I wanted to give an update on markets as well as some quick thoughts as I have fielded several phone calls/emails over the last few weeks. That is fairly typical when there is an uptick in turmoil across the markets. One thing I’d really like to emphasize is that we run completely market neutral strategies here. In a nutshell, our algorithmic strategies are not price dependent but rather volatility dependent. There is a significant difference. Markets could crash 90% tomorrow and we would likely benefit in a major way (ie: shorting the market). Our algorithms rely solely on order flow imbalances in the marketplace and do not favor any price direction. For a very crude example, if you have a market participant willing to purchase 100 contracts of Nasdaq futures and another participant willing to sell 150 contacts of Nasdaq futures at the same price, that creates an imbalance. Simple math shows there is net selling of 50 contracts and therefore that will pressure the current price lower. Markets auction higher and lower in this manner in what is called Auction Market Theory. In this very simple case, our algorithms would pick up on that sell side imbalance and likely short the market which is essentially making a bet that lower prices are about to ensue. Again, this is a very simple example for illustration purposes. Now, these order flow imbalances occur across all markets on different time scales, which translates into tradeable opportunities for us. Here’s the kicker, you’ve heard me talk a lot about volatility. The more volatility in a given market, the more transactions are occurring and therefore the more opportunity to capture those order flow imbalances. Hopefully, that gives you a little better idea of what is going on behind the scenes here. Note, all of this takes a tremendous amount of mathematical/quantitative and computing power. We have co-located servers sitting at the Chicago Mercantile Exchange’s data center in Aurora, IL with direct order routing to the exchange. Note, that unlike stocks which trade thru multiple exchanges, futures are traded through one centralized exchange (CME) which offers the most level playing field on the planet, as I’ve said many times.
Again, the reason I note all of these things above is I’ve noticed an inverse correlation with inquiries (asking how trading is going) and the underperformance of the general market. Don’t get me wrong, I love calls and could talk markets all day long but I just want to make very clear exactly what we do here and what affects our overall performance…..which is not market direction!
With all of that said, I’m going to pivot a bit and attempt to dust off my economics degree so bare with me. The forward economic outlook is certainly not a rosy one given we are in the beginning stages of stagflation, which is essentially low economic growth coupled with strong inflationary pressures. Everyone is so used to the free flowing spigot of easy monetary policy by the Federal Reserve. We have just experienced one of the longest expansionary cycles in the history of markets (less the small blip of economic activity during peak COVID). You’ve heard that saying before, a rising tide lifts all boats? Well, that’s what we’ve seen with risk assets the past several years and certainly post COVID with the unprecedented accommodative policy by the Fed. I hate to say it but a monkey could have picked stocks and made money when the Fed was printing money. Those days are over……for now. If you study monetary policy and economic history, one method to relieve inflationary pressures is a decrease in prices among risk assets. Things need to cool, it’s healthy. Otherwise, you’ll eventually get what is called “unintended consequences” (aka bubbles/financial crisis). If you are long stocks/risk assets, yes you need to protect your investments during this down cycle as there is likely more to come. It’s the nature of the beast. One last thing, be very careful listening to the “Talking Heads”……aka: the so called financial experts with no skin in the game and whose income is not tied to actual performance. You can thank me later.
Lastly, the team here is growing which will allow me to utilize this blog more to communicate more ideas going forward. As always, if you have any questions/comments/concerns please don’t hesitate to contact me.