Asset Allocation Using Black-Litterman

An asset allocation algorithm available here.

Computershare

Check out your holdings in US companies via Computershare's US service.

Intuit Acquires Mint for $170m

The online personal finance service provider Mint has been acquired. The read-only nature of the service is described here.

From Bioninformatics to Options Trading: Jeff Augen explains how to trade Options at Expiration

NYIF profile of Jeff.

ETNs versus Currency ETFs

Which are better for investors - ETNs or currency ETFs? This depends on two factors: taxes, and what's in the ETF/ETN.

Here's an awesome article from seekingalpha.

Also check this out from the awesome Edgar archives relating to a Series A MTN issued by Barclays for the "Intelligent Carry Index" (TM).

Also see the macro trader website.

New asset class? Here's another one of those "ETNs". What gives though? How is it hedged and what is hedging cost? There are many answers to this question (but perhaps only one correct one). 1 year ago Bradley Kay was analysing the possible hedging strategies. Also, what is the difference between this and inverse ETFs.

Thirdmost, this new dawn of vol-etf-dependent-on-futures-ala-UNG/USO, leads to insane tracking errors.

This stuff is like group theory (exercise:why?)

Take a look at best and worst ETFs for tracking volatility.

What is the European Central Bank?

The ECB is the central bank of the Eurozone, covering 16 member states. Established in 1998 by the European Union with headquarters in Frankfurt, Germany. It was modeled closely on the Bundesbank, the German reserve bank. The first President was Wim Duisenberg (PhD Economics). They use econometric models for forecasting and policy analysis.

LIFO Liquidation in Period of Rising Prices - The Concept

A LIFO inventory system can lead to LIFO liquidation, where older inventory is increasingly liquidated/sold. If prices are rising, this older inventory will have lower cost, and its liquidation leads to recognition of higher net income and payment of higher taxes.

Servitization

Wikipedia asserts that products today have a higher service component than in previous decades. Management literature refers to this phenomenon as "servitization of products", destroying the "old dichotomy" of product and service and instead creating a product-service continuum.
Financial technology companies, as as indirect example IBM, might thus be inclined to positon themselves as service companies, building products, surely, but treating the physical goods as a small part of the "business solutions" industry. (on an academic side note, the notion of servitization was first introduced by Vandermerwe and Rada in the late 1980s).

Software for Transfer Pricing

Corptax transfer pricing architect is a software for transfer pricing. What is transfer pricing and why is it important? It relates to the pricing of assets, services etc. within an organization. As prices are set within an organization, typical market mechanisms may not apply. It's an issue as the price levels set affect the allocation of total profit among parts of the company. This is a major concern for fiscal authorities to prevent degradation of tax revenues due to manipulation of transfer prices. There is an economic theory that underlies transfer pricing.

GEMPACK for computer modeling of General Economic Models

Melbourne's Monash University's GEMPACK allows you to simulate general equilibrium models on your computer. These models will all be variants based on General Equilibrium theory, a branch of neo-classical economics, that explains prices when an economy is in equilibrium (everyone is happy, no-one wants to trade and supply is equal to demand). A good book on modeling the economy as a multi-agent system has been written by Paul Samuelson of MIT.

How Barra Estimates Beta

What is Beta and Why is it important? Why do so many softwares have so many different ways of estimating Beta? Which is correct? These are fundamental issues in the design of portfolio management software.

Beta measures exposure to market risk. Moreover, in the CAPM expected returns depend on Beta. Barra estimates Betas using past Betas plus information about fundamentals e.g. volatility of earnings.

Simulating Soft Skills

Simulearn is a company that provides "soft skills" simulation software.

Clark Aldrich, who studied AI and cognitive science at Brown and developed the vLeader product, talks about "Simulations and the Future of Learning" with an emphasis on "kinesthetic content", well-understood by computer game makers.

He asks "How do you take leadership content and put it into a computer game format?" The task is to create a new genre. As we create more educational simulations, we need to create new genres.

Becoming Au Fait with the Bond Market

Looking for a bond trading system - why not check out BondDesk's offering? Before you do, though, it pays to know a little bit about bonds. The first thing to note is that there are multifarious ways of calculating a bond's yield.

Wealthy investors of yore (the primary investors in the bond market) would look for bonds with high credit quality and high coupons.

Coupons were quoted as yield, nowadays referred to as "nominal yield". (Example of this calculation: if a bond has par value of $1000, and pays $32.50 per 6months, its nominal yield is 6.5%). As an active secondary market developed for bonds in the late 19th and early 20th centuries, investors with a more "trader" mindset started to look at other measures to assess investments. Now they are not looking for bonds with high coupon rate per se, but looking for opportunity to make capital gains. In particular, how do you distinguish between a bond with high coupon rate trading above par, and a bond with low coupon rate trading below par. You need some concept of IRR of the bond to allow comparison. It's all about finding ways to buy low and sell high.

YTM is the IRR of the bond's dirty price including all scheduled coupon and principal payments. Before computers, this was hard to calculate, so another metric known as current yield became popular, defined as: (sum of coupons payable each year) / clean price.

If a bond is trading at par, nominal yield, current yield and yield to maturity are equal.

Government Technology

Read the latest on government technology (including Green IT!) on this magazine! The mag also has a link to an IT recruitment website.

Glencore

Glencore is a commodities trading company, dealing with producers and industrial consumers. They are a Swiss company employing over 2000 people globally. Founded in 1974, Glencore acquired a Dutch grain marketing company, creating an Agricultural Products group. Glencore holds a stake in UK company, XStrata PLC. Also own a 66% interest in Perubar, a Zinc/lead mine in Peru.

SAP makes "Carbon Impact"

SAP has unveiled "Carbon Impact" following its acquisition of Carbon Management software vendor, Clear Standards.

Library Services

Ok, ok it's not really financial technology here, but humour me. Dawsonera is one of a growing number of library services tech firms out there. They have a web-based reader portal where you can read books online from publishers like: Imperial College Press, McGraw Hill, Wiley, World Scientific and Cambridge University Press.

Bankruptcy Prediction Models

Edward Altman (professor of finance at Stern), in 1968, developed the Altman Z-Score to measure the "fiscal fitness" of a company. He used multiple discriminant analysis (MDA) - aka Discriminant Factor Analysis - a close relative of PCA. PCA and MDA are maximising mathematically different things. A keyword in both systems is eigenreduction. Discriminant analysis is used in classification problems; here's the corresponding Matlab function.

Altman designed the formula for manufacturing companies with assets of more than $1m.

Exotics Derivatives Blog

A neat blog on exotics derivatives trading can be found here.

Also, check out this quiz, called "Are you smarter than a Goldman Sachs trader?" Warning: you need to be totally at ease with swaptions, variance swaps and their relationship with realized vol, key properties of dark pools and the Ohrnstein-Uhlenbeck process.

Finding the Fifteen

“In the venture capital business, 15 companies a year still deliver 97 percent of returns. The key to success is still finding those 15.” - Ben Horowitz

Marc Andreessen, founder of Netscape, has started a technology VC fund together with Ben Horowitz. The firm, Andreessen Horowitz, will raise sums as small as $50K to wager on small tech businesses. The NY has reported the firm has raised a pool of $300m. Businesses that show promise will then be eligible for a second round of funding to enable them to grow globally. This is a really exciting idea; certainly there will be a lot of failures, but at least the cost of failure is kept controlled. Marc's gameplan is to look for companies "like Facebook", of which he is a director. FB started with $500K but since raised $600m to grow.

Hammer Time: Optiver's Oil Trading Software

Amsterdam-based options market making enterprise, Optiver, has a superfast oil trading software, called Hammer (reported by the NY Times). The CFTC believes Optiver has been manipulating the price of oil. Transcripts and taped conversations reportedly described traders talking about their activities as "whacking" and "bullying up" the price of oil. Commodities is 10% of Optiver's business, 65% is derivatives, 25% equities.

Regulators are wondering how prop trading and market making can coexist. Are the two inseparable? Tanno Massar, PR exec for Optiver, explained that there was no inherent conflict between making markets and pursuing profits, indeed, why would markets be made if profits could not be sought? Who would make the market then, the government? Supranationals?

The Chief Regulator of NYMEX, Thomas LaSala, reprimanded Optiver: "the market seems to move in reaction to your orders". The US has led Europe in high-frequency trading, but Getco and Madison Tyler have worked to fill that gap.

Market Microstructure

Professor Larry Harris, a director of Interactive Brokers Group, has published a book and some interesting papers on market microstructure (which studies how exchange occurs in markets) available on website of University of Southern California. One such article is called "Circuit Breakers and Trading Limits: What have we learned?".

A circuit breaker in electrical engineering is an electrical switch designed to protect the circuit from overload.

A circuit breaker in the stock market is a curb on trading when the market drops substantially in value. The NYSE implemented circuit breakers after "Black Monday" in 1987 ("Black Monday" has also been applied to the Monday following the 1929 stock market crash).

First Asia-Pacific Exchange-Backed Dark Pool

Dark pools are electronic trading systems which allow large blocks of shares to be traded anonymously. SGX and Chi-X have teamed up to launch the dark pool. SGX listed stocks are to be cleared through the Central Depository. SGX was formed in 1999 from the merger of SES and SIMEX.

The Korean IT Industry

All the news here. Has coverage of the Incheon fair.

Trading Weird Products

Inflation trading - e.g. Morgan Stanley's inflation-linked bond issue for Republic of Italy. You need to understand the concept of "breakeven inflation" to understand how to price these products. There was a very interesting article in Risk magazine in 2003 describing the "derivatives tail wagging the cash market dog".

Hybrids trading - derivatives formed from two or more asset classes e.g. equity and commodity, or equity and interest rate.

Climate Exchange facilitates trading in environmental financial instruments.

Second-guessing Trends in Volatility - What Method to Use?

If we want to second-guess trends in financial volatility, what is a better measure to use - implied volatility from the options market, or time-series of volatility based on historical daily returns. Does this differ across classes e.g. equity, forex, commodities.

In an efficient market, the option price will incorporate all available information. But are option prices really efficient?

Also, can we find mathematical models that model the impact of volatility shocks on different assets accurately?

Project Finance

Infrastructure spending can be seen as a form of economic stimulus, and often comes under the title of Project Finance.

Examples of infraprojects could be building toll roads in Eastern Europe, or hydroelectric plants in South America (e.g. Santo Antonio). Financial turmoil has led to deals being postponed or cancelled. Politics and economics as well as banking play a large part in the financing of these projects.

Dealogic is a company that tracks global project finance volume.

Project Finance Magazine is a magazine dedicated to infrastructure projects around the globe. It also provides coverage of infrastructure funds.

PPP - Public Private Partnership
PFI - Private Finance Initiative (started by UK and Australian governments). It is a means of obtaining private funding for public projects, in exchange for ownership. In the UK it was championed by John Major. Labour critics described it as a back-door form of privatisation. Banks are generally unwilling to lend money for public projects.

The Explanatory Power of BeFi

An interesting website on behavioural finance, the "study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets" Sewell (2005). It is a way of factoring irrationality into the study of financial markets.

"Momentum investing" as a riposte to the efficient market hypothesis is a good case-study for behavioural finance. The creed of momentum investing is echoed in Richard Driehaus' oft-quoted quip that "far more money is made buying high and selling at even higher prices". Schwager is good material to gain insight into the phenomena.

Innovation in China and India

Fortune article by Stephanie Mehta.

FOREX.com European launch

FOREX, an online currency trading platform, has launched in Europe, offering retail punters a chance to trade in the $3.2 trillion a day market (according to BIS). 37 currency pairs are offered, as well as gold and silver, on a five-days-a-week basis. FOREX has been running for 5 years in the US. It is part of GAIN Capital Group LLC. Last year GAIN received funding from 3i ($97m) and VantagePoint Venture Partners ($20m), who btw are planning to invest $1bn in green projects over the next two years ("cleantech").

Starting a Quant Hedge Fund

"Do you want to be a quant or a fundamental (hedge fund)" asks Andrew Clark in England's Guardian newspaper. Quant hedge funds are the most secretive, hi-tech firms on the street, frequently employing high frequency strategies to buy and sell at high speed.

According to Mr Clark: "Their software will process variables such as companies' earnings ratios and price history to determine what to buy - or they might pounce on tiny discrepancies between the price of the same stock on different stockmarkets".

All this sounds like amazing stuff, but be warned! When the market collapses, machine-driven funds can collapse in sync, in '07, one Goldman Sachs fund lost a third of its value in a week, a loss of $1.8bn. Scores of quant programs dumped stocks simultaneously, according to the Guardian article.

The allure of hedge funds is apparent, quant or otherwise. In 2007, Crispin Odey (founder of Odey Asset Management) generously paid himself £28m after tripling his firm's profits, giving him the status of City "grandee", or as The Times more directly described it "Business Big Shot".

FlexTrade

FlexTrade build algorithmic trading platforms. They are based in Great Neck, NY.

The Famous American Options Markets

The largest US options market is the ISE (International Securities Exchange) which offers equity, ETF and index options. ISE also offers a range of FX options, primary market maker Timber Hill. There are various levels of membership on the ISE. These range from humble exchange participant (EAMs), to primary market makers (PMMs) and competitive market makers (CMMs). A PMM is assigned to each trading "bin" plus up to 16 CMMs.

FXCMMs have similar duties to CMMs for equity and index markets. FXCMMs may only make markets in FX options. An FXCMM must purchase a license from the exchange via a "Dutch" auction process (starting with a high price that is lowered until some participant says "mine!").

Another famous US option market is the CBOE (Volatility == Opportunity).

Here you can buy:

S&P 500 Index Options (symbol SPX). European options on MAR quarterly cycle (Mar,Jun,Sep,Dec). Expiration date: Saturday following 3rd Friday of expiration month. But can only exercise on last business day before expiration. Strikes are at 5-point intervals, and 25 points for far months.

Last Trading Day:
"Trading in SPX options will ordinarily cease on the business day (usually a Thursday) preceding the day on which the exercise-settlement value is calculated."

Mini S&P Index Options (symbol XSP). European options, Mar cycle. Mini-SPX is 1/10th value of SP index. Strike price min increment is 1 point.

CBOE VIX Index. European options trade on Feb quarterly cycle (Feb, May, Aug, Nov). It is a "market estimate of expected volatility that is calculated by using real-time S&P 500Index (SPX) option bid/ask quotes".

The options trade between 8.30am and 3.15pm Central Time (Chicago time). CDT (Central Daylight time) is 1 hour behind NY. In winter CDT -> CST (central standard time).

The Energy Trading Software Space

olf.com is the home of OpenLink software, an energy trading software firm, founded in 1992 by Coleman Fung. Dallas-based allegro also provides an interesting platform. SunGard EAS also provide commodity-specific screens for power, gas, crude and emission contracts.

Sales managers of such platforms are in demand, such roles require strong sales experience and capability, knowledge of energy and commodity markets and relevant technical or business degree.

IT's ultimate purpose

From an article in InfoWorld: "Business insight is critical to succeed in IT's ultimate purpose: helping the business do better". "Your ability to articulate the value proposition of technology to the business your company is trying to deliver is critical" says IDC's Anderson.

Interesting Tech Websites

FaceSaerch (search for faces)

The actual "facesearch.com" points to "techposter.com".

Scribd (and ipaper)

Interesting new platform for online publishing.

£18 billion IT Whitehall scandal

http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article5636437.ece

Figures surface as government prepares a £12.7 billion plan to computerise all patient medical records.

Online FX trading via Currenex

Berkeley Online in London's Savile Row offers FX trading on Currenex. In other news, TDA takes over options broker thinkorswim.