Trading Tech Talk 62: Exploring the Nexus of Machine Learning, AI and the Options Markets

02/16/18 • 59 min

Trading Tech Talk

Mark is joined by co-host Matt Amberson, Principal at Option Research & Technology Services (ORATS).

CTO Interview: Our guest today is Michael Mescher, Founder of Gammon Capital.

He discusses:

What is Gammon Capital?
You've talked a lot about the dangers of selling volatility and how short vol managers aren't worth their fees. What are your thoughts on the maelstrom of the past week? How have your funds fared over the past week?
Machine learning is a hot buzzword these days, but what are some of the practical applications that you're seeing in the financial markets right now? Is it ready for prime time or still in the nascent phase?
Unsupervised learning/ fundamental strategies?
Supervised learning / quantitative strategies?
Classification vs. Regression problems
Hiring machine learning specialists vs. Products specialists
90% of the world's data was created in the past two years. Is that an opportunity or a terrifying statistic?
Testing models on out-of-sample data vs. carefully constructed back tests?
Should managers be concerned that the robots are coming to take their jobs and their clients?

The Inbox: Listener questions and comments

Question from BLAL9 - What do you see as the outlook for AI and machine learning in the financial management space going forward? I see a lot of smoke but is there much fire? Are there many funds currently using it to generate alpha right now?
Question from Tonc - What are the best ways to invest in blockchain right now?
Question from Mark Kalis - How are comps getting the edge on us in trading? Is it just pure correlation trading?
Comment from tDok3 - No debate to be had there. It's a simple & foregone conclusion. Higher fees ==> lower participation perhaps goal for CB market manipulation In response to tweet: Are exchanges shooting themselves in the foot by continually hiking market data fees?
Question from See16 - Can you please do a deep dive into smart routers on a future program? They are the secret sauce of the market these days, but no one really seems to understand how they work. Shedding some light on the otherwise dark world of routing would be a great service.

Mark is joined by co-host Matt Amberson, Principal at Option Research & Technology Services (ORATS).

CTO Interview: Our guest today is Michael Mescher, Founder of Gammon Capital.

He discusses:

What is Gammon Capital?
You've talked a lot about the dangers of selling volatility and how short vol managers aren't worth their fees. What are your thoughts on the maelstrom of the past week? How have your funds fared over the past week?
Machine learning is a hot buzzword these days, but what are some of the practical applications that you're seeing in the financial markets right now? Is it ready for prime time or still in the nascent phase?
Unsupervised learning/ fundamental strategies?
Supervised learning / quantitative strategies?
Classification vs. Regression problems
Hiring machine learning specialists vs. Products specialists
90% of the world's data was created in the past two years. Is that an opportunity or a terrifying statistic?
Testing models on out-of-sample data vs. carefully constructed back tests?
Should managers be concerned that the robots are coming to take their jobs and their clients?

The Inbox: Listener questions and comments

Question from BLAL9 - What do you see as the outlook for AI and machine learning in the financial management space going forward? I see a lot of smoke but is there much fire? Are there many funds currently using it to generate alpha right now?
Question from Tonc - What are the best ways to invest in blockchain right now?
Question from Mark Kalis - How are comps getting the edge on us in trading? Is it just pure correlation trading?
Comment from tDok3 - No debate to be had there. It's a simple & foregone conclusion. Higher fees ==> lower participation perhaps goal for CB market manipulation In response to tweet: Are exchanges shooting themselves in the foot by continually hiking market data fees?
Question from See16 - Can you please do a deep dive into smart routers on a future program? They are the secret sauce of the market these days, but no one really seems to understand how they work. Shedding some light on the otherwise dark world of routing would be a great service.

Previous Episode

Trading Tech Talk 61: Tackling Market Data Fees, AI and More

Today we have special guest co-host Rob Brogan from Flextrade.

Hot Topics in Tech: What's going on in fintech?

Next Episode

Trading Tech Talk 63: What the Heck Is a Smart Router?

CTO Interview: Today we feature special guest co-host Peter Maragos, CEO, Dash Financial.

Catching up with Dash:

When Peter was last on Dash had just acquired the LiquidPoint business from Convergex with the help of private equity firm GTCR. Now they've just partnered with Flexpoint Ford, another PE firm. What was the impetus behind the second transaction?
Dash has an impressive suite of diverse products and services - smart order routers and algos, the Dash360 analytics platform, trading workflow tools, an options ATS and even human traders.
What are the upcoming projects/initiatives at Dash?
Peter's views on crypto trading

Hot Topics in Tech: Smart Routers

Today's topic was inspired by the following listener question: Question from See16: Can you please do a deep dive into smart routers on a future program? They are the secret sauce of the market these days but no one really seems to understand how they work. Shedding some light on the otherwise dark world of routing would be a great service. Smart Routing Deep Dive: Quite a few things happen after you hit the trade button in the options market - probably much more than most people realize. Your order has to get routed from your broker/execution platform to the exchange. But it's not a simple path. That's where smart routers come in. What is a smart router? What do they do? What makes them smart? What are the different rules/filters/configurations that most smart routers have to consider? - NBBO, exchange fees, size, exchange pricing model, PIP auctions, payment for order flow rates, etc. What about resting orders? Are the smart routers constantly monitoring them and rerouting if necessary? Why do we need them in the options market? How do options smart routers differ from equity smart routers? Why have smart routers become so controversial in the options market? Spreads: This is the Achilles heel for many "smart" routers since every exchange has its own spread book and they don't talk to each other. So you could easily work a spread order that lines up on one exchange but, because your order was routed to a different spread book, your trade isn't filled. How do we overcome the spread routing issue in 2018? Is it a tech problem or a regulatory problem? Final thoughts/takeaways on smart routers?

The Inbox: Listener questions and comments

Question from Nikes T: Hey Options Insider! Love the network particularly the tech talk. We need more episodes! On an upcoming show do you think you guys could talk about why dark pools don't exist in the options market? Is it a tech limitation or something else?
Question from LaLaLad: Does block chain have any practical use on the trading front or is it all just back office stuff?