CASTrader Blog

Boomtimes

In my other life apart from developing CASTrader, I sometimes consult on projects where slope stability and landslides are an issue. Such is the case the past few weeks as I am involved in the construction of a new gas well stuck high up on a cliff in a landslide area. The oil and gas boom has created a lot of activity around the Piceance Creek Basin (PDF), a portion of the home of more potential oil than Saudi Arabia (if you can get it out). Oil and gas companies seem to be drilling anywhere and everywhere. Around the town of Parachute, where I'm staying, motels are 100% full of all sorts of contractors - the place is hopping with activity. Property values are way up, along with everyone's salaries.  Local word is it's pretty easy to earn $100,000+ if you have what they want and are willing to work.  It's not quite the wild west atmosphere of the previous energy boom when inflation-adjusted oil was these levels and oil shale projects were red hot, but it certainly reminds me of that period.

Just the fact that about everyone with a pulse who has any know-how at all is being wooed to lend a hand makes me wonder if oil is peaking in price rather than quantity produced. The history sure is rhyming. I made a friendly bet with someone about a year ago that oil would not hit $100 before 2010 just as it was zooming past $80, as I felt is was soon to peak or at least plateau. Seeing this boom first-hand, one gets a healthy respect for it.

At night, the Colorado River valley between Newcastle and Parachute is lit up with the activity of several dozens of drilling rigs. Assuming the well I am working on is a producer, it will be online in a matter of months, like so many of the other wells being drilled. Such is the case with current energy prices that have set off a boom the likes of which have not been seen in 30 years. Although there's certainly counterparts to these wells that are seeing production declines, at least in this little corner of the world, new supply is far outstripping decline.

It's certainly nice to get out in the wilds a bit, and while I've had some good photographic opportunities of peaks, plateaus and canyons (the view from my work area is at left), I haven't done much with CASTrader.  It's been far easier to get out exploring the surrounding area at night after work, collecting a few scrapes, bruises, sore legs and photos along the way than code CASTrader.   That will change when this well pad is done in the next few days, at least until the next offer I can't refuse comes along. Until then, here are a few photos I've taken of the surrounding country.

Update:  Brett Steenbarger covers the geopolitics of oil, particularly in Iraq, which could definately impact the price of oil.

 

Machines in the Market Linkfest & Blogs

Day Trading on Steroids: He's seated amid 24 computer screens, each of which flashes hundreds of numbers. Vos points out the one that matters: a line chart that shows he's made more than $5,000 after rapidly buying and selling millions of shares of stock. ... "I saw the world of computers and trading converging," Cummings said. "So the idea was really to just create a robot that traded like a pit trader." ... Cummings doesn't think his idea is unique. Instead, he was uniquely positioned to execute it -- he could code software with a trader's mind. ...Rizzello said he thinks Tradebot is one of the Nasdaq's top 10 traders, by volume.

Alea, a new to me blog, is all over Tradebots, and it's successor, BATS.  More from Alea:

Market Effects of Autodealing
High Frequency Automated Trading
Algorithmic Arms Race
Algorithmic Arms Race [2]

Chips with everything for traders:  This particular program, he says, is actually a modified version of a previous one he wrote for the Norwegian ministry of defence that could be used to track down nuclear submarines in the murky waters of the fjords...."One has some notion of what kind of sounds a sub can make and we try to spot this sound among an ensemble of signals," he says. "This works on the same principle - it is very much like eavesdropping on one specific conversation in a noisy crowded room. But I'm not going to tell you any more than that."...Computerised trading of one kind or another now dominates London's financial markets. At least 50 per cent of the trades made in FTSE100 stocks originate from so-called "black-box" trading systems, or trading algorithms. Some investment banks put the figure nearer 60 per cent.

The smartest (or nuttiest) futurist on Earth: Kurzweil says he is applying Simons-like quantitative analysis to take advantage of market inefficiencies. And he's confident that, just as he trained computers to recognize patterns in human speech or the sound of a violin, he can do the same with currency fluctuations and stock-ownership trends. The ultimate goal is to create the first fully artificially intelligent quant fund - a black box that can learn to monitor itself and adjust. Although he started the company back in 1999, the fund has only been trading for about a year....How's he doing? Kurzweil won't say, citing SEC rules, nor will his investors. "I view Ray as one of the best pattern-recognition people in the world," says Khosla, when asked why he put money into FatKat. "I am a happy investor in Ray's company. A very happy investor."

Blogs with a quant/machine trading focus:

Tales from a Trading Desk

Dinosaur Technology and Trading

Magmasystems Blog

Coding the Markets

Chris Donnan: Programming - Brooklyn Style (you gotta love that title)

Last, but not least, another new to me blog, Zero Beta, takes a skeptical view of machines in the market:  "By handing over power and money to machines left unchecked we may be setting ourselves up for an ugly scenario.  What if they are THAT good?  What if they can learn? A mild result would be a lack of interest in the financial market system from the ordinary investor.  If expected returns go negative – much like a casino, you will see much less investment and much more hording of money.  There will always be the gamblers but those with the best machine will always win – I believe they are called the house at the Borgata."

Update:  C++ Trader links a Bloomerg article on AI and trading and has some thoughts.

Computer-guided stock trading reaches levels undreamed of in sci-fi: "In his cubicle overlooking the trading floor, Kearns, 44, consults with Lehman Brothers traders as Ph.D.s tap away at secret software. The programs they’re writing are designed to sift through billions of trades and spot subtle patterns in world markets.  Kearns, a computer scientist who has a doctorate from Harvard University, says the code is part of a dream he’s been chasing for more than two decades: to imbue computers with artificial intelligence, or AI."

Hey Senator, got any stock tips?

I stumbled across an older paper from 2004 (PDF):

(emphasis mine) "The actions of the federal government can have a profound impact on financial markets. As prominent participants in the government decision making process, U.S. Senators are likely to have knowledge of forthcoming government actions before the information becomes public. This could provide them with an informational advantage over other investors. We test for abnormal returns from the common stock investments of members of the U.S. Senate during the period 1993--1998. We document that a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month, while a portfolio that mimics the sales of Senators lags the market by 12 basis points per month. The large difference in the returns of stocks bought and sold (nearly one percentage point per month) is economically large and reliably positive."

With the top 25 Senators worth between $2.6M to $234M, that's probably some fairly hefty gains.  If the top 25 Senators pooled their 2005 assets, they could open a hedge fund worth between $760 million to $1.4 billion - not too shabby.  With 12% + market outperformance, they would no doubt attract additional capital and hefty management fees.  The study compares the results of their study to other studies of common groups of shareholders:

• Average US household underperform the market by 12 basis points a month
• Corporate insiders outperform by 50 basis points per month
• Senators outperform by nearly 100 basis points per month

The Senators seem to not just be good stockpickers, but good timers as well:

"Cumulative abnormal returns for the portfolio of stocks bought by Senators are near zero for the calendar year prior to the date of purchase. After acquisition,the cumulative abnormal return rises over 25% within one calendar year after the purchase date. The cumulative abnormal returns for the portfolio of stocks sold by the Senators are near zero for the calendar year after the date of sale. However,these same stocks saw a cumulative abnormal positive return of 25% during the year immediately preceding the event date. These results suggest that Senators knew appropriate times to both buy and sell their common stocks."

Lest you think you might put together a lazy portfolio of Senate stockpicks, the data only appears to come out once per year and appears to be pretty stale by then, but the next report for 2006 is due May 15.   Opensecrets carries the Senator's stock picks.