Thursday, January 03, 2008


A musing about "information" in the financial markets.

The "Big Boys", or the largest investment management houses and traders, don't read the Wall Street Journal or the Financial Times. Rather, they just speak to the reporters writing the story and get a "feel" for the putative articles contents.

In other words, what you are reading in these publications is very much old news. This is not to say "information" is not extremely valuable, but one must be cognizant of what kind of information one has access to. In the financial markets, several categories are important.

Price information. Everyone has it. Thousands of sophisticated algorithmic models use it, and financial services has seen a massive inflow of quantitative analysts all looking for that next correlation trade. Excessive profits attract competition and only the most sophisticated "Big Boy" players will do well over time using price information.

Economic Forecasts from brokerage firms. Almost entirely useless. It is a curious thing about information in recursive systems with thinking, self-interested participants: A case can ALWAYS be made for the bullish or bearish sides, depending on what magical factors one sees as having the most weight...and this is ALWAYS dependent on one's interest in the outcome. There simply is no such thing as an "objective" macro-economic forecast.

"Buy", "Sell", "Hold". Again, almost entirely useless for most players. The "Big Boys" have preferential access to the analysts providing these "calls" and know when a "SELL!" announcement will be made. As an aside, this is one of the reasons I do not agree with the "efficient markets hypothesis" - valuable "information", almost by definition, is never distributed to all market participants simultaneously.

However, there are certain talented AND experienced participants that are able to use "information" effectively. These are likely players that have actually been through more than one credit cycle and understand factor-based "balance points". Unfortunately, the business models (which is not to say its a conscious effort by executives) of large investment houses preclude this type of development, as the worst thing an experienced person can do in his or her career is putting the brakes on the gravy train.

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