At Olsen, we have been researching financial markets for 25 years using tick-by-tick price data. We have developed a variety of information and risk management services and also have hands on experience from managing assets using quantitative models. Traders have repeatedly asked me, if I can give them recommendations on how to trade. In response to this, I will publish a number of blogs on the subject.
You have time
The most common mistake that a trader makes, is to rush into a position too quickly and to be too aggressive in his opening trade. There is no need to rush into a position and make a big trade, you have all the time in the world. Similar to the practice of serving slow food, I strongly recommend that you temper your natural impulse of trading at a high pace with large positions. Read the rest of this entry »
January 11th, 2010 |
Investment, News | 9 Comments »
Today, there is a divide between the optimism of the public and the concerns of practitioners with in-depth market knowledge. Who will be right?
What does the theory of high frequency finance tell us?
Central banks and governments have the clout to skew market prices for extended periods of time. They are successfully doing this in response to the economic crisis by providing liquidity to lower short-term interest rates and by buying long dated debt to lower long-term interest rates. They succeeded in stopping the meltdown of the financial markets, but they cannot continue their skewing strategy indefinitely. They need to be aware that their actions will give rise to a rebound, which has the effect that interest rates will be higher than normal. Financial markets tend towards a dynamic equilibrium, where overshoots in one direction will ultimately be balanced out by overshoots in the other direction. Read the rest of this entry »
December 29th, 2009 |
Market, News | 1 Comment »
The global crisis has fueled a debate of what needs to be changed. People have focused on regulatory reform and on the need of imposing restrictions on compensation packages for bankers. The debate has failed to address wider and more fundamental issues. In the following I give a brief overview of initiatives for change that I propose. My ideas have germinated over the course of thirty years. The proposals for the reform of the financial markets are based on my work in high frequency finance and hands on experience in building two businesses active in financial markets. The other proposals are inspired by my system theory, the theoretical foundation of my work in high frequency finance and also leverage insights gained by studying law. Read the rest of this entry »
December 14th, 2009 |
Economics, News | No Comments »
Obama calls for a stronger Renminbi: does he have real clout or is this just a publicity stint to appease voters back home? China is the powerhouse of international finance. It has accumulated the world’s largest pool of currency reserves of 2.3 trillion USD. By imposing strict capital controls China has been able to peg its exchange rate to the Dollar. Its ultra-competitive exchange rate has allowed China to grow its exports disproportionately. Today, exports in the amount of 1.4 trillion USD account for 32 percent of its GDP. The low cost Chinese products are the de-facto price benchmark of manufacturing goods across the world. The prices put downward pressure on manufacturing prices and force businesses to offer their goods at prices that are not sustainable and do not allowfor long-term investment and reserve accumulation. This has a distorting effect and drives companies across the globe out of business leading to a loss of valuable human capital. Read the rest of this entry »
November 19th, 2009 |
Economics, News | 2 Comments »
I was invited to give a talk at a conference hosted by the Manchester Business School funded by a Marie Curie grant of the EU. The title of the conference was ‘Understanding the New World of Financial Risk Management – Research Agendas after Subprime’. The conference was interesting, because it included both practitioners and academics. The practitioners were sanguine, clearly stating that the current risk models are insufficient. In my talk I tried to introduce how high frequency finance opens a new world of research and explain, why this approach can revolutionize economics and finance.
Richard B. Olsen, Founder and CEO of Olsen Ltd
November 18th, 2009 |
High frequency finance, News | No Comments »
In the last month, the economic news releases have been better than expected. Manufacturing numbers and property sales for the US have turned positive surprising the public. Investors and government decision makers ask themselves whether this trend will continue; little do they realize that these numbers are spurious. They depend on the point of reference; are they computed month-to-month, or relative to a year ago? The outcome depends on the starting point; if in the previous year the numbers were bad, then it is easy to report a positive performance now. The practice of reporting one number, such as the growth compared to a year ago, is misleading. Economic numbers should be made public in the appropriate context, ideally as part of a comprehensive weather map for the economy and its financial markets. Read the rest of this entry »
November 4th, 2009 |
Economics, General | 1 Comment »
Northern Rock is back in the press. The EU commission has given the green light to restructure Northern Rock and remove the impaired assets from its balance sheet. This is window dressing: if impaired assets are marked to market and losses are realized, then the assets are on par with all the other assets. They then have a fair chance to perform better or worse than the other assets. If losses are realized, there is no good or bad bank and a combined bank is just as good as two separate banks.
The regulators should focus on the real issues:
Credit agreements, loans, etc. are highly complex legal agreements. The in-transparency of 200 page legal contracts does not gibe as well with quantitative modeling as we would expect it to in the 21st century. We need a computer language to code legal agreements. Read the rest of this entry »
October 29th, 2009 |
General, News | No Comments »
Analyzing tick data of currency markets we have discovered 12 new scaling laws in the foreign exchange markets that complement the two scaling laws that we uncovered in the 90s. A scaling law exists when two quantities maintain the same proportions over a certain range. For the scaling laws that we have discovered the range of proportionality is big, a factor of 1000, from the purely intraday domain to inter-day and longer. Scaling laws play an increasingly important role in natural sciences from biology to physics and complex systems for the calibration of models. In economics, this has so far not happened. I believe that this could change in view of the many new scaling laws. Read the rest of this entry »
October 27th, 2009 |
High frequency finance, News | No Comments »
The pressure is increasing in the currency markets as the USD approaches new lows. The central banks with strong currencies, such as Australia, Canada and Europe, will have to decide whether or not to adopt the policy of the SNB and intervene to weaken the EURO.
The SNB has intervened for the past 6 months and has temporarily blocked the Swiss Franc from appreciating. The cost of doing so is, however, higher than most people appreciate. There are more and more traders, who are shorting the CHF and rely on the SNB to intervene in the market. The SNB interventions have the effect of subsidizing these speculators and are becoming increasingly costly. Read the rest of this entry »
October 27th, 2009 |
Market, News | 2 Comments »
In the late 80s, we at Olsen coined the term high frequency finance to describe our scientific approach to finance and economics. We later published a book, Introduction to High Frequency Finance, that describes the new field. High frequency finance firstly deals with collecting as much information as possible; in particular storing all tick by tick market data, then in a second step studying the detailed statistical properties of the data; describing the economic processes and later based on these observations develop models to explain the observed phenomena. In biology, this approach has a long tradition. Biologists in the field of systematics have literally for centuries specialized in carefully describing the plants and only after completing this step have they moved on to introduce a systematic approach to categorize the species. Read the rest of this entry »
October 7th, 2009 |
High frequency finance, News | No Comments »
