Greater Than the Sum of Its Parts?

When I was at Gelber Group in Chicago, I researched and productionalized an S&P 500 swing trade. I was the junior on that desk so I was taking queues from a senior trader with a mind for innovating. Together we built a trade that paid us handsomely by running three copies, each into a different bar size.

One of the positive side effects of running three versions of one system was the portfolio’s stats were better than any individual’s stats. This was our goal from the start but there were no guarantees that it would happen. This improvement may seem obvious to some but we were surprised: after all it was not a portfolio of different strategies!

I am seeing a similar aggregation effect with different latency levels for HFT clients. Yes: tech/infra buildouts are vastly different for different latency requirements. Once that’s all in place though, running different versions of the same strat may have surprising compounding effects.

Some questions:

• Can layering strategies with varying latency requirements have a similar effect as traditional portfolio diversification?

• What unexpected compounding effects surface once a firm or trade desk is diverse in this way?

• In the never-ending pursuit of flow detection, can firms build predictors from their low latency strats for use in longer time-hold trades?

• Similarly, can larger biases be applied to ultra granular spaces like microstructure analysis, scalping ticks, or similar?

I have focused on unexpected compounding effects both for growing my own consultancy and also on behalf of my clients.

Check out Slow is Smooth and Unplanned Success.

What could a fresh perspective do for your business or trade desk?

Pallino: On Target