The ten-year cycle of innovation in Trading

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1987, 1997, 2007, 2017?

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What led to Trend Following in 1980s?

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  • Futures market

  • Worked before the 1987 crash, during the crash, and after crash.

  • Technology was just right for this trade.

What led to Stat-Arb in late 1990s?

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  • Efficient borrowing and leverage of stocks.

  • Trend Following was implemented at such scales that it led to opportunities.

  • Stat-Arb worked well before the dot-com crash, during the crash, and after crash.

  • Technology was just right for this trade.

What led to High Frequency Trading in 2000s?

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  • Over crowding in the Stat-Arb strategy.

  • Rise of ETFs and index futures.

  • The first purely machine-learning trade.

  • Fierce competition from exchanges - rebates

1987, 1997, 2007, 2017?

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Information

 

 

 

Short term

Structuring

 

 

 

Medium term

Prediction

 

 

 

Long term

Information
Speed
Short term
These trades work most of the time. They make a little bit of money, when they do. They are consistently profitable but not very scalable.
Structuring
Stat-Arb
Lead/Lag
Medium term
Works a fair bit of the time. Works particularly well when volatility and risk in the market is low. Reasonable scale, about 3% to 5% of annual alpha.
Prediction
View-based
Long term
These trades are typically very few, but when they work, they are very big winners. This is traditionally what  Global Macro firms place bets on.

Investing can be a science, if we all work towards it.

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qplum LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Ten year cycle of innovation in trading

By Gaurav Chakravorty

Ten year cycle of innovation in trading

The next ten years are going to be about deep learning. We show what happened in the past and what were the business drivers, and how the business drivers are converging behind making investing a utility powered by Deep Learning

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