boasting about having a non slip surface “in part,” yet without appearing to be boasting too explicitly.
3. We are not sure which is your best course of action (there is human heterogeneity), but we want to get you thinking about the non slip surface and also the slip surface. We are sure you will put the information to good use and also we are showing our respect for your decision-making and autonomy.
4. We have attempted to word this message as emotionally neutrally as possible. We are therefore signaling that we are a quality hotel, without intending to offer any particular advice about the non slip surface or for that matter the slip surface. We also did not fall into the trap of hyphenating “non slip” (though we did elsewhere in the bathroom hyphenate “co-operation”), nor did we place a comma after “addition” as you barbarians might have done.
I am not intelligent enough to discern which of these might be true.
Assorted links
1. Where Chicago law and economics is at right now, and Bruce Lee plays ping pong (fake short video).
2. Via Chris F. Masse, iPads on the menu?
3. Why a bumper Indian wheat harvest isn’t leading to much good.
4. How the Greek bank jog is also a form of insurance, for some that is.
Quick Spain thoughts
Is there actually any news in the “deal”, summarized here? It’s long been known that Spain would end up getting a chunk of ESM and/or ESFS (indeed they had a quota of 93 billion euros and this is barely more at 100 billion euros), and now they have, although the details still are not announced. And Spain already had been given an extension on their austerity target, so not attaching “austerity conditionality” to this deal isn’t quite news either. Their obligations are already “floating” in this regard, because even the previous target could not be met.
Did I mention there were already a trillion euros lent from the ECB since December (not all to Spain)?
Is the deal in some way a new signal? I would think the new signal is that if you play a bit tough with the Germans you get a more relaxed deal, at least nominally in a way that you can take to your citizens. Maybe you think the more relaxed deal is a better outcome, but in the longer run does this keep the Germans on board? Does it keep Ireland on board? Do Greece and Portugal now wish to renegotiate? One hundred billion euros is unlikely to be enough, so what precedent is created when Spain negotiates for the next round?
Doesn’t this all mean that Netherlands, Finland, and Slovakia are getting somewhat rolled? They feel less responsible for the rest of the eurozone than Germany does.
How senior will the debt be from this new package? That seems like the key question to me. Very senior debt will kill the Spanish bond yields, but very junior debt will make this pure aid. How many eurozone countries are up for supporting pure aid on this scale?
The wisdom of Dani Rodrik
Sometimes agnosticism is so…appropriate:
The main lesson I take from all this is the need to avoid easy generalizations that do not respect country peculiarities. Fiscal austerity missionaries are surely off base when they say Latvia’s experience decisively proves Keynesians and advocates of currency depreciation wrong. It is too early to judge the Latvian experience a success. But it is also too early to say Latvia has been a failure. Growth may continue, in which case the country will look better and better.
The full post is here, and it is full of interesting detail.
Posner on Patents
Our patent law is by and large judge created and thus it is judges rather than legislators who are responsible for most of the dysfunction in patent law. It was judges who expanded (or endorsed) patents to cover business methods, software and animals. It was judges who weakened the obviousness, enablement and possession requirements. Finally, it was judges who interpreted vague patents broadly, thereby midwifing fearsome patent trolls.
Fortunately, judges also have the power to reform patent law which is why Judge Posner’s recent suggestion that he may dismiss with prejudice the Apple v. Google/Motorola suit over smartphone patents is potentially ground breaking.
We don’t yet have a full ruling but in early rulings Posner referred to claims made by Apple and Motorola as “silly” and “ridiculous.” Most importantly, Posner has said:
“injunctive relief would impose costs disproportionate to the harm to the patentee and the benefit of the alleged infringement to the alleged infringer and would be contrary to the public interest….”
which I read as saying that Posner is tired of the patent system being used by big business as a cudgel against competitive innovation.
Posner is a founder of the law and economics movement and one of the most influential judges in America. Indeed, as I have said before, Posner is the only person in the world who deserves a Nobel prize in economics and a seat on the Supreme Court so this ruling will be closely followed.
Peak fax Japan
As of March, according to Japan’s Cabinet Office, fax machines could be found in 59 percent of Japanese homes. (That penetration rate, after climbing for years, has peaked in the past five years.)
Coming up with a similar number for the United States would require a “polite fiction,” said Jonathan Coopersmith, a Texas A&M University associate professor and an expert on the history of the facsimile. But even in the early 1990s, only about 3 percent of U.S. homes had the machines, he said.
In terms of fax reliance, “I don’t think any other nation comes close to Japan,” Coopersmith said.
The article is interesting throughout. Kevin Drum offers comment.