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They Still Haven't Told You
- spekcular 5y agoThe author's earlier paper explains more clearly exactly what the firms in question are doing and how they profit from it: https://arxiv.org/abs/1811.04994 https://arxiv.org/abs/1811.04994 The first page suffices to get the idea.
- cesaref 5y agoBut spreads aren't larger in the morning are they? If anything they are smaller, due to the action of the opening auction. Without actual data to back up that assertion, the rest of it doesn't really need reading. Assuming his assertion is correct, the reverse is also a strategy. Selling in the morning, causing prices to drop, then buying back when they are cheap in the afternoon, so ending flat but having made money. So anyone that buys and then sells or sells and then buys makes money. This is easy! What could possibly go wrong? My knowledge of this is maybe limited, i've not worked as a quant, but i've stared at a fair bit of market data having written feed handlers for a fund.
- posnet 5y agoExpand doesn't necessarily mean buys. It's a leveraged market neutral portfolio, so most likely built from a combination of the future and hedged options books. So would be a combination of buys and sells of derivative products. Even if the net position is larger.
- ksdale 5y agoSeems to me like an easy explanation is that a whole ton of firms wouldn't want to hold anything overnight because you can't respond to it until the next morning? So they pile in in the morning, and exit in the afternoon.
- _2d30 5y agoYou clearly didn't read the abstract. There's obviously a conspiracy and if any of this is news to you, it is because the people you trust to alert you to such problems still haven’t told you. Only Bruce knows the truth!!! /s
- vmception 5y agoBruce should make a newsletter so they can sell some branded mugs
- kordlessagain 5y agoPlease properly open your sarcasm with a tag before closing it because my AI now thinks everything is a conspiracy.
- thanatos519 5y agoShades of Slartibartfast: "... Anyway, the recession came, so we decided to sleep through it."
- encoderer 5y agoYeah this is so obvious I would hope it could be controlled for by the Analyst. There are simply a lot of funds and traders who, by policy, do not hold positions overnight.
- notdemo88 5y ago
- joshuamorton 5y agoThis would make tons of sense with regard to actual HFT firms. If you're whole schtick is doing stuff over timescales that are (far) shorter than a minute, being locked into a position for hours is risk you really don't want to take.
- ksdale 5y ago
- paulpauper 5y agoimportant news is often released b4 market open or after close, or pundits will hype the stock over the close. Manipulation, such as gapping the price higher or lower to make profit from options or increased liquidity of regular trading hours. So you spend $10 million in the pre-market hours to make a stock open 5% higher and then use the extra liquidity to unload a $100 million position at the open while also selling calls.
- Victerius 5y agoTangential question: why isn't the stock market open 24/7/365 (minus periodic maintenance of the computer systems)?
- saco 5y agoprobably because there are still 2 days needed for settlement crypto markets don't have this issue and are open 24/7
- vineyardmike 5y agoBecause once upon a time people had to go in person to a building to trade and no one wanted to do that 24/7. Now, we still maintain that for some markets. I'm guessing its a combination of laws, inertia, and the ability to do outside of RTH news/sys updates. Some markets are open much more than the 9-430 stock market - for example futures markets open sunday night.
- pavlov 5y agoBecause professionals don’t want to monitor stock prices 24/7, and because the end-of-day price is significant a lot of things. A lot of trading takes place in the last 30 minutes of the day for that reason.
- Victerius 5y ago> Because professionals don’t want to monitor stock prices 24/7 I'm sure you could pay professionals to work in shifts to monitor stock prices 24/7. > because the end-of-day price is significant a lot of things. Isn't that circular reasoning? "The stock market needs to close during the day because the end-of-day price is significant to a lot of things because the stock market needs to close during the day". Take the spot price at 00:00:00 AM as your end-of-day price and call it a day.
- nixpulvis 5y agoAm I blind or does this paper spend a huge amount of time lamenting the failures to notice the issue, without ever once actually describing the issue. I don't claim to be very knowledgable here, so can someone fill in the gaps for those of us who want to know exactly why Fig 2. is so damning?
- paulpauper 5y agoI don't think there is anything new here. The overnight trading anomaly has been observed for years
- bloodyplonker22 5y agoI work on wall st and, trust me, even the greenest traders know this. I think the author is trying overly hard to be dramatic in order to achieve his PhD certificate.
- nwiswell 5y agoI don't understand: if this is a persistent effect why can't you short in the morning and cover in the afternoon?
- deleted 5y ago[deleted]
- timkam 5y agoI don't think that these papers will earn the author a PhD, and I also don't think that this is a goal. Looking at the references, the author seems to like to publish such analyses on the arXiv, which is arguably not really what it is meant for; but still, it's a pre-print server so who cares.
- antisthenes 5y ago"They still haven't told you and I'm not going to either" should have been the correct name for the paper.
- tome 5y agoThere are so many questions waiting to be answered. He's plotted intraday versus overnight returns and showed that the former are larger. He claims this is evidence of market manipulation because overnight positions should be less risky. So demonstrate that by plotting the volatilities! There's no mention of observed volatility in either paper. I'd be willing to bet the overnight vols are correspondingly higher. An interesting result -- but not worth the hot air.
- mikewarot 5y agoWhat are the implications if this is true?
- second--shift 5y ago> Fortunately, the other sentences in footnote 78 contain no words that start with v, so we should be able to take them at face volume. Savage. I saw lots of charts & graphs & flashy wordsmithing, but I didn't actually see any evidence or examples of firms doing unscrupulous trades. I'm not an expert, but I know better than to dish it out better than I can take it. My opinion is that these "exemplary" market returns are simply the result of markets being open only part of the day: between 0930h and 1600h there's liquidity to buy/sell your position at any time, for the prevailing price. Markets are open only 7h of the day but 24h worth of events takes place each day. The other elephant in the room is that all market participants know the trading hours. Much news, releases, events, etc. happen outside of the liquid trading hours, resulting in discrete jumps between the close of one day and the open of another. These are also cumulative returns over a huge timespan: everybody knows the fed can crash the markets mid-day with the wrong jawboning. the reverse price effect can also be true, resulting in huge open-to-close changes.
- tome 5y ago> between 0930h and 1600h there's liquidity to buy/sell your position at any time, for the prevailing price. Markets are open only 7h of the day but 24h worth of events takes place each day. Yes indeed. The author claims that there is less risk in overnight positions than in intra-day positions. I think there's more. Firstly more time passes overnight and secondly the lack of liquidity means you can't unwind overnight positions if you need to.
- Victerius 5y ago> one or more large, long-lived quant firms tending to expand its portfolio early in the day (when its trading moves prices more) and contract its portfolio later in the day (when its trading moves prices less), losing money on its daily round-trip trades to create mark-to-market gains on its large existing book. Renaissance Technologies' Medallion Fund? Simons is a genius.
- paulpauper 5y agoI am surprised that by now, decades later, no one has the goods on Renaissance . What is to stop someone who works there or former employee from uploading to the dark web the "Renaissance strategy", for a price tag of $10-100 million btc, monero or something. Who would know. Although no one would beleive him.
- posnet 5y agoWell one of the big factors was tax avoidance. Basically mislabel your long term strategy as short term for a lower tax bill. Then just wait, and know that the final penalty fine (while still large) will still be less than the total you made over time by not paying the tax. https://www.reuters.com/business/finance/renaissance-executives-pay-about-7-bln-settle-tax-probe-wsj-2021-09-02/ https://www.reuters.com/business/finance/renaissance-executi...
- paulpauper 5y agoYou don't geta 60% cagr with tax loopholes. all hedge funds try to minimize their taxes by whatever means possible.
- vineyardmike 5y agoOne good reason is that the employee retirement fund is the Medallion fund, so employees profit from the firms continued success.
- raws 5y agoPeople tend to point out how much energy cryptos consume, is there an estimate for how much high frequency trading consumes world wide?
- dataflow 5y agoNot sure, but I understand crypto uses > 0.5% of global electricity production. So you can pull up any chart that accounts for the 99.5% of top electricity users and verify HFT is not one of them if that's what you're seeking to show.
- lxgr 5y agoPeople have certainly tried, but I think that these comparisons don't make any sense. What makes the "waste" of crypto stand out is a qualitative concern: HFT uses energy as a means to an end (i.e. computation), while proof-of-work mining has an incentive structure that directly rewards energy expenditure. In other words, one is energy- (and hardware-)bound, the other isn't. As a thought experiment: If fusion energy and self-replicating nanobots were to become viable tomorrow, how would that impact HFTs and proof-of-work mining, respectively?
- xyzzy123 5y agoYou left it unsaid but wow, PoW is a horrifying grey-goo type scenario that ends in dyson spheres and intersellar war. I had never explicitly thought that through before.
- dan-robertson 5y agoWell for the actual trading they will be operating out of the same datacentres as the exchanges which are not particularly massive and will have relatively small limits on the heat (and therefore power). There will be other computers in other bigger cheaper datacentres for analysis and suchlike. And office buildings of course. But not really comparable to e.g. the energy usage of Argentina. I would guess the total is less than one of the massive internet companies like Google or fb but that might be a bit low.
- posnet 5y ago
- kyleblarson 5y agoTL;DR, a lot of hedge funds don't hold positions overnight. This paper reads more like some click bait article on BuzzFeed or Business Insider than an academic piece.
- paulpauper 5y agoit reads like the sort of thing they would publish
- bee_rider 5y agoClickbait paper titles on arxiv, good grief. Out of curiously I looked the guy up -- he must have gotten access via some technical publications ~a decade ago. There ought to be away to cut off access to people who are no longer publishing in their field of expertise.
- yellow_lead 5y agoI thought anyone can publish to arxiv?
- paulpauper 5y agono. from what I know, you need two endorsements or have a certain academic credentials.
- sneeds 5y agoCan someone explain for a total layman?
- xbar 5y agoNo, I don't think that can be done. No insult to the layman, whatsoever.
- m3kw9 5y agoSo he is saying large firms use money to pump up prices early morning to promote FOMO and chaos and they would trade the predictable chaos and even after they sell their initial pump, they still make money?
- vineyardmike 5y agoNo. He is saying that some firm own lots of $stock that they buy-and-hold. They then buy smaller amount of $stock early in morning to cause a swing up in price. Over course of day, the ability to influence price declines, so they can sell the amount they just bought without influencing price as much. Sell for profit or loss, doesn't matter. The root goal (how they make money) is that they should have influenced the price enough that the large buy-and-hold stock they own has increased in value. Specifically, they want the "overnight" price change to be more positive than the decline across the day (again, by pumping up the morning price). They don't have to buy/sell, its more the value of their holdings are higher.
- kleene_op 5y agoHonestly? I blame the reptilians for this.
- Centigonal 5y agoThis is a really poor use of the arXiv. Here's a discussion of the same phenomenon that provides some explanations that aren't "a shadowy trading firm is propping up prices by painting the tape at open": https://systematicindividualinvestor.com/2021/01/15/the-magic-of-overnight-stock-market-returns/ https://systematicindividualinvestor.com/2021/01/15/the-magi... To be honest, the author's strategy could really be happening: some market player (or players) may be aggressively buying up stocks at open and selling them throughout the day at a loss so that the overnight gains positively impact their much larger buy-and-hold tranche of the same stocks. So what? Not only would they be taking on a risk premium by holding that larger slice of stocks overnight, but they're also opening themselves up to massive tail risk. A strategy like this works by taking advantage of the change in order book depth throughout the day to pump up P/Es. P/Es will eventually come back down. When that happens, who knows whether the crash'll start during a trading session or overnight. It reduces into a market timing strategy. This "paper" is ridiculous.
- popemarijuanaxv 5y agoIt is not ridiculous if the data is longitudinally consistent.
- amon22 5y agoBut that's illegal. It's market making.
- galaxyLogic 5y agoDoes this mean I should sell more often in the morning than in the afternoon?
- kd0amg 5y ago> Figure 2 shows plots of overnight and intraday returns for twenty-one major stock market indices around the world. Turn the page and compare Figure 1 with Figure 2. See if you can tell a difference. These images... do not render well on my machine, to put it lightly. So they look remarkably similar to me. Perhaps the author could spell out what this difference is? There is eventually mention of "striking similarity in the overnight and in- traday return patterns in the indices around the globe," but I don't think I'm ready to conclude that strong correlation of phenomena across markets in a global economy must be caused by a collection of manipulators acting on all of those markets. I'm curious to see what others have to say, since I lack the hardware and background to properly read this document.
- bfirsh 5y agoHere's a web version if you don't want to read a PDF: https://www.arxiv-vanity.com/papers/2201.00223/ https://www.arxiv-vanity.com/papers/2201.00223/
- joshlemer 5y agoThis is such a horribly clickbait title. Please edit or remove it
- xab31 5y agoLots of condescension here, but supposing that overnight returns are in fact on average substantially greater than intraday returns, what is the layman-friendly, non-conspiracy-theory explanation of this phenomenon?
- pindab0ter 5y agoThis title is peak click bait. I don’t think you could’ve made it more clickbaity if you tried.