Whence comes liquidity?
Tuesday, 2 October 2007 Joscelynn TomawLast night my Derivatives professor made two simple but timely observations:
1. Personal edification asside, it is virtually fruitless for us to learn the algebraic gymnastics necessary to find arbitrage opportunities because in today’s trading environment the millisecond it takes to put pen to paper is sufficient to eliminate said opportunity. (Funny how the course still requires me to spend hours finding and dispensing of such opportunities the ‘old fashioned’ way.)
2. Liquidity requires that for any position desired there is another party willing to take the opposite.
Today Dow Jones Financial News has an interesting article on the blight of quant based trading in the recent liquidity crisis. The implications are very interesting. Is hyper-rationality bad for a market? What happens when all the big players take the same position? The article suggests that quant funds are revising algorithms to better capture market events. I am curious to see how these funds might capture a bit of the artistic side of investing without setting the same trap.