Expert opinion

Algorithmic trading, a systematic method that utilizes mathematical models for making transaction decisions in the financial markets, is a global phenomenon, but the subject is a complex one1.

Stock exchanges began transitioning from a traditional auction to computerized transactions in the early 1980s. In the late 1980s and early 1990s, Electronic Communication Networks (“ECNs”) became increasingly popular for traders looking for more efficient access to the markets.

In 2001, IBM reserchers published Agent-Human Interactions in the Continuous Double Auction2. The research paper found that in a Continuos Double Auction market process, simple software bidding agent- strategies were able to outperform human subjects by a clear margin, setting the stage for the high-frequency trading, an algortithmic trading approach characterized by high speeeds and widely used today in the financial markets.

Last month I interviewed, in occasion of the publication of his last book “A guide to creating a succesful algorithmic Trading Strategy”, Perry Kaufman. He began his career as a “rocket scientist,” first working on the Orbiting Astronomical Observatory (OAO-1), the predecessor of the Hubble Observatory, and then on the navigation for Gemini, later used for Apollo missions, and subsequently in military reconnaissance. There is a certain connection between the construction of a trading program and the world of rockets; in fact, the earliest systematic programs used exponential smoothing, a technique developed in Aerospace for estimating the path of missiles. In the early 1970s, he started trading using automated systems while the idea was demeaned by professional traders as “ridiculous”, “the market just doesn’t work that way”, “you can’t make money if you don’t know the value of the stock”8. Now that opinion seems to have been turned upside down

Technical analysis is constituted by several operative techniques. One of the most efficient, confirmed also by various academic studies, is the use of relative strength. Relative strenght is a stock selection process that argues that the strongest stocks are the best future performers.

What will happen next is very difficult to assess, and this lack of visibility is the very reason why markets should remain very volatile and unpredictable over the months to come.
Politics will outshine market fundamentals, where the UK and the EU will enter into long and complex negotiations.

According to the Ifo Institute of Economic Research, German business sentiment improved in June, despite all the turmoil caused by the EU referendum in UK. Economists were expecting the reading to disappoint, falling from 107.70 to 107.50, while the actual result was 108.7 points.

The German Business Climate is calculated by a number of surveys from different firms and companies in a handful of sectors, such as construction, wholesales, manufacturing, retailing, services, which altogether provide insight on the German economy. The given release is important, as it tends to also provide a preliminary forecast for future economic activity and the economic conditions in the Eurozone overall. Furthermore, the survey consists of approximately seven thousand businesses, which are asked to assess the economic outlook for the upcoming six months.

The markets had been anticipating a “remain” victory and the surprise effect should even amplify the impact on financial markets. The immediate effect should be extreme volatility with market dislocations due to margin call, panic selling and the search for safe haven.
The UK are to enter into a two year procedure with the EU, to negotiate the exit terms. The EU will probably not make it easy in order to discourage other leavers, which promise to keep uncertainty and volatility fairly elevated at least for the next months.

The first months of 2016 were a reminder that we are not only living in a world of low to negative interest rates. It was also a good reflection of uncertainties around global growth in general and a long list of looming event risks.

The volatility witnessed during the first months of the year and the whipsawing in the valuation of risk premia is not a 2016 phenomenon: equity indices for Europe, the US or Emerging Markets unveil that high volatility and significant market swings have been with us since at least late 2014.

We were cautious in our diversified portfolios with a reduced exposure to equities and high yield bonds. We held significant amounts of cash (over 10% on average) to stay flexible and be able to act quickly. We sold our UK exposure and hedged the GBP currency in order to preserve investors’ capital. We also hedged part of our peripheral exposure by selling futures contracts on Italian debt.

Kirkpatrick and Dahlquist, in their book about Technical Analysis published in 2010, hypothesized that technical analysis is considered historically native from Japan, because is there that the first recorded technical rules have been found.
However technical analysis is thought to be a more ancient method of analyzing markets and prices, but its history has been poorly recorded.