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The Rise Of Algorithmic Trading: How Manned Trading Desks Are Seeing Their Demise

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One of the last human points of resistance to the algorithmic take-over of professional trading can be found in the fixed-income trading desk.

The deft relationship business is known for having participants with Ivy League pedigrees and a lacrosse playing background, a data point that a machine learning algorithm recently used when making hiring recommendations.

With an algorithmic transition, profit margins are being squeezed as human relationships are becoming less important. Benchmarking the transition are new hiring mandates at some of the largest banks, a recent Greenwich Associates report pointed out.

Relationships and fundamental market understanding are less important, the report noted, and algorithmic experience and data science skills are now in demand.

In this emerging environment, what are best practices for an integration framework?

When combining fundamental investment thinking with quantitative thinking unique conflicts often arise. Fundamental, discretionary fund managers often creatively connect non-correlated dots and sometimes challenge consensus thinking.

Quantitative logic, on the other hand, is often driven by if-then Boolean logic at its core and looks for mathematical consensus to guide decisions. Mixing these two disciplines can be like expecting oil and water to enjoy each other’s company.

“Relationships and balance sheet still matter, of course,” Greenwich Associates Managing Director Kevin McPartland wrote in a report title that highlights a dichotomy, “Trust and Data Drive Fixed-Income Dealer Growth.”

Trust is a human concept and data is often associated with empirical, mathematically discovered understanding is the point where a melding of the minds might occur.

The integration of the two highlights the new path forward. “But the ability to manage both in a more quantitatively driven way can mean the difference between profit growth and a year-on-year decline,” McPartland observed.

Technology is increasingly becoming an important feature on bond trading desks, particularly for sell-side banks. Fully 91% of bulge bracket banks said automating parts of the trading process was one of their “top technology priorities for 2018,” the Greenwich Associates report pointed out.

Only 44% of middle market participants, meanwhile, felt the same. This group was having slightly more difficulty “complying with new/changing regulations” and was more focused on improving client management tools and data.

Knowing what technology to integrate so as to deliver a near-term positive return on investment while positioning the firm for a longer-term shift in intelligent automation can prove challenging and, itself, might have variables that don’t easily fit into a math formula.

“Assessing the process of tech integration is always a challenge because no technology is perfect, but it is often much better than human performance,” said Evan Schnidman, CEO and Co-Founder, Prattle, a firm that uses machine learning techniques to analyze human speech patterns to provide a market edge.

Electronic equities trading has proven to be highly reliable, but very rare missteps can have catastrophic cascading effects. With bond trading, and any other technology-driven process in financial services, it is vital to build appropriate circuit breakers and human checkpoints. Simply, technology is a valuable tool, but humans still need to be in the loop.”

When integrating technology into a bond trading workflow it is important to set proper expectations that can be measured on a project plan timeline.

Often times expecting the unexpected is a discretionary skill that requires understanding technology’s limits.

“The best practice in tech integration is to remember that technology will not solve all of your problems, but it may be able to streamline the human workflow and optimize decision making,” Schnidman said. “If institutions keep that in mind, they are likely to adopt technology more readily, thereby making each additional innovation less jarring from a tech integration standpoint.”

With technological change coming at an increasingly rapid pace, the imperative is in understand what aspects of human trading can be modeled and what should remain discretionary.

“Instead of fully relying on quantitative approach at the beginning, it is a good starting point to integrate the output of quants and AI models in the human decision making process of position taking and dealing,” said Tsuyoshi Yokokawa, founder and CEO of San Francisco based Alpaca Markets, a firm that in parts helps integrate quantitative trading models into fundamental trading methodologies.

As the last refuge of human-based trading turns algorithmic, the processes and methodologies that drive these projects are likely to determine success or failure to a large degree.

In bond trading, the sell side is taking a different approach to that of the middle market.

Business

Raising Startup Capital: 4 Funding Sources You Can Bank On

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Turning entrepreneur can be an exciting adventure—one that demands an incredible amount of perseverance and hard work. But one of the biggest startup challenges is fundraising. VCs are getting pickier and pickier, so tapping the right fundraising strategy can make or break your business. Here are four ways to tackle that.

1. Bank On Microloans:

Many entrepreneurs take to Kickstarter too soon, before even gauging other options. Microfunding—an SBA-backed program that’s been around over 25 years—is a much easier and quicker to get funding vs. a traditional loan. (And it’s a great way to build your credit score, as well.) Here’s a brief and somewhat-informative video that explores how small business loans work:

What’s more, Microlenders also offer flexible payment options, and may mentor entrepreneurs to help them succeed.

2. Get A Partner:

When you’re looking for a little extra capital or technical know-how, seeking a co-founder and establishing a partnership can drive capital and planning. If a co-founder isn’t in the works, building strategic partnership with complementary businesses is a great avenue to fuel growth. 

3. Sponsorships:

You don’t have to vie for a business’ CSR initiative or do charity work to get sponsored. As long as your idea sells and you’re building a great product, you’re on the grind. Sponsorships are largely done through advertising or media appearances. And sometimes by adding their brand to yours for a while.

4. Using Charge Cards:

Charge cards can be a powerful tool to obtain capital for your business. Unlike credit cards, charge cards do not come with a preset spending limit. The perks? It allows you to meet large expenses swiftly. What’s the catch? The lender requires you to pay the balance in full every month. If you’re financially responsible, charge cards are a great way to meet your costs.

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5 Global Fintech Apps To Watch

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The fintech space has witnessed significant growth in recent years – marrying tech and finance to simplify a lot of processes for businesses and people like you and me. Here are five fintech apps that you can bank on.

1. Robinhood

This stock trading app comes with a big perk – no commissions. How does it make money? It has a subscription-based service, Robinhood Gold, which charges users a tiered monthly fee for services like extended-hours trading and margin. Available across both iOS and Android platforms, Robinhood has over 4 million accounts currently.

2. Piggybank.ng

In an effort to tap into Africa’s growing millennial base, Nigerian fintech startup, Piggybank.ng, aims to help people increase savings – through plans that cater to both low and middle-income Nigerians. Savers don’t incur any upfront fees and may deposit as little as a dollar a day, and are discouraged from withdrawing their savings until an agreed date by charging an early withdrawal fee of 5%. What’s the interest you gain? Depending on the duration and type of investment, you can expect to accrue anywhere between 10-12.5%.

3. Square Cash

With over 7 million active users, Square Inc’s cryptocurrency-integrated payments app, Cash, has enjoyed staggering growth recently. The app simplified payment transfers – if you want to transfer money to a friend, all you have to do is send an email to the friend with the amount, and cc cash@square.com. This move just wiped away the need to create an account or look up bank account details. All it requires is your debit card number.

4. BudgetBakers

BudgetBakers’ popular personal finance app, Wallet, helps users track their expenses and allows them to integrate multiple accounts into the app – if you need to add more than three accounts, a small fee is charged. The app provides your expense details across a bunch of useful charts, reports and lending records.

5. Google Wallet

Google jumped the payments space and came out with something packed with great perks – transfer payments with a single tap, coupons to grab bargains, completely paperless and it works across some of the biggest stores like Macy’s, Subway, and outlets that permit MasterCard, Visa, Discover and American Express.

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FLASHBACK: Amazon Is Worth A Trillion Dollars

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This is sick.

One month after Apple cracked the Big T, Amazon just became the second US public company to cross the $1 trillion valuation mark—nearly doubling in value since January.

Amazon came out the 2018 gate at “just” $580B in January. But in Q2, the company’s net income ballooned to $2.5B, compared to—again, “just”—$197M 12 months prior in Q2’17.

Which sent the stock into a frenzy.

amzn-stock-2018.png

According to S&P senior index analyst Howard Silverblatt, Amazon and Apple now make up more than 8% of the entire value of the S&P 500.

In other words, Amazon and Apple alone are worth almost as much as 1/10 of the entire fucking stock market.

Other blue-chippers—including century old corps like Boeing (worth $207B) and General Motors ($55B)—are worth way less than their tech peers. Mainly because there’s a ceiling on earnings growth.

Apple and Amazon? Not so much. They look like they’re just getting started.

Jeff Bezos, rich AF, for the umpteenth time this year, must be sittin’ pretty somewhere smiling.

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