Trader Warns Algos Have "Fooled Us Into Thinking Facts, Details Don't Matter"
"Don't ask me what you should figure out yourself," is the blunt message from former fund manager and FX trader Richard Breslow this morning.
“What do you think?” is a question you hear over and over again in the trading world. At least some people are still asking at a period of time when you are more likely to get, “Do you agree with me or not?” Still, the proper answer should be “Why do you want to know?”
Context is everything. Are you talking about the next five minutes or six months? Is it a theoretical question about what would happen in a perfect scenario, or are you simply asking to be told what to do? What are you planning to do based on the answer? Traders are becoming less clear about what they’re asking for and too often the respondents are forced to wear so many hats that it’s impossible to know how to use their response.
In an increasingly complex environment we are all becoming generalists when it’s arguable that having a specialty is an underappreciated attribute. In the financial realm it’s easy to see how the last 10 years, in so many ways, contributed to this situation. As have structural changes and economic realities in the industry. Not to mention, to use the term kindly, technological advancements. Computers have fooled us into thinking that facts and details are no longer as important.
Correlation matrices are great things to have. They were far more effective for generating alpha when they weren’t the ubiquitous not-to-be-questioned Holy Grail driving the whole shebang. Traders these days struggle mightily whenever an asset goes its own way.
The first reaction is always that it’s out of whack, or a canary in the coal mine. Sometimes things do just change. And boning up on the situation after the fact is always sub-optimal. As is asserting that yes, something may indeed be going on that we were unprepared for, but the base case is this, too, shall pass. You can only use that excuse so many times in letters to your limited partners.