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The Trading Mesh

Winning in Today’s Stock Market at The Trading Show Chicago

Fri, 29 Jun 2012 15:54:42 GMT           

Winning in Today’s Stock Market at The Trading Show Chicago Matthew Shapiro of MWS Capital enthusiastically comes to the podium and addresses the audience with the opening line, "Are you guys ready to win!”. Mr. Shapiro goes right into the presentation by separating financial management approaches into two distinct styles. The first is the one most of us are comfortable with, the “classic” approach. This style of management generally places confidence in the known probability assignments from standard models that we are familiar with. The second style, and certainly more alarming, is the “catastrophic” approach. While we can assert the effectiveness of the standard modeling techniques some of the times, there are opportunities where the standard models do not perform as expected. This is generally due to not understanding the dynamics of the market during a slice of time when the robustness of the general model dissipates. When these opportunities arise, quantitatively we have not generated the right parameters to our probability functions. These opportunities arise more than expected and Mr. Shapiro is an advocate of understanding how the dynamics of these “catastrophe” events perturb our current expectations.


As such, Mr. Shapiro has delicately modeled his version of the parameters in his catastrophe model using six dimensions. The visualization of the model from his presentation shows a dynamic system continuously expanding into itself as expected until an event occurs that influences the system to recreate itself unexpectedly. What are the dimensions of this catastrophe model? Mr. Shapiro states that the dimensions can be understood through the irrational effects that occur on behalf of the following controls; cooperation, firms, long term investors, short term traders, market makers, and liquidity providers.


These interweaving controls result in irrational byproduct effects throughout the process. First, market markers dominate the dynamics of the market and then leave when market conditions do not meet their liquidity objectives. The short term traders then enter and leverage any arbitrage opportunities in the current state of the system. Once there are no more short term gains to be made to the satisfaction of the traders, cooperation and long term investors scale the market for buy and hold opportunities. What may be construed from this process is rational and irrational players intertwine under certain conditions leaving effects to the market that can potentially produce unexpected, catastrophic events.


Since popular themes in finance, modern portfolio theory, etc., "work" under certain conditions when certain players participate, it can very well be understood that some irrationality effects from these interactions sway expected probability functions values. The key, according to Mr. Shapiro, is to recognize the conditions of the participants in the market which support the potential probability functions and its expected values.


-Original content provided by Safraz Rampersaud, an on-site blogger at The Trading Show Chicago

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