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Brandon Adams, who teaches behavioral finance at Harvard University’s Department of Economics, says some of the best candidates for Wall Street trading jobs are the professional card players at FullTiltPoker.com and similar Web sites.
“They’ve essentially been the survivors in the system, a very difficult system where 95 percent of people lose money,” the 30-year-old Adams, who plays at the site, said in a telephone interview. “Anyone smart enough and disciplined enough to survive that system is probably going to do very well in the trading world.”
An increasing number of hedge funds and brokerages are scrutinizing professional poker to find talent and analytical tools, according to financial recruiters including Options Group, a New York-based executive-search company. Susquehanna International Group LLP, the Bala Cynwyd, Pennsylvania-based options and equity trading company, uses poker to teach strategic thinking.
“Someone who has made a successful living as a poker player for a few years would more likely be a good trader than someone who hasn’t,” said Aaron Brown, a 53-year-old former poker pro who is now a risk manager at AQR Capital Management LLC in Greenwich, Connecticut, which oversees $23 billion. “They know to push when they have the edge and they know how not to bust, and that’s a tough combination to find.”
Skill Sets
Skills that define successful traders -- rational approach toward risk, speedy decision-making under pressure, discipline and a well-trained memory -- are the same ones that separate elite poker players from ones known as “dead money,” financial recruiters say.
After the World Series of Poker started in Las Vegas four months ago, Options Group recruiter Simon Satanovsky said he received a hedge-fund request for online poker players with no financial experience. He wouldn’t identify the client.
“Before, we were asking about GPA or the Math/Physics Olympiad,” Satanovsky, a former Russian national bridge champion, said in a telephone interview. “Now, we’re asking questions about poker successes.”
Satanovsky said Wall Street firms and recruiters have been paying increasing attention to poker players as job candidates since 2003, when amateur Chris Moneymaker beat hundreds of professionals to win the World Series of Poker’s No-Limit Texas Hold ‘Em main event.
The Right Game
Adams, who has taught at Harvard in Cambridge, Massachusetts, each spring since 2003, said disciplined poker players can be spotted on sites such as Full Tilt and PokerStars.com waiting for particular games, not tempted by those outside their area of expertise or financial comfort level.
Their self-control and confidence would be useful in trading where large profits are possible, the probability of going broke high and the competition formidable, he said. Adams cited as an example a trader who notices a slight imperfection in the way options are being priced, then works to come up with the proper bet per trade.
“In poker, people are used to not sitting back and waiting for the fat pitch,” Adams said. “They’re used to skirting the edge of ruin and they learn the tools of how to do that.”
Susquehanna has been using poker to teach its new traders since it was founded in 1987, said Pat McCauley, who heads the privately held firm’s trader-development program.
College Friends
The company’s founders played the game as college friends at the State University of New York-Binghamton. Susquehanna has held in-house poker tournaments to recruit traders and monitor decision-making skills.
The trainees learn to use information they see in the marketplace to infer what motivates others, helping them make better prices. It’s the same way poker pro Phil Ivey, considered among the game’s greats, makes bets based on what he sees among his opponents, McCauley said.
“What professional poker players are really good at is taking this information that’s relatively subjective, quantifying it and making it objective, and that’s what trading is about,” McCauley said.
The ability to write complex poker algorithms, which either run poker Web sites or try to beat them, will get hedge funds interested, said Todd Fahey, a recruiter who specializes in quantitative finance at New York-based Exemplar Partners.
“There have been a few guys that I’ve placed in the industry that come from the poker software side of the house,” Fahey said in a telephone interview. “Two Sigma, D.E. Shaw and any of your larger computationally-based hedge funds are going to want to see people like this.”
Two Sigma Investments LLC and D.E. Shaw Group, both based in New York, declined to comment.
Begleiter’s Try
The worlds of poker and finance often intersect. Steven Begleiter, who headed corporate strategy at Bear Stearns Cos. before its 2008 collapse, earned $1.6 million earlier this month with a sixth-place finish in the main event. Greenlight Capital LLC founder David Einhorn was 18th in 2006. The annual “Wall Street Poker Night,” benefiting Math for America, was started by billionaire James Simons, the founder of hedge-fund firm Renaissance Technologies Corp. This April, the $5,000 buy-in tournament drew 100 entrants -- 90 percent from hedge funds or other Wall Street jobs -- raising $1.3 million.
Even though poker players make good traders, they aren’t necessarily good with their own investments, said Adams, adding that he is almost “famously unsuccessful” as an investor.
“Poker players are lazy and they’re gossipers,” he said. “If you look at the way they trade, they tend to latch onto other people’s ideas.”
Texas Hold ‘Em
One person who has chosen poker over finance is Joe Cada, who this month outlasted Begleiter and Ivey at the main event final table. Cada, who plays the game professionally, was first among 6,494 entrants and took home the $8.55 million top prize, giving half to financial backers Cliff Josephy and Eric Haber, poker pros with Wall Street backgrounds. The Texas Hold ‘Em contest had a $10,000 entry fee.
“As a little kid, I used to watch the stock markets day in and day out,” Cada, 22, said in an interview. “My parents always thought I was going to get into banking or become a stockbroker because I was really good with math and logic, and I was obsessed with money.”
Cada said he plans to remain a poker pro. AQR’s Brown, the author of “The Poker Face of Wall Street” and a life-long player, long ago gave up the game professionally after a couple years of trying.
“I eventually decided finance was easier,” he said.
Showing posts with label wall street trading. Show all posts
Showing posts with label wall street trading. Show all posts
Friday, April 9, 2010
Thursday, April 8, 2010
China Futures May Challenge U.S. as Busiest Market
China’s increased trading in equities from index futures will help the nation challenge the U.S. as the world’s busiest stock market, according to Guotai Junan Securities Co. and HSBC Jintrust Fund Management Co.
China will start trading of contracts based on the CSI 300 Index on April 16, tracking the 300 biggest stocks on the Shanghai and Shenzhen bourses, according to the China Financial Futures Exchange. The move may increase equity transaction volumes by 50 percent, Morgan Stanley predicted in January.
“It’s possible for China to surpass the U.S. in terms of trading volumes, and index futures trading is one positive factor that’s bolstering transactions,” Liang Jing, a Shanghai- based analyst at Guotai, the nation’s second-largest brokerage in terms of broking revenue, said yesterday. “China’s still a growth market, so we still have lots of derivatives to come and lots of good companies to be listed.”
China Securities Regulatory Commission Chairman Shang Fulin, said today at an event on index futures trading that the introduction will help institutional investors and provide a tool for managing risks.
Chinese equities have fallen in 2010 on concern tighter lending and a property crackdown will slow economic growth. The benchmark Shanghai Composite Index has dropped 3.9 percent, making it the world’s worst performing major stock market, after rallying 80 percent in 2009. The CSI 300 has lost 5.3 percent.
The nation’s first stock-index contracts, agreements to buy or sell the CSI 300 at a preset value on an agreed date, are designed to allow investors to bet on and profit from both gains and declines in the market.
No Short-Term Change
“I don’t expect any near-term, short-term changes in the overall volumes in the cash markets based on that,” said Paul Zubulake, senior analyst at Boston-based Aite Group LLC, who cover futures and options. “It’s still a government-controlled marketplace and you still have a currency situation that makes people a little concerned about entering that market from other places outside China. Any derivative market globally needs some feedback from outside the country.”
Some U.S. lawmakers want China to be labeled a “currency manipulator” for keeping the value of the yuan at about 6.8 to the dollar, which they say gives unfair advantage to Chinese exporters. The yuan’s exchange rate is not the cause of China’s trade imbalance with the U.S., China’s foreign ministry said this week.
Overtaking Japan
Shanghai overtook Tokyo as Asia’s biggest stock market by trading value last year. Only the Nasdaq stock market and the New York Stock Exchange have higher trading volumes than Shanghai.
About 120 billion yuan ($18 billion) of shares changed hands on a daily basis on the Shanghai Stock Exchange this year, compared with 140 billion yuan last year, according to data compiled by Bloomberg.
The daily average turnover of the Tokyo Stock Exchange is about $15 billion this year while that for the New York Stock Exchange is $27 billion, according to Bloomberg data.
“The impact in the medium to long term will be huge” said Rainer Riess, managing director of XETRA Market Development at Deutsche Boerse AG, in Shanghai today. “The interplay between derivatives and the cash market will lead to more efficient trading and price formation. Overall liquidity will vastly increase.”
China International Capital Corp., the top-ranked brokerage for China research in the annual survey by Asiamoney magazine, said last month that spot trading will increase, while the futures market has the potential to grow sevenfold over time based on the historical experience in South Korea and Taiwan.
Large Caps
Index futures and margin trading will increase demand for large-capitalization stocks and boost their valuations, according to China Galaxy Securities Co. Smaller companies on the CSI 500 have doubled the performance of their larger rivals over the past year, according to data compiled by Bloomberg.
The Shanghai and Shenzhen exchanges began trials for margin trading on March 31. Investors borrowed about 6.6 million yuan in cash and stocks from brokerages on the first day, the Shanghai Securities News reported.
“With more players on the futures market, they will build more positions on the spot market to influence futures,” Yan Ji, who helps oversee about $1.2 billion at HSBC Jintrust in Shanghai, said yesterday. “Blue chips are now at a valuation bottom and they may rise to a level you can’t imagine now.”
The Shanghai Composite’s retreat this year has sent valuations falling by 24 percent to 28.5 times reported earnings from last year’s high of 37.7 times in August, according to weekly data compiled by Bloomberg.
The first index futures contracts to trade will be for May, June, September and December, the China Financial Futures Exchange said last month. Investors must pay cash deposits equivalent to 15 percent of the contract value for May and June contracts and 18 percent for longer-term contracts. The contract values are points of the CSI 300 multiplied by 300 yuan, it said.
China has the world’s third largest stock market by market capitalization, briefly overtaking Tokyo in July 2009. New York is the biggest by market cap.
China will start trading of contracts based on the CSI 300 Index on April 16, tracking the 300 biggest stocks on the Shanghai and Shenzhen bourses, according to the China Financial Futures Exchange. The move may increase equity transaction volumes by 50 percent, Morgan Stanley predicted in January.
“It’s possible for China to surpass the U.S. in terms of trading volumes, and index futures trading is one positive factor that’s bolstering transactions,” Liang Jing, a Shanghai- based analyst at Guotai, the nation’s second-largest brokerage in terms of broking revenue, said yesterday. “China’s still a growth market, so we still have lots of derivatives to come and lots of good companies to be listed.”
China Securities Regulatory Commission Chairman Shang Fulin, said today at an event on index futures trading that the introduction will help institutional investors and provide a tool for managing risks.
Chinese equities have fallen in 2010 on concern tighter lending and a property crackdown will slow economic growth. The benchmark Shanghai Composite Index has dropped 3.9 percent, making it the world’s worst performing major stock market, after rallying 80 percent in 2009. The CSI 300 has lost 5.3 percent.
The nation’s first stock-index contracts, agreements to buy or sell the CSI 300 at a preset value on an agreed date, are designed to allow investors to bet on and profit from both gains and declines in the market.
No Short-Term Change
“I don’t expect any near-term, short-term changes in the overall volumes in the cash markets based on that,” said Paul Zubulake, senior analyst at Boston-based Aite Group LLC, who cover futures and options. “It’s still a government-controlled marketplace and you still have a currency situation that makes people a little concerned about entering that market from other places outside China. Any derivative market globally needs some feedback from outside the country.”
Some U.S. lawmakers want China to be labeled a “currency manipulator” for keeping the value of the yuan at about 6.8 to the dollar, which they say gives unfair advantage to Chinese exporters. The yuan’s exchange rate is not the cause of China’s trade imbalance with the U.S., China’s foreign ministry said this week.
Overtaking Japan
Shanghai overtook Tokyo as Asia’s biggest stock market by trading value last year. Only the Nasdaq stock market and the New York Stock Exchange have higher trading volumes than Shanghai.
About 120 billion yuan ($18 billion) of shares changed hands on a daily basis on the Shanghai Stock Exchange this year, compared with 140 billion yuan last year, according to data compiled by Bloomberg.
The daily average turnover of the Tokyo Stock Exchange is about $15 billion this year while that for the New York Stock Exchange is $27 billion, according to Bloomberg data.
“The impact in the medium to long term will be huge” said Rainer Riess, managing director of XETRA Market Development at Deutsche Boerse AG, in Shanghai today. “The interplay between derivatives and the cash market will lead to more efficient trading and price formation. Overall liquidity will vastly increase.”
China International Capital Corp., the top-ranked brokerage for China research in the annual survey by Asiamoney magazine, said last month that spot trading will increase, while the futures market has the potential to grow sevenfold over time based on the historical experience in South Korea and Taiwan.
Large Caps
Index futures and margin trading will increase demand for large-capitalization stocks and boost their valuations, according to China Galaxy Securities Co. Smaller companies on the CSI 500 have doubled the performance of their larger rivals over the past year, according to data compiled by Bloomberg.
The Shanghai and Shenzhen exchanges began trials for margin trading on March 31. Investors borrowed about 6.6 million yuan in cash and stocks from brokerages on the first day, the Shanghai Securities News reported.
“With more players on the futures market, they will build more positions on the spot market to influence futures,” Yan Ji, who helps oversee about $1.2 billion at HSBC Jintrust in Shanghai, said yesterday. “Blue chips are now at a valuation bottom and they may rise to a level you can’t imagine now.”
The Shanghai Composite’s retreat this year has sent valuations falling by 24 percent to 28.5 times reported earnings from last year’s high of 37.7 times in August, according to weekly data compiled by Bloomberg.
The first index futures contracts to trade will be for May, June, September and December, the China Financial Futures Exchange said last month. Investors must pay cash deposits equivalent to 15 percent of the contract value for May and June contracts and 18 percent for longer-term contracts. The contract values are points of the CSI 300 multiplied by 300 yuan, it said.
China has the world’s third largest stock market by market capitalization, briefly overtaking Tokyo in July 2009. New York is the biggest by market cap.
Tuesday, March 16, 2010
Conserving capital in options trading
There has been discernible investor interest in options trading in recent times. One reason for the rising interest is the volatility in the stock market; higher volatility makes options more valuable. The problem, however, is that most options expire worthless, leading to loss in capital. How then should investor gainfully use options trading in a portfolio framework?
This article explains the risks associated with options trading. It then discusses why investors should define risk budgets to contain such risks. It then shows how such budgets along with risk management rules help conserve investment capital.
Options carry asymmetric payoffs. The maximum loss for a call option buyer is the premium paid; the maximum profit is unlimited. For put buyers, the maximum loss is the premium paid; the maximum profit is high.
The problem, however, is that options are wasting assets. That is, they have finite life and rapidly lose value if the underlying does not move in the required direction.
Suppose an investor buys the Nifty 4,900 call option on February 12 when the underlying index is at 4,830. The option at 25 per cent volatility will be worth Rs 64. If the underlying does not move for a week, the option will decline to Rs 39. And if the underlying instead declines to 4,750 after a week, the option would be worth only Rs 18. The option rapidly loses value because of time decay; with each passing day, the option has less time to generate gains before expiry.
The option also loses value due to volatility; decline in volatility leads to fall in option value. If the Nifty index stays at 4,830 for a week but volatility declines to 15 per cent, the Nifty 4,900 call will fall to Rs 3.
Time decay and volatility factors explain why most options expire worthless every month.
The strategy then should be to conserve capital. Otherwise, investors would exhaust investment capital every month with each expiring option.
Risk budget
It is, hence, important to define a risk budget. That is, the investor should define the investment capital allocated for options trading. And then frame risk management rules to prevent losses due to time decay and volatility factors.
Risk budget, for instance, can be allocating 5 per cent of the total portfolio to the options market. Suppose the total investment portfolio is Rs 25 lakh. The allocation to options trading would then be Rs 1.25 lakh.
Just allocating risk capital does not help. An investor buying option contracts will lose sizable capital in several months if options she buys expire worthless. That is why the two per cent risk management rule is important. This rule requires that the investor should not expose more than 2 per cent of the options risk capital to each trade.
Suppose an investor buys one contract of the 4,900 call option for Rs 64 for a total outlay of Rs 3,200 (Rs 64 times 50). Two per cent of the options risk budget of Rs 1.25 lakh is Rs 2,500. The investor, therefore, cannot risk more than Rs 2,500 in this trade. Given the contract size of 50, this translates into a maximum loss of Rs 50 per option. So, the investor has to close the position if the 4,900 call declines to Rs 14 (Rs 64 less Rs 50). The next trade will carry lower risk because the risk capital will be Rs 1.25 lakh less the loss of the previous trade. This rule forces the investor to engage in only one trade at a time.
Conclusion
Options, because of asymmetric payoff, fit well within the satellite portfolio in a core-satellite framework. Time decay and volatility factors, however, lead to frequent small losses and infrequent large gains. Risk budget, therefore, helps investors stretch their investment capital despite the likelihood of options expiring worthless.
This article explains the risks associated with options trading. It then discusses why investors should define risk budgets to contain such risks. It then shows how such budgets along with risk management rules help conserve investment capital.
Options carry asymmetric payoffs. The maximum loss for a call option buyer is the premium paid; the maximum profit is unlimited. For put buyers, the maximum loss is the premium paid; the maximum profit is high.
The problem, however, is that options are wasting assets. That is, they have finite life and rapidly lose value if the underlying does not move in the required direction.
Suppose an investor buys the Nifty 4,900 call option on February 12 when the underlying index is at 4,830. The option at 25 per cent volatility will be worth Rs 64. If the underlying does not move for a week, the option will decline to Rs 39. And if the underlying instead declines to 4,750 after a week, the option would be worth only Rs 18. The option rapidly loses value because of time decay; with each passing day, the option has less time to generate gains before expiry.
The option also loses value due to volatility; decline in volatility leads to fall in option value. If the Nifty index stays at 4,830 for a week but volatility declines to 15 per cent, the Nifty 4,900 call will fall to Rs 3.
Time decay and volatility factors explain why most options expire worthless every month.
The strategy then should be to conserve capital. Otherwise, investors would exhaust investment capital every month with each expiring option.
Risk budget
It is, hence, important to define a risk budget. That is, the investor should define the investment capital allocated for options trading. And then frame risk management rules to prevent losses due to time decay and volatility factors.
Risk budget, for instance, can be allocating 5 per cent of the total portfolio to the options market. Suppose the total investment portfolio is Rs 25 lakh. The allocation to options trading would then be Rs 1.25 lakh.
Just allocating risk capital does not help. An investor buying option contracts will lose sizable capital in several months if options she buys expire worthless. That is why the two per cent risk management rule is important. This rule requires that the investor should not expose more than 2 per cent of the options risk capital to each trade.
Suppose an investor buys one contract of the 4,900 call option for Rs 64 for a total outlay of Rs 3,200 (Rs 64 times 50). Two per cent of the options risk budget of Rs 1.25 lakh is Rs 2,500. The investor, therefore, cannot risk more than Rs 2,500 in this trade. Given the contract size of 50, this translates into a maximum loss of Rs 50 per option. So, the investor has to close the position if the 4,900 call declines to Rs 14 (Rs 64 less Rs 50). The next trade will carry lower risk because the risk capital will be Rs 1.25 lakh less the loss of the previous trade. This rule forces the investor to engage in only one trade at a time.
Conclusion
Options, because of asymmetric payoff, fit well within the satellite portfolio in a core-satellite framework. Time decay and volatility factors, however, lead to frequent small losses and infrequent large gains. Risk budget, therefore, helps investors stretch their investment capital despite the likelihood of options expiring worthless.
Thursday, December 31, 2009
2010 set to be year of indices trading
2010 set to be year of indices trading
A fixed-income index, a volatility index and indices of commodities and weather (rainfall, temperature and moisture) will be available for trading from 2010.
An index is an indicator of market movement and a hedging tool. Currently, trading happens only in equity indices. The National Stock Exchange, which is the world's third-largest derivatives trading platform, is developing an index of fixed-income securities in a joint venture with Standard & Poor's.
Market participants say trading in a fixed income index will be successful once interest rate futures, an illiquid instrument, gains momentum. A fixed-income index reflects movement in interest rates.
"We are developing some more indices through our JV with NSE, called IISL," Deven Sharma, chairman, Crisil, said.
NSE is working on launching VIX, developed under licence from S&P. S&P developed VIX for the Chicago exchange, too.
Volatility is decided based on trading in options contracts. "Volatility is inversely related to the market. In a range-bound market, chances are that volatility will come down if the market is at the lower end of the range and a trader can short VIX once the market moves up," said Sidharth Bhamre, head (derivatives), Angel Broking. The volatility index could also be used as a hedging instrument by index traders, he added.
Trading in commodity and weather indices would be a reality once amendments to the Forwards Contract Regulations (FCR) are passed in Parliament in the coming months. If an investors/trader wants to invest in commodities, but doesn't know which commodity would go up, he could buy into an index. For example, in case of drought, agro commodity prices tend to move up and, hence, one can buy into the agri index.
"Existing commodity exchanges like MCX and NCDEX are prepared to launch trading in indices. If all go well, commodity index trading will start in the early second half of 2010," P K Singhal, deputy managing director of MCX, said.
"It will help in diversification of portfolio and offer a broader basket to hedge, using a single product. Globally, institutional participants such as banks and asset management companies hedge their risk in commodities using indices, as they can select the structure and composition of the index," he added.
A weather index is useful for various industries, apart from farmers and traders. The Chicago Mercantile Exchange has several weather indices like rainfall index, temperature index and even moisture index.
Commodities and industries can hedge on such products. For example, cement sales come down if rainfall is high, so cement manufacturers can go bullish on the rainfall index (expecting more rain) and make money there, which will compensate for lower sales in cement due to slower construction.
If the monsoon turns deficient, they will lose money on the rainfall index, but will get compensated by higher cement sales, as construction work will be on fast track. Fertiliser companies take a reverse call, as their sales go up if rainfall is higher. In many cases, quantum of rainfall or temperature is important and, therefore, trading in such indices helps.
Ice cream sales can fall if temperature is low. The wheat crop benefits if winter is cooler. In case of traders, they can simply go long in such indices if they feel the monsoon will be better.
Indices also provide investment opportunities in commodities, as actual buying and selling commodities require investors to go through various formalities like tax and deliveries.
A fixed-income index, a volatility index and indices of commodities and weather (rainfall, temperature and moisture) will be available for trading from 2010.
An index is an indicator of market movement and a hedging tool. Currently, trading happens only in equity indices. The National Stock Exchange, which is the world's third-largest derivatives trading platform, is developing an index of fixed-income securities in a joint venture with Standard & Poor's.
Market participants say trading in a fixed income index will be successful once interest rate futures, an illiquid instrument, gains momentum. A fixed-income index reflects movement in interest rates.
"We are developing some more indices through our JV with NSE, called IISL," Deven Sharma, chairman, Crisil, said.
NSE is working on launching VIX, developed under licence from S&P. S&P developed VIX for the Chicago exchange, too.
Volatility is decided based on trading in options contracts. "Volatility is inversely related to the market. In a range-bound market, chances are that volatility will come down if the market is at the lower end of the range and a trader can short VIX once the market moves up," said Sidharth Bhamre, head (derivatives), Angel Broking. The volatility index could also be used as a hedging instrument by index traders, he added.
Trading in commodity and weather indices would be a reality once amendments to the Forwards Contract Regulations (FCR) are passed in Parliament in the coming months. If an investors/trader wants to invest in commodities, but doesn't know which commodity would go up, he could buy into an index. For example, in case of drought, agro commodity prices tend to move up and, hence, one can buy into the agri index.
"Existing commodity exchanges like MCX and NCDEX are prepared to launch trading in indices. If all go well, commodity index trading will start in the early second half of 2010," P K Singhal, deputy managing director of MCX, said.
"It will help in diversification of portfolio and offer a broader basket to hedge, using a single product. Globally, institutional participants such as banks and asset management companies hedge their risk in commodities using indices, as they can select the structure and composition of the index," he added.
A weather index is useful for various industries, apart from farmers and traders. The Chicago Mercantile Exchange has several weather indices like rainfall index, temperature index and even moisture index.
Commodities and industries can hedge on such products. For example, cement sales come down if rainfall is high, so cement manufacturers can go bullish on the rainfall index (expecting more rain) and make money there, which will compensate for lower sales in cement due to slower construction.
If the monsoon turns deficient, they will lose money on the rainfall index, but will get compensated by higher cement sales, as construction work will be on fast track. Fertiliser companies take a reverse call, as their sales go up if rainfall is higher. In many cases, quantum of rainfall or temperature is important and, therefore, trading in such indices helps.
Ice cream sales can fall if temperature is low. The wheat crop benefits if winter is cooler. In case of traders, they can simply go long in such indices if they feel the monsoon will be better.
Indices also provide investment opportunities in commodities, as actual buying and selling commodities require investors to go through various formalities like tax and deliveries.
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