Went to New York Traders Expo 2016 last week, as have done for last 3 years. We have two main aims to get ideas for the 30 Day Trading strategy back tester and keep up with option product trends in the market. You can still view all the recorded New York Traders Expo events here until 12th March 2016, including some of the one’s discussed below.
Its given great direct access to either the owner or developers who write the products and generally brainstorming ideas. Can quite happily spend a few hours just chatting away to various product owners about option strategies, and everyone is generally interested and helpful.
First impressions are that there are now a lot more products with options, options on futures and futures – would estimate about one third this year, versus about 10% in 2012 (unscientific estimate/guess).
Secondly the cross over between what is a developer, quant or product owner is becoming more blurred. For example there are CEOs who programmed the original code base for their system or developers who can articulate option strategy and market risk like a quantitative analyst. Having a cross over skillset understanding IT, trading strategies and product marketing is really important for a lot of people creating these products.
These are some high level ideas we took away from the daily presentations. They are deliberately high level so as not to take away from the presenters proprietary ideas (just to give a flavour of what was discussed).
New York Traders Expo – Fintech trends
The following were not really related directly to any of our 30 Day Trading option strategy ideas, but just interesting Fintech industry trends. “Fintech” definition is broadly speaking usually Silicon Valley startup firms in the last 5 years that trying to disrupt the heavily regulated financial industry. Why has it taken so long for this time of innovation to come to financial industry ? If it has been done in travel by Expedia, or book selling by Amazon, why not finance? Simple answer regulation is so high in the financial industry so has taken long to disrupt in the last 30 years. Plus a number of entrenched players like exchanges and traditional asset gatherer have no motivation to change the profitable status quo. These are some trends we found from various presentations:
The algos are coming, and thats a good thing!
One company presenting at New York Traders Expo was Motif, that enables customers to re-use existing or customize a “motif” list of up to 30 stocks that can be purchased as a basket with one click. User can have fractional shares owned by themselves, so algorithm can buy exact dollar amount $500 of a stock basket (the “motif”) in real time. Motif algorithm handles the fractional share distribution among users, transparently to the user. Motif can actually make money on transaction costs because their fractional share algorithm is so efficient, unlike traditional brokerages that find it harder to make money from transaction fess because their model require a lot of legacy inefficient behind scenes processing. Their CEO made the point that Fintech companies can start with a clean slate from the technical design without years of software development layered on top of legacy platforms.
Process automation for financial overload
One big New York Traders Expo theme was using process automation to deal with financial information overload and handle complex tasks for you. For example, Motif is looking at automating tax harvesting strategies. This year they are planning to provide a service where you get an alert on your phone saying “It’s year end, do you want to tax loss harvest?”. If you pick “yes”, then the algorithm will sell your losers at year end, go to cash, then auto buy back your stocks after 31 days to avoid the IRS wash rule (without you need to do anything else).
Constantly reducing transaction costs
What is the long term term in trading transaction fees ? Likely heading towards zero.
Traditional brokers make money from holding customer cash and fees. Costs an average broker about $600 to inboard a customer. Fintech companies new investment from the ground up in custom technology ultimately reduces transaction fees for users.
There is a lot of friction (transaction costs) moving USD around the banking system (bank fees) and trading securities (trading fees). Can bitcoin transactions on the block chain help reduce transaction fees towards zero?
Bitcoin transaction costs are cheaper than USD and bank transfers in the US (using ACH) are generally inefficient.
Forbes also offered some ideas on how blockchain technology could be used to improve this. The distributed ledger technology, has potential, however people are starting to create multiple block chain technologies, with no consolidated system. For example if broker A is using block chain technology X and broker B using block chain technology Y, then they need to use a 3rd system to settle transactions – that’s not scalable or desirable. As was pointed out – “That’s the great thing about standards, if you don’t like the existing standard you can always invent your own!”
Automation cannot solve everything (yet)
Transaction costs might go to close to zero in future, but these ideas will survive because they are hard to replicate. These investment ideas will still require non automated human effort:
1) insight – the idea of better strategies and risk management
2) relationship – a human to manage emotions in market stress and check market risk tolerance
3) hard to do tailored financial advice – hard to get good advice if you are not generic “401K” style allocation.
Market Place Execution “Fairness”
Currently IEX is applying to become an exchange, so what would that mean. Iex is currently dark pool, due to regulations very hard. applied to become a us exchange, received about 400 public comment letters. There are were about 15 public letters for all other us exchanges.
Everyone trading at Iex has the same info make a decision. Iex aim to not charge for market data if they become an exchange. IEX has a “speed bump” which slows down order speed 350micro seconds of delay (1/100th of time taken to blink your eyes). Nasdaq has a 40 pipe (used to be 10 pipe) now is 10 micro seconds faster. That means if you have the money you pay for faster market access, you can get trading info faster. That is essentially what IEX is offering is slightly slowed down known playing field for a All market players, not just those with the cash to play.
Customer now the designer, not just the consumer
Another New York Traders Expo theme was that customers are becoming more important for idea development, and large numbers of engaged users drives improvements and ideas with Fintech company products. More companies use social crowd sourcing to gather ideas and allow customers to customize their own solutions. Traditional finance managers have a list of products to choose from and you pick the one you like best – if its not on the list you cannot do it. For example, if you didn’t want to invest in tobacco companies, and the only mutual funds included tobacco companies – your historical choice was invest or dont.
Fintech companies are saying here is the basic template, but now how would you like to customise it ? This can get very specific to sub sector themes with ideas that people see around them or have job expertise in (e.g. cancer related biotech startups).
Self directed investing
Tasty Trade believe that self directed investing is becoming the new finance model, because of inherent conflict of interest in the existing model. Current finance providers have no vested interest in investor results because there are not penalized for bad performance and still take a greater than 1% fee. Fees add up over time, and fees remove any return over standard market performance. Today there are better finance education, lower trading fees and better mentoring resources available, so everyone can get better (no excuses!).
Using options to hedge long term portfolio
Saw an interesting Buy and Hedge book similar to our portfolio principles ebook of using options to hedge ETFs. This is unusual because do not often see a similar approach in main stream financial books, so thought we’d review it at some point. I believe it involved using long term put options to completely hedge downside risk on the entire portfolio (totally cut off tail risk), which could get very expensive in the long run, so curious to see their criteria for managing the put options.
Market outlook 2016
Went to a market outlook presentation by Larry MacMillian Options as a strategic investment. Basic view is that 2016 would be a bear market, but there could be a bounce into April/May, then rolling over into the rest of the year. But not 2008 disaster scenario, just a typical bear market. Recommended various short delta hedges on indexes or trying to go long volatility via the VIX. Without going into too much detail on their proprietary criteria, essentially this was a VIX futures calendar, involving buying VXX futures front month (eg April 2016) and selling back month (eg may 2016). A couple of traders I discussed this with actually discounted this trade because of the possibility of large differences in VIX front month and back month spreads – basically too dangerous because potential differences in VIX term structure (most of the time it would be fine, unless the differences between front month and back month become too pronounced).
This was a really quick overview of the New York Traders Expo. There was lots of content in 2016 as usual, but definitely worth attending if you are in New York in February next year.