Elite E Services Newsletter November, 2006
Intelligence disclaimer: Reading and thinking on an intelligent level carries a high level of risk, and may not be suitable for all humans. A high degree of intelligence can work against you as well as for you. Before deciding to read this article you should carefully consider your objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial knowledge and therefore you should not invest time that you cannot afford to lose. You should be aware of all the risks associated with intelligence, and seek advice from an independent advisor if you have any doubts.
Forex Disclaimer: WARNING! Foreign exchange is risky! There is a very high probability that you could lose some or all of your investment. Therefore, forex should be taken with a grain of salt, by only the elite, sophistocated investor. See Risk Disclosure
Do you feel the desire to go shopping, run errands, and 'get things done' ? Were you taught that these are productive activities which are fulfilling by themselves?
Do we need to quote statistics to prove that intelligent english speaking workers are diminishing at an astonishing rate? Baby boomers are retiring, and a new generation born into the world of existing technology is not motivated to do mundane jobs that are not stimulating. And why should anyone be stimulated to do something that a robot could do? But the question is not about robots it is about accuracy and quality.
In a letter to a prospective business partner, we write:
We have been building automated trading systems for several years. During that time, we have traded many systems with great success, but in our experience, each has a time limit – ranging from several weeks to several months, after which time they start losing. Sometimes, we can adjust and optimize the strategies and keep them profitable, but eventually this too becomes impossible. So it is our final conclusion that no strategy, by itself, based on static rules, can be consistently profitable in the long term. It is with this in mind that we endeavor to build a software that will create strategies.
We can spend the next years of our lives making a perfect strategy, which may or may not succeed. Or, we can create an environment to build strategies which will create the strategies itself. It is the equivalent of making an algorithm factory.
Automation simply frees us from doing simple repetetive tasks, at the bare minimum. In the best case scenario, automation can run the business by itself without any human intervention. If we find ourselves somewhere in the middle, we will have accomplished something. I.T. is nothing more than a tool, a technological hammer. So far, no one has applied the notion of using the computer to actually make money.
The problem is not the technology it is the misuse of it. For example, in the age of the horsecarriage, the car was the spectacular device. When your life is designed around the car, are you driving the car or is the car driving you? When cities are then built (suburbia) based on the 50 mile commute, and then wars are fought to keep the cost of fuel down, what does that say about war? Is the machinery already running society?
Which technology has more intelligence: the chemical weapon or the artificial intelligence algorithm? As weapons drive soldiers to war, algorithms will drive more traders into the markets. Automation in trading is not replacing the trader, it is enhancing him, freeing up his time to do other more important things that the algorithms cannot do. Trader's trade because the opportunity is there. Traders and other financial professionals are often opportunists - algorithmic strategy generation will create more opportunities, which cannot be seen or executed by even the expert analyst.
While there are many algorithmic trading models, many 'quant strategies' have more to do with execution, or arbitrage, than generating real strategies. What is a real trading strategy? For example, straddling the EUR/USD and USD/CHF during a fed announcement, exiting the loser, riding the winner, and taking a 5% profit in 10 minutes. Or, noticing that everyday during interest rollover, there is a pattern selling of interest bearing currencies at 5:00 PM after the interest is credited by large brokerages. These types of strategies, especially those involving multiple currencies and large, complex calculation, are better left to the algorithm than the human.
There are now 36 instances where genetic programming has produced a human-competitive result. Click here for the 8 criteria defining “human-competitive” These human-competitive results include 15 instances where genetic programming has created an entity that either infringes or duplicates the functionality of a previously patented 20th-century invention, 6 instances where genetic programming has done the same with respect to a 21st-centry invention, and 2 instances where genetic programming has created a patentable new invention. These human-competitive results come from the fields of computational molecular biology, cellular automata, sorting networks, and the synthesis of the design of both the topology and component sizing for complex structures, such as analog electrical circuits, controllers, and antenna.
http://www.genetic-programming.com/humancompetitive.html
High frequency finance – the hedge fund category of the future
Dr. Richard Olsen, Chairman of Olsen Ltd, Zurich, Switzerland.
There are many different categories of hedge funds from ‘convertible arbitrage’, ‘short bias’, ‘global
macro’ and managed futures, etc. The most important category is missing! It is the category of‘high frequency finance hedge funds’. High frequency finance managers use tick by tick market
data as an input to their statistically driven quantitative models. They use tick by tick data, not
only to optimise the timing of their trades, but also to generate the initial recommendation of their
trades.
Why is it necessary to create a separate category? The purpose of creating categories of hedge
funds is to make it easier to track the performance of a manager, a particular category and to
make peer to peer comparisons of different managers within one category.
Hedge fund managers using the methodology of high frequency finance have a very different risk
return profile to other hedge fund managers. In particular, they can build models that are far more
adaptive to changing market environments. Furthermore, their models have a much longer life
time than traditional models developed on the basis of low frequency data.
http://www.olsen.ch/center/papers/hedgefuture.pdf
Final thought: data and algorithms
Our application of automation is towards the financial markets, which represents our dataset. The dataset however could be anything, such as distributing disaster relief to hurricane victims, or the optimization of street traffic. However, after spending 100 million on the optimization of traffic it will be very difficult to see any resulting profit directly, and actually what have you really accomplished? In our case, money invested will be realized with exact profit as output - computing power will be directly translated into cash. This is the new paradigm of trading and investing as seen from a GIGO Garbage In - Garbage Out perspective.
Data examples: (Garbage In)
News Map - A collection of news articles, using a relevance algorithm to determine size, shape, and color of blocks that display the news.
Alert Map - World map displaying current disasters.
Forex Map - World map colored according to various exchange rate fluctuations, offered by Oanda.
Our input, are discretionary numbers from the forex market, or 'tick data'. The algorithms will analyze the data, create strategies, and execute them. The end result, will be money (profit).
Profit: (Garbage Out)
The above represents a real (live) account statement, generated by a fully automated forex trading system that generated 989 trades in 3 days for a total profit of 8.3%. The scalping strategy was traded on an interbank feed, but it was taking profits intra-minute which is discouraged, so trading stopped. However it does demonstrate, in a live environment, how a specific strategy may look on a live account.
To see the full account statement click here
EES CTA
Elite E Services is a registered Commodity Trading Advisor (CTA) with the National Futures Association (NFA) NFA ID# 0373609
Managing risk by trading futures and options on futures contracts is a vital component of the global economy. Every business day tens of millions of futures contracts are traded on an increasingly broad spectrum of products, including agricultural commodities, oil, precious metals, equities, treasury bonds, financial indexes and foreign currencies. Investor confidence is crucial to the success of the futures markets, and the best way to gain investor confidence is to ensure that the highest levels of integrity are demanded of all market participants and intermediaries. Membership in NFA is mandatory, assuring that everyone conducting business with the public on the U.S. futures exchanges-more than 4,200 firms and 55,000 associates-must adhere to the same high standards of professional conduct. NFA is an independent regulatory organization with no ties to any specific marketplace. We operate at no cost to the taxpayer. We are financed exclusively from membership dues and from assessment fees paid by the users of the futures markets.
Click here to read more about the NFA or scroll to the end of the newsletter
Commodity Trading Advisor (CTA)
A CTA is an individual or organization which, for compensation or profit, advises others as to the value of or the advisability of buying or selling futures contracts or commodity options. Providing advice indirectly includes exercising trading authority over a customer's account as well as giving advice through written publications or other media.
EES - ACM
Membership #: 1040684
Elite E Services joins the Association for Computing Machinery (ACM) and Special Interest Group for Genetic and Evolutionary Programming (SIGEVO), formerly known as the International Society for Genetic and Evolutionary Computation (ISGEC).
ACM, the Association for Computing Machinery, is an international scientific and educational organization dedicated to advancing the arts, sciences, and applications of information technology. With a world-wide membership ACM is a leading resource for computing professionals and students working in the various fields of Information Technology, and for interpreting the impact of information technology on society.
ACM delivers resources that advance computing as a science and a profession. ACM provides the computing field’s premier Digital Library and serves its members and the computing profession with leading-edge publications, conferences, and career resources.
Download the latest copy of SigEvolution Newsletter
SIGEVO -
home of the ACM Special Interest Group on Genetic
and Evolutionary Computation.
Predecessor
Organization -- ISGEC International
Society for Genetic and Evolutionary Computation
NFA's role in the U.S. futures industry
In 1974 Congress established the Commodity Futures Trading Commission (CFTC), a federal regulatory agency with jurisdiction over futures trading. The same legislation authorized the creation of "registered futures associations," giving the futures industry the opportunity to create a nationwide self-regulatory organization.
The CFTC provides government oversight for the entire industry. Each U.S. futures exchange operates as a self-regulatory organization, governing its floor brokers, traders and member firms. NFA regulates every firm or individual who conducts futures trading business with public customers. Although the various regulatory organizations in the futures industry have their own specific areas of authority, together they form a regulatory partnership that oversees all industry participants.
How NFA Fights Fraud and Abuse
Rigorous registration requirements. NFA thoroughly screens all firms and individuals wishing to do business with the public on any U.S. futures exchange. Applicants must meet stringent fitness requirements, including providing fingerprint cards for background checks. In addition, registrants must pass comprehensive proficiency testing requirements. We also have the authority to deny, revoke, suspend, restrict or condition any firm's or individual's registration.
Comprehensive compliance rules. Over the years, NFA has adopted stringent rules covering a wide variety of areas such as advertising, telephone solicitations, risk disclosure, discretionary trading, disclosure of fees, minimum capital requirements, reporting and proficiency testing. Just as importantly, we perform audits and examinations of our Members to monitor compliance with those rules. We also conduct financial surveillance to enforce compliance with NFA's financial requirements.
Strong enforcement authority. NFA has the authority to take disciplinary actions against any firm or individual who violates its rules, ranging from Warning Letters for minor rule infractions to formal Complaints in cases where rule violations warrant prosecution. Penalties resulting from Complaints include expulsion, suspension for a fixed period, prohibition from future association with any NFA Member, censure, reprimand and a fine of up to $250,000 per violation. NFA often collaborates with the CFTC, the FBI and other law enforcement agencies to ensure successful prosecutions.
Trade practice and market surveillance. The futures industry has changed dramatically in the past few years. Long-established methods of trading, such as open-outcry, have given way to electronic trading at both traditional and new all-electronic exchanges. NFA provides a variety of regulatory services and programs to electronic exchanges to ensure the fair treatment of customers and to maintain orderly markets.
Resources for Investors
Investor protection begins with investor education. From its inception, NFA has committed resources to provide investors with the tools they need to make informed financial decisions. We have developed several publications that discuss a variety of futures-related topics. All of the publications are available on NFA's Web site (www.nfa.futures.org) and through NFA's Information Center (800-621-3570).
In 1991, NFA created the nation's first clearinghouse of disciplinary information about futures firms and salespeople. This clearinghouse allowed investors and others for the first time to get a "one-stop" background check from government and self-regulatory sources about the disciplinary history and other background of 150,000 individuals and 10,000 firms that either are now or have been involved in the futures industry.
NFA moved its extensive database of information online in 1998 when we introduced the Background Affiliation Status Information Center (BASIC). BASIC, which can be accessed through our Web site, contains current and historical registration information concerning all current and former CFTC registrants. It also provides information concerning disciplinary actions taken by NFA, the CFTC and all the U.S. futures exchanges. Investors and other industry participants conduct more than 600,000 BASIC searches every year.
Dispute Resolution
Disputes occasionally occur in any business, and the futures industry is no exception. In 1983, NFA began an arbitration program, providing a convenient, inexpensive and prompt method for investors to resolve futures-related disputes. Since that time, NFA arbitration has become the primary venue for dispute resolution in the futures industry.
Since August 1991 we have also offered a mediation program to provide a faster and less expensive alternative to arbitration. To date, more than 1,500 cases have been referred to mediation.
In October 2001, we became the first regulatory organization in the financial services industry to accept arbitration claims online. Customers are now able to file their initial arbitration or mediation claims on NFA's Web site. Within minutes, we send a reply stating that the claim has been received. As the case progresses, claimants and respondents can check the status of the case online.
Making Self-Regulation Work
Keeping the Self in Self-Regulation. An important element of self-regulatory success is active, voluntary Member involvement. NFA's 25-member Board of Directors consists of representatives of every category of membership. These representatives, elected by their peers, are joined by representatives from U.S. futures exchanges and non-industry Board members to form a governing body that is responsible for interpreting the mission of the organization, developing policy and ensuring a sound financial structure.
NFA's organizational structure gives our Members many opportunities to participate in the self-regulatory process, from rule making to rule enforcement. Members sit on NFA's Business Conduct Committees, Advisory Committees and numerous special committees appointed by the Board of Directors to ensure maximum Member involvement in all of our regulatory efforts.
Operating efficiently. NFA is constantly looking for new ways to use technology to streamline work processes and increase efficiency. For example, in June 2002 we launched our Online Registration System (ORS), leading the futures industry into a new era of increased registration efficiency. In 2004, we began submitting digital image of fingerprint cards to the FBI, shortening the background check procedure from an average of three weeks to as little as several hours. Later that year we introduced Easy File, an online system that allows certain membership categories to file financial statements with NFA electronically.
Many regulatory efficiencies also have been achieved through the delegation of regulatory responsibilities to NFA from the CFTC. Throughout NFA's history, the CFTC has authorized NFA to conduct additional regulatory functions. For example, NFA now processes registration applications for all futures industry participants, initiates actions to revoke and/or deny registrations, acts as agent for service of process for foreign firms under Part 30 of the Commodity Exchange Act and reviews pool financial statements, as well as CPO and CTA Disclosure Documents.
Providing leadership. NFA's accomplishments and reputation are a direct result of the commitment to quality work exhibited by each and every NFA employee on a daily basis. Their professionalism, expertise and commitment to NFA's mission and goals are key elements of our success.
NFA has also developed an extensive Member outreach program to help our Members understand and fulfill their regulatory obligations. We publish several regulatory guides, offer education visits to new Members to help them establish sound business practices, and periodically host Member meetings at various locations around the country.
Adding value to the industry. Even in areas where we do not have regulatory jurisdiction, NFA constantly looks for opportunities to provide additional value to the industry. For example, NFA's restitution program helps customers involved in commodity fraud cases recover some of the money they lost dealing with dishonest salespeople.
The program usually applies to judgments awarded in cases brought by the CFTC involving commodity fraud by unregistered firms and individuals. Although the majority of these cases do not involve NFA Members, offering the restitution program reflects our commitment to market integrity and investor protection. And because NFA does not charge any fees for administering the restitution service, we are able to return as much money as possible to the victims.
Meeting the Regulatory Needs of an Evolving Industry
In 1982, NFA began its mission to strengthen the integrity of the U.S. futures industry and protect investors. More than two decades later, the futures industry is a thriving, integral part of the country's economy. Trading volume on the nation's futures exchanges continues to set new records. At the same time, the number of customer complaints have decreased dramatically, a direct result of the collaborative work done by NFA, the CFTC and the futures exchanges to ensure the integrity of the markets.
As the financial markets have evolved, NFA has taken a leading role in addressing new regulatory issues and has earned a worldwide reputation as a model for self-regulation. Every year NFA hosts visitors from many countries wanting to learn more about NFA's self-regulatory structure and methodology. NFA has also provided formal training programs to regulators, government officials and exchange representatives from several countries.
In today's rapidly changing marketplace, the need for regulation that is both effective and efficient has never been greater. NFA pledges to always strive to be a unique and exemplary self-regulatory organization.
We are confident that we have the experience and expertise to meet whatever regulatory challenges may arise. We are first, foremost and only a regulatory body devoted to investor protection and market integrity.
More about Richard Olsen and Oanda
Dr. Richard Olsen is founder and CEO of the Zurich-based Olsen Group, a pioneer in the development of online financial forecasting systems and trading models for applications ranging from trading to investment and risk management.
Dr. Olsen founded the company in 1986 after studying economics and law at Oxford and the University of Zurich and working two years as a foreign exchange trader and member of the research team for a major bank. In the latter capacity, he was responsible for developing research tools and conducting a pilot study on market dynamics.
From this work came his first attempts at building the computational models that would become Olsen & Associates' core technology. Today the company remains in the forefront of research demonstrating persistent predictability in the financial markets.
Dr. Olsen holds a master's degree in economics from the University of Oxford and a doctorate of law from the University of Zurich. In 1995, he launched the first in an ongoing series of conferences entitled "High Frequency Data in Finance" in which the Olsen Group provides filtered tick-by-data to researchers internationally and convenes a meeting in Zurich for presentation of papers.
Dr. Olsen is also co-author of the new book "An Introduction to High Frequency Finance," the first major overview of the field, which will be published in early 2001 by Academic Press.
About the Olsen Group
Founded in 1985 by economist Richard Olsen, the Olsen Group has played a pioneering role in the development of the young field of high-frequency finance. Based on ongoing analysis of what is considered the world's largest filtered database of tick-by-tick price movements, the Olsen Group is in the forefront of research demonstrating persistent predictability in the financial markets.
Specifically, the firm has contributed to the growing body of evidence that markets have internal structures, with participants acting in prescribed ways based on their differing profiles and time horizons. Within this framework, the Olsen Group has demonstrated that financial time series exhibit significant deviations from a random walk and can be conditionally forecast.
From the firm's 15-year research effort has come not only new financial theory but also sophisticated online tools for forecasting, trading and risk management.
The primary goal: To be an effective "incubator" for predictive technologies
The mission of the Olsen Group is to serve as an industry "incubator" for ventures related to the development of new predictive technologies. Accordingly, the organization is structured into highly focused units designed to efficiently carry new ideas from research through market application.
At the core of the Olsen Group's capabilities is the Olsen Research Institute, which works closely with the ETH in Zurich and other leading universities to explore new technologies and develop pilot products. Complementing the institute's activities are commercial units focused on creating:
In addition, the Olsen Foundation underwrites research and development in the predictive technology area.
For more information OANDA - Riskeye - Olsen Research Institute - emergingfinance
Reference Articles:
ref: http://en.wikipedia.org/wiki/Genetic_algorithms Genetic Algorithms Definition
http://www.technicalanalysis.org.uk/moving-averages/ThSy00.pdf Integrating Genetic Algorithms and Text Learning for Financial
Prediction
http://privatewww.essex.ac.uk/~scher/eddieProj/TsangCEE2001.doc Evolutionary Arbitrage For FTSE-100 Index Options and Futures
http://www.olsen.ch/research/307_ga_pase95.pdf Olsen GA 1995
High frequency finance œ the hedge fund category of the future High frequency finance œ the hedge fund category of the future. Dr. Richard Olsen, Chairman of Olsen Ltd, Zurich, Switzerland. ...
http://en.wikipedia.org/wiki/Weasel_program Weasel Program The weasel program is a computer software simulation written by ethologist Richard Dawkins in order to demonstrate the relative power of cumulative selection in natural and artificial evolutionary systems.
isgec.org International Society for Genetic and Evolutionary programming
http://evonet.lri.fr/index.php EvoWeb
http://www.genetic-programming.com/johnkoza.html John Koza Homepage
nfa.futures.org NFA National Futures Association Website
acm.org ACM Association for Computing Machinery
http://www.investorwords.com/983/Commodity_Trading_Advisor.html Definition of CTA
EES Newsletter Info
This newsletter can be accessed in its entirety from this link:
http://ees.net.nz/info/ees-newsletter/11-2006-newsletter.htm
Newsletter Folder:
http://ees.net.nz/info/ees-newsletter/
© 2006 Elite E Services Inc. Elite E Services is an electronic boutique brokerage offering managed accounts, trading systems, and I.T. consulting for the financial industry. eliteeservices.net ees.net.nz
Risk Disclosure
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
We have contacted you because you have at some point corresponded with Elite E Services or signed up for our newsletter. This message is an informational newsletter, not a commercial advertisement. It is compliant with all federal and state laws regarding e-mail messages including the California Business and Professionals Code, . We have provided (mailto:info@ees.net.nz?subject=REMOVE) e-mail contact so you can be deleted from our mailing list. Elite E Services USA mailing address is Po Box 1436 Swansea, SC and our website address is www.eliteeservices.net eliteeservices.net