John At The Center

The Adaptive Market Hypothesis, as proposed by Andrew Lo 2004,2005, is an attempt to reconcile theories that imply that the markets are efficient with behavioral alternatives, by applying the principles of evolution – competition, adaptation, and natural selection – to financial interactions. [1]Under this approach the traditional models of modern financial economics can coexist alongside behavioral models. He argues that much of what behavioralists cite as counterexamples to economic rationality – loss aversion, overconfidence, overreaction, and other behavioral biases – are, in fact, consistent with an evolutionary model of individuals adapting to a changing environment using simple heuristics.According to Lo, the Adaptive Markets Hypothesis can be viewed as a new version of the efficient market hypothesis, derived from evolutionary principles. “Prices reflect as much information as dictated by the combination of environmental conditions and the number and nature of “species” in the economy.” By species, he means distinct groups of market participants, each behaving in a common manner i.e. pension funds, retail investors, market makers, and hedge-fund managers, etc.. If multiple members of a single group are competing for rather scarce resources within a single market, that market is likely to be highly efficient, e.g., the market for 10-Year US Treasury Notes, which reflects most relevant information very quickly indeed. If, on the other hand, a small number of species are competing for rather abundant resources in a given market, that market will be less efficient, e.g., the market for oil paintings from the Italian Renaissance. Market efficiency cannot be evaluated in a vacuum, but is highly context-dependent and dynamic. Shortly stated, the degree of market efficiency is related to environmental factors characterizing market ecology such as the number of competitors in the market, the magnitude of profit opportunities available, and the adaptability of the market participants Lo,2005.

via Adaptive market hypothesis – Wikipedia, the free encyclopedia.

What does IQ and where you went to school have to do with trading? All you need is a monkey with brass balls to make markets. Good traders don’t give frog’s fat ass about the fundamentals of a given stock. It’s about liquidity, how much it trades and where the players are. My buddy’s father used to train Harvard Business School grads – One kid was tops in the naval academy and flew F-16 fighter jets but couldn’t trade himself out of a paper bag. Try pricing 5.7 million shares of Oracle for sale at 3:55 p.m. on a triple witch. Trading is about street smarts, instinct and balls – It takes all three. You could put any name in front of a good trader and he can glance at a chart, see the levels, average daily volume and trade the stock effortlessly without ever knowing what the company does.

via Dopey Cowboy » Blog Archive » Oh Really – Harvard?.

Lots of market chatter this week about layoffs at hedge fund giant D.E. Shaw, with around 10% of the 1,500-person workforce being handed walking papers.What hasn’t been reported yet, however, is that the cuts included most of the firm’s venture capital group, which has invested in such companies as Offerpal Media, WiQuest Communications, DesiHits and Adam Aircraft big oops on that last one.

via Hedge fund giant bails on venture capital – The Term Sheet: Fortune’s deals blog.

A single trade by Waddell & Reed Financial Inc helped spark the cascade of market selling on May 6, said a source familiar with regulators’ report on the so-called flash crash.

The report will not name Waddell, which sold a large order of e-mini futures contracts during the plunge, according to the source, who requested anonymity because the report has not been made public.

But the report will describe Waddell’s trade as a single trade by an entity, the source said.

via Report to say Waddell stoked flash crash: source | Reuters.

The only other surprise is the – relative – fall from grace of DE Shaw, which according to AR manages just $17.8bn as of July 1 (we understand the number has since increased). Little wonder the firm is slashing jobs.

via FT Alphaville » The biggest hedge funds in the US….

No. 3 — Goldman Sachs, Morgan Stanley and JPMorgan are not in fact abandoning proprietary trading. They are just giving it a different name.

They are dismantling the units called “proprietary trading” and shifting the activity onto trading desks that deal directly with customers. (Which would explain why so few prop traders are being let go.)

via Mystery of Disappearing Proprietary Traders: Michael Lewis – Bloomberg.

The big hedge fund D.E. Shaw & Company laid off 150 employees on Tuesday, or about 10 percent of its work force, Institutional Investor reports, citing unidentified people familiar with the situation.The cuts affected employees at all levels throughout at the company and included partners and portfolio managers, according to these people.  They came as D.E. Shaw has seen its assets shrink sharply as a result of big redemptions the past two years.

via D. E. Shaw Said to Cut 10 Percent of Staff – NYTimes.com.

t is instructive to examine a couple of instances where the differing competitive dynamics result in dramatically different distributions of the rents flowing from socialized finance. The same moral hazard argument that I have made repeatedly for the banking systems in the United States and the United Kingdom applies in an even stronger fashion to the banking system in Germany which is dominated by a multitude of state-backed institutions. Yet Germany is one of the most unprofitable banking markets in the world – the ultra-competitive nature of the market means that almost all the rents flow out of the banking sector to their clients (depositors and borrowers such as the formidable Mittelstand).

via Inequality and Moral Hazard Rents in the Financial Sector at Macroeconomic Resilience.

“There is a lot of debate going on right now among economists,” said Cristian deRitis, the director of credit analytics with Moody’s Analytics, which is studying the issue. “Is there truly deleveraging or are charge-offs removing a lot of balances?”

via Looking Behind the Decline in Credit Card Debt – NYTimes.com.

While Wall Street may not return to “the go-go days” when it earned “20, 40 percent of all the profits in the entire nation,” the financial industry will benefit from the new regulations because “setting clear rules of the road is going to allow the credit channels to keep flowing to the wider economy,” Mr. Goolsbee said during a lunch with Bloomberg News editors and reporters.

via Goolsbee Says ‘Go-Go Days’ Over for Wall St. – NYTimes.com.