Future Trends for the Modern Trader at The Trading Show Chicago
The moderator for this session is Rich Brown of Thomson Reuters. The panel is filled with experts ranging from policy specialists, CEOs, and senior analysts. The initial attention was on the current state of our markets and what factors may provide insight into a disaster awaiting us. Howard Tai of Aite Group responded, “Everyone is watching the demise of the Euro, this is one risk. It would be better for a few of the EU members to exit and maintain the core as best as possible.” Mr. Tai is a seasoned professional as he has experience with the previous three major crashes. Carol Clark of the Federal Reserve Bank of Chicago answers the question from a policy perspective, “There are gaps at each level of the trade cycle which relate to contagion. Controls at the exchange level do not have pre-trade risk controls set up for all cases. There is not one clear picture of the market risk criteria required for catastrophe scenarios.” This statement pre-empts the next question by the moderator, “Are the regulators capable to handle the overall risk criteria for the changing markets?” David Andre of Cerebellum Capital responds, “Possibly not, due to the significant complexity to the models. It would be difficult to accurately get the control criteria correct.” His recommendation is to treat the controls like a continual approval process instead of a massive one time regulation change. Arun Kaul of Olympian Capital Management seems to agree with the need for change to the regulator’s implementation of controls. “No one knows the way the markets work. I think having the regulators regulate everything doesn’t make sense.” Mr. Kaul then makes a statement about what we should have learned from the previous crash. “What we did not learn from the possible failures to occur leaves the market without one of its pricing elements. Micromanagement is not the cure and this leads to false price discovery.”
How does the regulatory body then make changes to its methods to deliver rules that accommodate fairness and opportunity? James Koutoulas makes a case for just how hard it is to deliver these rules. “Time and evidence are hard to work against. For traditional crimes, it may take 3 – 4 years to gather evidence, the financial industry does not have that time frame.”
Post discussing the regulations, the next issue for the panel related to the Quant-agion effect. Mr. Kaul’s perspective implies that the hypothesis behind quant models needs to be developed. If someone has model insight, then the foundations as to why the model will work need to be readily explained. Quant-imentality relates to the human vs. machine issue and this is the next discussion. Mr. Tai suggests, "When push comes to shove human judgment will give you the decision making edge.” This position is affirmed by Mr. Koutoulas, “Machines are still programmed by humans.” Dr. Andre responds, “Looking at the variables are still machine learning responsibilities. Humans will be the data scientists and the data repair men. Feature states, negotiations, etc. are still very much a human activity. Humans are still needed on the front end i.e., for garbage in-garbage out. There is still much debate and in closing the conference, we are assured this is not the last time this topic will come up.
-Original content provided by Safraz Rampersaud, an on-site blogger at The Trading Show Chicago
