Volatility, High-Frequency Hacking Algos, and That Brady Sketch

Random thoughts on the week, including realized volatility, the latest hacker bust, and the infamous Tom Brady sketch

Aug 14, 2015 at 9:06 AM
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    Another week, another scare, another churn, another time for some random short topics as I ready for a second career as courtroom sketch artist. I hear there may be an opening soon in Manhattan. Here's my sketch of NFL Commissioner Roger Goodell:

    150814Warner

    I know, I know. Too accurate.

    With all the action the markets, you'd think realized volatility (RV) must have spiked, right? Well, wrong. 

    Ten-day RV didn't do much at all this week. It actually crept slightly lower. It sits just below 10, which isn't high at all.

    In some ways, it's a bit of a quirk. We had a couple of high-range days leave the calculation just as a couple new ones joined in. 

    And in other ways… well, it's just a calculated number, and it doesn't quite capture the feel of a day like Wednesday, which basically felt like about double the actual range in that it was a round trip from down small, to down big, to up small. So, yes, if you're sitting net short options this week, it feels closer to 20 volatility than 10. 

    Oh, and there's that Dow Death Cross again. I think basically you can prove it's signaling either End of Days or absolutely nothing depending on all sorts of variables. Back-fitting data is a wonderful thing, which is why I'm a little skeptical about some of these homegrown Algo machines popping up. 

    I realize insider trading is illegal and all, but I found this week's big bust pretty fascinating. Long story short: A team of insider traders hired a team of Ukrainian hackers to access press releases early. Such a 2015 twist on an ageless crime.

    I figure there are two ways a scam like this gets ratted out: Either someone blabs and it gets back to the SEC, or they do a real sloppy job covering their tracks.  And in this case it was the latter. Their prescient trading looked too good to be true, apparently, and it got investigated. 

    It did lead me to wonder, though… How many more groups like this are out there? By that I mean groups that are hacking inside, market-moving info. This is probably the absolute tip of a huge iceberg. I'm sure there's way smarter ones both hacking the info and not trading in such an obvious way. Remember those algos that can read newswires and Twitter and create their own trading strategies, and then execute them? Well, pretty sure someone's going to figure out how to do all that, but include hacked, confidential info. 

    Yes, that's my prediction. High-Frequency Hacking Algos. Guys are going to come home from their day job and find out they front-ran earnings and deals. 

    Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

     

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