STREET DOGS

EXTRACTS from a report by Nicholas Colas, group chief market strategist at ConvergEx, after attending an algorithm-themed conference:

“I had the shock of my life. Right in the middle of a presentation, one of the audience members interrupted the speaker and asked a question. And then another. And then someone chimed in. The speaker, a university professor from NYU, took it all in his stride. The next speaker took the podium. Again, more interruptions.

“Many other clues showed this wasn’t your typical investment confab, where everyone sits and listens to the speakers and only asks questions at the end. Everyone there was a ‘Quant’. No one cared what the company represented by a given stock actually did. Apple or General Motors, CAT or IBM.… Everything boiled down to a set of statistical observations that, when assembled into the proper algorithm, delivered a portfolio that beats the market. The shop-worn consultant’s grid of small-mid-large capitalisation and growth/value tradeoff was nowhere to be seen. This group looks at the entire market for listed stocks as their available universe. There were more accents than at a United Nations meeting. And way more PhDs than at any road show I have attended.

“As the only person in the room who has apparently never written a line of computer code or back-tested a stat arb model, I began to wonder if there was a way to ‘hack the hackers’. Most computerised trading models try to either do something faster than a human trader/investor, or do it more consistently. We can’t beat them on speed, but can we learn what these new algorithms will look for, and then base an investment style around front-running the machines? Or at least stay out of their way.

Michel Pireu — e-mail: pireum@streetdogs.co.za