Thread by @AnilVohra1962

Systemic Equity Manipulation (THREAD from 2019)

Based on the paper written in November, 2018 entitled “How to Increase Global Wealth Inequality for Fun and Profit” by Bruce Knuteson, a particle physicist who was a professor at MIT before leaving to become a quant at D. E. Shaw,

an academia focused hedge fund with over $50b of assets under management. Bruce has since left to set up Kn-X, The Knowledge Exchange, for the purchase and sale of knowledge, bridging the gap between academia and industry. 

papers.ssrn.com/sol3/papers.cf…

In this short 5 page paper, which consists of a humorously laid out two page thesis, one page of graphs, and two pages of references, he notes that for major western equity markets, over the last 25 years, more than all of the gains have come during the overnight hours.

Specifically, the gains for the major western equity markets can be broken down as follows:

US SPX (93-18):
   - Overnight return: +1171%
   - Intraday return: -21%
US NASDAQ (93-18):
   - Overnight return: +3002%
   - Intraday return: -65%

Canada TSX 60 (99-18):
   - Overnight return: +1173%
   - Intraday return: -67%
France CAC 40 (93-18):
   - Overnight return: +679%
   - Intraday return: -64%
Germany DAX (93-18):
   - Overnight return: +1160%
   - Intraday return: -58%

Japan Nikkei 225 (93-18):
   - Overnight return: +1037%
   - Intraday return: -89%

See charts here:

https://twitter.com/anilvohra69/status/1114847410679717888/photo/1

A few points to note:
1) more than 100% of the gains come overnight 
2) daytime returns are negative, ranging from (-89% to -21%) in every case.

3) daytime returns since 2009 have been virtually flat in every market. 
The paper argues that a large ($billion+) leveraged fund with a large core portfolio can enter a program to buy equities on the open. At the open liquidity is low with larger bid offer spreads.

Executing a large order at that time increases the the transaction costs. It also sets an upward drift in prices that persists throughout the day. The trade can then be closed at the close when liquidity is high and spreads are narrow.

Given the negative daytime returns, which in the last decade have been near zero, the strategy incurs a small cost. The drift however continues into the overnight hours racking up large gains in the large portfolio. He goes on to point out that:
1) the practice is illegal

2) the strategy is used by several participants each doing their variation of the same basic strategy 
3) it is unlikely to be caught
4) it feeds fees to the market infrastructure which includes prime brokers, banks and exchanges

5) there is no collusion with each party acting independently though executing a similar strategy. 
6) it creates asset bubbles

In keeping with the tongue in cheek style of the paper,it even suggests contacting regulators “if you would like to know whose trading caused the highly suspicious return patterns shown” in the charts above, going so far as to give contact information for each national regulator.

Finally, note that this strategy helps to explain a few things:
1) the truth behind the perception that the market is run by algos.
2) the probability of a day trader succeeding over time in this market are essentially nil.
3) why the largest trade is at the end of the day

cc @biancoresearch

https://twitter.com/biancoresearch/status/1353569205413687297

Link to the paper.

https://twitter.com/grove654/status/1353590947171479555