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Quantitative Trading and Basic Frameworks Episode I


Disclaimer:

Nothing contained in the following content constitutes an offer, solicitation, or recommendation regarding any investment management product or service, or the offer to sell or the solicitation of an offer to buy any security; The following content is purely for information only and is based on information available at the time it was created. It does not take your financial situation or goals into consideration, and may not be suited for you.



Transcript

Welcome to Zimark Open, a weekly podcast from Zimark, focused on knowledge about financial markets and economics.


I am Henry, digital marketer at Zimark, a digital-powered advisory boutique focusing on middle markets. It is Tuesday, September 23rd at 2 p.m. in Tokyo, and we are continuing our light discussion series on basic facts and frameworks on quantitative trading.


Well, first thing first, before we dive deep into the technicals, let's talk about the conflict of interests in the financial markets.


The first thing that needs to be paid attention to is the retail liquidity.


Retail investors are generally expected to provide liquidity to institutions. Based on this logic, the normal trading session from 9:30 am to 4:00 p.m. may not always be the best time for market entry except for certain time spots. Liquidity algorithms may operate at 8:00 a.m., 11:45 a.m., 12:45 p.m., 13:45 p.m., and 15:45 p.m. to seek liquidity from the retail. These times are short-term inflection or pivot points that are worth paying attention to. In most cases, to maximize intra-day return, 12:45 pm and 15:45 pm are the best times for order entry or close because of the liquidity algorithms set up by most hedge funds to maximize return even in environments without significant catalysts or volatility.


The next thing worth paying attention to is news in the context of index behaviors.


In most cases, 95% of the time, news including economic data releases do not affect the trajectories or outcomes of the quantitative models, except for scalping timeframes. This is even more true in the current time where information is quickly incorporated into the markets in milliseconds and needs to exit on retail or even institutional liquidity via larger block trades.


News, including economic data, impacts the market through shocks. The railroad is pre-planned by a defined technical path via collective action with the goal to provide defined profits for clients. Shocks and impulse curves fade, and unless it is a shock big enough like COVID-19, neither CPI overheating nor rate hikes would affect the trajectory of the technicals and mechanics of the market. Geopolitical and economic variables are important in the model when the AUM is large enough to be impacted by the limitation of market depth. Nonetheless, those exits are played by the book 95% of the time.


Market maker


The market maker holds positions in order to facilitate real-time transactions and make money off the spread and commission per trade. In other words, they provide liquidity to the market by acting as wholesalers. This is to avoid illiquidity in the market so that there is always a seller when someone wants to buy instruments. It also means they hold positions even though their goal is not to profit from the trade. Therefore, they need to hedge the risks. Many floor option orders are aimed at hedging the risks that market makers hold. It is important to note that there will be times when they incur losses on held positions or fail to hedge the risks. When this happens, market makers will try to write off the losses by realizing the hedged position. Those actions will create short-term momentum for the market.


Seasonality


Seasonality has always been a controversial topic among market participants. Many mutual funds tend to sell off their investments to take advantage of tax losses before October comes to a close. Another factor that could affect seasonality is the portfolio rebalancing that happens after the summer.


For the participants, it is important to identify such market anomalies in the context of conflict of interest, and I hope this episode is helpful.


That's all for this episode of Zimark Open, and next we will move on to the basic building blocks of the technical and quantitative analysis and data streams.



Disclaimer:

Nothing contained in the following content constitutes an offer, solicitation, or recommendation regarding any investment management product or service, or the offer to sell or the solicitation of an offer to buy any security; The following content is purely for information only and is based on information available at the time it was created. It does not take your financial situation or goals into consideration, and may not be suited for you.


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