The Derivative - Why is intraday trading so hard, Where is the ES liquidity, and When are most market moves happening (overnight), with Deepfield’s CEO, Bastian Bolesta

Episode Date: March 31, 2022

Who in the right mind would choose to make a living day trading stock index futures? It must be one of the most competitive, most challenging arenas out there with HFT and 10s of billions of dollars in quant strategies chasing alpha. In this week's episode, we're chatting up the founder and CEO of short-term systematic shop Deepfield Capital from Switzerland, who ply their wares on stock index markets from Asia to Europe, the U.S. Bastian also discusses why there is a difference between market movement during the day and overnight sessions, the status of ES liquidity these days, whether less liquidity will bring new opportunities, the science (and art) of strategy research, why VIX futures are tough to trade, and more! Plus, as a bonus, we find out why Bastian dressed in a full head-to-toe Chewbacca costume for a wedding. Chapters: 00:00-01:25 = Intro 01:26-14:20 = A Swiss View on Swiss Neutrality 14:21-29:11 = Is Day trading Stock Indices the hardest game around? 29:12-51:56 = Why is there such a Difference between Market Movement in day and overnight sessions? 51:57-59:42 = Where is ES Liquidity these days? Does less Liquidity bring More Opportunity? 59:43-01:19:00 = The Science (and the Art) of Strategy Research 01:19:01-01:27:45- Why VIX Futures are Really Hard to Trade 01:27:46-01:33:34 = Two Truths & a Lie Follow along with Bastian on Twitter @LongVol_DFC and for any questions email him at [e-mail] About Bastian Bolesta Bastian Bolesta is a founding partner and Chief Executive Officer of Deep Field Capital AG (DFC), a Switzerland-based, independent, purely systematic asset manager, developing and trading niche intraday and short-term systematic programs in global futures and equity markets. DFC's expertise in developing short-term quantitative programs is built on +20 years of independent, proprietary trading. As CEO and member of the Investment & Research Committee, Bastian drives Deep Field's business development and investment process for its systematic investment strategies on the proprietary trading and asset management side. Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hey, everyone. Happy April Fool's Day Eve. Is that a thing? We've got quite a lineup for you the next couple of episodes. Mike Green of Simplify, Olympic gold medalist Lindsay Jacob Ellis' performance coach,

and VIX specialist Jim Carroll, Stuart Barton, and Vance Hardwood to talk the new VIX ETFs coming out from Ballshares. Okay, after traveling to Ireland, then Norway in the last two episodes, we're continuing our European tour de coin in today's episode by chatting up the founder and CEO of short-term systematic shop Deepfield Capital from Switzerland, who apply their wares on stock index markets from Asia to Europe to US. Okay, time to get going with Bastion Balesta. Send it. This episode is brought to you by RCM's Outsource Trading Desk. We talk about trading in the overnight session in this episode, and RCM's 24-6 desk is there all night to facilitate such orders, so you U.S.-based traders can get some shut-eye. Visit www.r automaton. Welcome, Bastian.

Hi, Jeff. Thank you very much for having me today. Always a pleasure. Hopefully, it didn't take offense to call you automaton. Have you ever read the book, The Invention of Hugo Cabret? I heard you talking about it a couple of times and I haven't read it yet. So, but it's definitely on the to-do list because you're going to ask me again sometime in the future.

Yeah, the kid finds an old mechanical robot like the ones you are fond of. And it was his father's and he rebuilds it. It's a tearjerker with a little bit of coolness in there. And then I almost bought you

a present in Vail, Colorado, a little shop I was in that I sent you the picture of all those little, those little robots, but yeah, we loved it. I shared it with the team. Beautiful. No, it's old mechanical out of metal, right? That's, that's, that's, that's beautiful. I didn't have some of these in the shop. We have some of these in the office as well. Yeah, those were about $18,000.

So I didn't have that on me to send you the present. Yeah, we're working on that. Yeah, and probably it's $18,000. It's not really the billable thing. Exactly. It's beyond the norm, for sure. And so how are you? Your background's in international relations, right?

Yes, I have a passion in international relations. After studying business administration and finance and working for Deutsche Bank for a while, I decided to, I wanted to do something what is real fun. And that's when I started international relations and lived in China and stuff like that. But now I'm back in finance already.

So it's rather a passion, I would say, than a focus point. So with that passion, what are you making of Switzerland breaking with their long held neutral stance and all that's going on in the world? What are your pet theories or couch? A light start on a good mood. Awesome.

But actually, yeah, maybe to put that into perspective, while we are currently recording, it seems to be that Ukraine and Russia are making some progress. So you can actually really record on a good mute and markets are reacting to it accordingly. But in regards to Switzerland, I've read and heard, especially from the US, that it was well noted that Switzerland has changed something in the politics of neutrality.

I think Bill Clinton just the other day also said it quite openly and pointed out that this is a departure from certain ways Switzerland has acted in the past. There are actually a number of occasions in the past couple of years where Switzerland joined on certain sanctions. And one could probably say that, argue to a certain degree, this is now a continuation of that policy. So the current topic is neutrality,

but not showing lack of sympathy, so to say. So they want to show sympathy definitely towards Ukraine. The president of the Confederation has been traveling to Poland the other day. So he's at the forefront of showing that. And it's certainly, it's perceived as mixed feelings here in Switzerland, because not all political parties are happy with that departure from neutrality. But ultimately, I think they're also caught by surprise, because everybody, a lot of people were surprised how quick Europe spoke with one voice. Europe has a history of discussing over and over

and very long late nights. Think about Chancellor Merkel, always pushing it towards the night because everybody's sleeping. Then she has the overhand in Germany, guiding the discussions. But now she's gone. So there are certain changes in Europe now in terms of constellations. And I was very positively surprised how quick Europe spoke with one voice. The same goes for how NATO came together and the importance and relevance and the way how NATO works has been revived, which is probably a good thing, considering that it is standing for democracies and values of freedom and liberty and many other things we all cherish

and have enjoyed for many years and have just been reminded that it's not for granted. And in our case, in terms of distance, it's not for granted. And in our case, in terms of distance, it's not really far. So it's happening on the ground and we have a lot of refugees coming to the neighboring countries, but also to Switzerland now and to Germany. My kids this weekend and the weekend before, they actually went into the kitchen and baked cakes and said, mom, we want to do cakes. We want to sell cakes.

We want to raise money for Ukraine, for the refugees and the displaced people. And they are seven and nine. So when I was seven and nine, I don't know. I wasn't baking cakes for refugees. I had no clue that they're actually refugees. So it seems to be that our kids are living in a different kind of world now as well. And they have been successfully raising funds. We donated it to a World Central Kitchen, a U.S. organization.

I love these guys. They always, whenever there's a crisis in the U.S. or a natural disaster, or now also in Ukraine, they go out and they cook food. So their focus is on preparing meals, hot meals. If somebody arrives and has suffered heavily, that they feel comfort just for a short period of time. And this is an awesome effort. And yeah, my kids together with neighboring kids, they stood there the entire Sunday and people came by and very happily bought

heavily overpriced cake. Yeah, but it worked. And yeah, my wife just came back from an organization where they give out toys for kids who are arriving and clothes. So it is in our day-to-day life. It's crazy. And just a couple of months ago, just a couple of months ago, everything was, that was a different world. So it's a different, we are living in a different kind of world. And maybe we are reminded that how blessed we are in terms of what we could actually continue working in our now home offices and even benefited from it to a certain degree maybe

because we don't have to commute to the office every single day. And now maybe the world is even changing in terms of work that we can continue working from home and in the office. So some kind of hybrid model. And again, now there's another crisis with even more tragedy,

not more, but a different kind of tragedy. Yeah. And more avoidable. Yeah. Yeah. Yes. Yes, probably. But it's like history repeating itself or rhyming at least.

And I'm very humbled to see how people got together and help and how it is uniting. And I'm also very sad about seeing what has happening on the ground in Russia over years already. And now in a very short period of time, because I have friends from Russia as well.

One of my best friends is married to a very cool Russian girl or lady and very modern. And Moscow has been a very modern place. So we just had a talk the other day and they were paying with their subway tickets with faces. And they had Google Pay all over the place. And it was more modern. If you wanted to tip in a restaurant, you didn't leave any money there. You did this all by app.

So it was being in Moscow just a couple of weeks ago was felt more modern 21st century than many places much closer here by or in the US as well. But now this is all falling apart. And I hope that we somehow can all fix that together. Keep the dialogue open. And what's happening today in Turkey is certainly very helpful.

Even when I wouldn't put too much immediate hope into it. It's good if there's dialogue and people continue to talk. So definitely. Yeah, I put out on Twitter, like a week ago of my wife texted me, it's the kids need to bring a dollar for Ukraine to school. And I'm like a text I never thought I would get, right? Bring a dollar for Ukraine.

Okay. But that's beautiful. No, that's beautiful. It's yes. If everybody gives the dollar, then that works out somehow. Exactly. When I donated, I had to top up to cover

for the expense of sending money from A to B. It seems to be still be a thing that there are fees of sending money around the world. But yeah, wasn't crypto supposed to fix that? Yeah, exactly. Exactly. Exactly. Yeah. But no, the kids everybody's very engaged and I just told, I hope for the best.

So I see a lot of very positive things and my international relation perspective certainly has been shaken up to a certain degree, but it's a lot of real politic taking place as well. Switzerland reacting rather quickly then as well, joining the sanctions was just pure realpolitik because they caught by surprise and they knew this time around they couldn't just sit it out. Didn't work. Too much pressure and too much focus also on Russian money in Switzerland and oligarch money. And as such, yeah, there's a certain degree of departure, but I wouldn't emphasize it as strongly as it has been presented in media

in the last couple of weeks. They still want to be a place for mediation and they still want to be a place for all parties coming together. And they made a very strong stance that Russia should not be excluded from international organizations. You have heard that probably last couple of days that there were certain ideas to exclude them from the G7 and in some other organizations.

And the argument here is keep these platforms for dialogue. Maybe they have to sit at another table in a corner, the corner of shame. The kid's table. The kid's table, exactly. But it's still in the same room and the dialogue keeps on going. And that's very important. And do you have a take?

We've had Luke Groman on here a couple of episodes ago, basically saying this signals the end of the US dollar as the world's reserve currency, and the world's going to move more towards hard asset-based reserves, oil, gold, that kind of thing. Got any thoughts on that? Yeah. It's not our direct area of expertise, considering that we're purely systematic. Obviously, we love macro as well as a story, and we listen to other folks who are very highly qualified on that field.

Generally speaking, just very shortly, you can make the case that some folks out there have been reminded that a reserve currency could be switched off from one day to another. If you have reserves somewhere, you don't have the reserves anymore. That was quite a surprise maybe for a lot of folks. And that could be an argument that the transition to alternatives besides the dollar may have accelerated. You could make the case that there have been some certain developments

all over the place and China has been looking into alternatives as well. But then for the foreseeable future, I don't think that there will be any drastic change. The dollar will still have his role and a larger part of the world will still anchor their day-to-day life on the dollar. And it will not disappear as a reserve currency overnight. Agreed.

So let's get started. That was all just the appetizer. That was good. I saw it. We're done now. Yeah, yeah. So I wanted to start by asking you, basically, who in their right mind would choose to make a living day trading stock index futures? All right. That's got to be one of the most competitive, hardest arena out there.

So just how do you handle the insanity, which is these markets on a day-to-day basis? It's a good question. You could probably put it to more insanity, adding discretionary. If I would sit there and I have to do a discretionary, I know a lot of discretionary traders, but I never envied them in times of March 2020 or Volmageddon or something like that, when you have to put on trades while everything is on fire. And even when your portfolio is doing well, to keep calm and make good decisions at this point, I was always impressed by some folks managing that.

So considering that we are fully systematic and everything is automated, it is not really day-to-day stress. It's more a research effort, which has to deal with the difficulties and has to overcome the challenges of the data presented in daily trading. So there are certainly challenges because there's a lot of noise if you go very short term. All but one of our programs are all momentum-based and the majority of our research and development all focuses on momentum. You could argue that the larger part of movements into a day are rather mean reversion. If you look at the return distribution of the S a day are rather mean reversion. If you look at the return distribution of the S&P,

the little up and little downs, that's a highly mean reverting territory where you have a higher occurrence than the normal distribution would suggest. So very high. And as such, the majority of days you are facing are not really in your favor if you're momentum. But at the same time, once the market moves towards these outer edges, you have a lot of return potential as well. So one of our programs, the ICA, focuses on the tails.

It includes a signal which focuses on the shoulders. So we're trying to stay away from the mean reversion part, which is probably somewhere around 60 to 80% of the time the case. So noise and mean reversion are predominant and momentum, either a very strong downwards momentum or upwards momentum is probably around 20% of the time. So you have to come up with measures to stay away from the trouble zone. But once something is happening, it can be very rewarding as well. And ultimately, you have a very different return profile. If you consider that most short-term managers are rather focusing on mean reversion, there aren't as many momentum guys out there. So you have a USP, which sticks out because of the very short holding periods. What was that again? USP? Unique Selling Preposition. Oh, got it, got it. Yeah.

That's a marketing hat. I thought you were throwing a market term I didn't know at me. No, no, never, never. So the returns look different as a result and your role in the portfolio is different. So you don't have as much competition when somebody looks at you or compares what you do with other short-term managers. But the short-term space itself is very heterogeneous because everybody's going after slightly different things. But I'm with you in regards to challenges that you have to overcome the noise. That's

certainly one aspect. And the market structure is changing also over time. And do you feel the noise is created in the bulk of the bell there? Is that created by the high-frequency trading firms, the market makers? Is that noise created by all that super well-funded, super have the best computing power there is, but they're all competing in that 60% to 80% range?

So get out of there, right? Don't compete with them. Yeah, I would say that the pattern, if you look at historical data, has always been like that. So it's not new that the majority of time you rather have noise and it's not as directional. So high frequency has been around now also for quite some time,

but if you go in terms of data to the times prior, you will still find that. So the predominant pattern is these little up and downs and not as strong momentum divergent movements in the market. If you consider that on the left side of the distribution, these very strong downwards moves, they are driven by fear and panic. So people, the market is under stress, and this doesn't happen too often. And at the same time, on the right side, that you basically have very strong up days, you need quite some positive news and momentum there as well in order to push markets as strongly. So it's rather the little up and downs, which are the day-to-day moves.

If you look in terms of returns, the majority of market moving news in terms of earning reports and stuff like that are in the off hours. Yeah, we'll get to that in a sec. Yeah, if you look in terms of returns, where the returns are coming from, this has been very stable through our time as well, and has not substantially been influenced by the rise of market makers, high frequency trading or things like that. So what you can observe in looking at the data that the extreme overreactions on both

sides of the distribution have increased in terms of frequency and magnitude. And as such, it is very beneficial to focus on the shoulders or tails, but you have to be patient. So you can't go after every single trade and you don't want to be lured into taking a position where something looks like an opportunity and then it's falling back. It must be very active risk management in terms of position sizing, how high is the quality of that momentum currently evolving? What should the bet size be given the current very short-term market environment? And there's a lot of intel and many years of research,

close to 20 years, which have driven that in order to increase the odds that we can stay away from the noise, the very low vol days and the mean reversion days, and just focus on the momentum as much and as good as possible. And so in your mind, you're not even trying to compete with like Renaissance or Citadel or groups like that who can outgun you, so to speak. Yeah, they can definitely outgun us from a technology perspective, as well as certainly brains on their teams.

But I don't know about that. Give yourself some credit. Yeah, but just in terms of number of brains. Number of brains. Not the massiveness of the brains. No, just kidding aside, but being very humble. Renaissance is a quite impressive shop. And so are the others mentioned. But they come all with size. So they're very large, billions and billions in assets under

management. And if you look at our core playing ground, which is futures. The future space with all its liquidity is still not as large when you look intraday. If you think longer term, you hold overnight, it's a different story. But if you want to go in and out intraday, we are only focusing on the most liquid equity indices globally. So trading Asia, Europe, and the US. And so we don't even have some very attractive ones, which are very small because they don't drive the needle even for our portfolio. So for a renaissance trading, I don't know, the Malaysian market or Indonesia intraday,

that just doesn't work. So I would argue that they may be active to a certain degree. There are some other prop shops and short-term systematic managers who are also active intraday. But it's a rather niche, capacity-constrained space. And it comes with a lot of technology you have to invest as well. So this is certainly not an issue for renaissance, but if a new competitor is coming in and they want to trade in today and globally, we have service centers in Japan, in Hong Kong, in London,

in Chicago. So you're very close to the individual exchanges. It's a lot of money you have to invest first in infrastructure, and then it's around the clock operations as well. So there are certain hurdles, and it's not as scalable. So you will not have a billion fund trading intraday futures. It's not going to happen. It's more like 250, 300, maybe a bit more. So it's a very juicy space, but capacity constrained. And I think that keeps us safe

to a certain degree from the folks you mentioned got it and what about the retail guy who's gotten into options who's trading futures more and more did they have any hope in in which regards in what day trading s&p futures or E-minis, right? Yeah. You can pass on that one. No, it's a good question. I think it's always good if you're curious and if adding additional strategies to your portfolio is certainly a good idea. I don't know if you're currently running meme stocks, which are hot again. You probably have seen it over the last couple of days. They're skyrocketing. And if you're so active, predominantly on the call option side,

if now venturing into S&P intraday trading is the right addition to your portfolio. I don't know. But generally speaking, to be curious about new approaches is very helpful. In our case, we have worked on such type of strategies for 25 years, some team members even longer. And we have learned a lot of lessons there as well. So it could be a better approach. So that's how you'll just show up and be successful. Yeah. If you look at a lot of new investors coming into the sphere of investing

over the past two or three years, and a lot of folks had a really good ride. It was a specific market environment. We had tremendous stimulus, monetary as fiscal. So who do you want to blame if someone who has made decent money, especially from a very low starting point, very aggressively, and one day after another be confirmed in this very aggressive stance, being a successful trade. And it's happening at the moment right now while we're speaking. Over the past two weeks, the market has seen a tremendous change again. So we are seeing

tech being in again. I think Apple is now the 10th to 11th day up, positive day in a row. On a trillion dollar market cap. It's hard to do. On top of it. So Nasdaq is being pushed substantially. And you have seen a substantial increase in option activity around the meme stocks again. So it seems to be a blueprint which has worked definitely in 2020, 2021. Now it's just being put out of the drawer and reapplied. The tricky part could be that certain other circumstances are changing while we're speaking. So the Fed has changed the policy. It is starting to implement certain changes.

Monetary tailwinds are, to a certain degree, becoming headwinds. So there are certain dynamics which may not be embedded in applying that blueprint successfully going forward. But for the time being, these folks are adding a certain degree of volatility to markets. We love volatility. All our strategies are on the wall. So we have benefited from these new craze. We love volatility. All our strategies are on wall. So we have benefited from these new craze. Exactly. Exactly. And I feel like people, I'll lump you in with me, but probably not fair, but right. I'm like, oh, these guys are going to get blown out. They don't know what

they're doing. They're right. They're just jumping in, but it's kind of like people like us could be too smart, too clever for our own good. And if you just ignore all your experience, ignore all the data and plow into these meme stocks, you would have made a lot of money. Exactly. Yeah. So it's a little, it's hard to, hard to measure up. I just hope that they don't burn themselves too much.

Because ultimately it's a, it's a new generation of investors, and they are facing certain difficulties out there in the environment anyway. Think about changing economy, a lot of automation as well, a lot of folks not necessarily being able to work the jobs their parents worked because the jobs are not there anymore, and all these different things in environmental difficulties, climate change. So this is basically here is the world we have prepared for you guys.

And now stop, stop playing around with money, with your meme stocks. So I don't want to be too judgmental there. It's I have a lot of respect for people who, who are eager to learn and apply their experience good good and bad, on a day-to-day basis in markets. And I just hope that this generation of new investors is not burned to bed, that they just make the experience as all the folks prior to them,

and that they continue to be investors in the space, and that they don't have a bad awakening somewhere in the future. Amen. You touched on it a little bit. I want to dig into this. You've done some research, shared some reports, how the bifurcation between the U.S. day session and the overnight session. So tell us what you've seen. How has that evolved? Then after that, why does it exist? We definitely did a lot of research into that driven by initially starting out

trading the US intraday session only on the future side. So the ICA program, the intraday crisis alpha started as an S&P program. And in what year are we talking? Early? This is 2017, May, 2017. Yeah. So and consider 2017 being so substantially low wall. And this program focuses on larger intraday moves in the S&P and the S&P didn't move up or down more than a percent for weeks and months in a row, so there was not much activity. I don't want to say that we were bored, and as such, we were looking out of the U.S. and we're looking at different places. It's always a good idea if you develop a program on a specific instrument

or a specific market, and you apply to different markets as well to see if the pattern you're trying to capture there is existing somewhere else as well. And as I said earlier, momentum specifically on the downside being a fear and panic-driven aspect, overreactions, so a lot of behavioral aspects of how humans react to stress or also how they react, reinterpret certain news, and then relief is kicking in or even FOMO on the right-hand side. But the tails, the shoulders and the tails are very, very strongly explained by behavioral aspects of trading markets or approaching difficulties, which are deeply embedded in us as human beings. And you can't even escape even when you program algas and everything.

And so it was not a surprise to see that focusing on tails, focusing on downwards and upwards momentum, strong upwards momentum should also be present in Asia, for example. So we applied it to Hong Kong. Hong Kong has higher retail participation, higher volatility as well. So it very quickly was reconfirmed that these patterns are omnipresent. It's not just a US specific thing, but you actually have it around the world and it could be beneficial to apply exactly that approach to different markets. So from that degree, our interest to apply to different markets and making it a global program

with all the advantages of trading something globally, which we can discuss in a second as well, it was certainly very helpful for periods where we have now seen higher volatility and large movements, specifically to the downside overnight in the US. So thinking about March 2020, so the COVID and market crisis was an outlier to a certain degree historically, but has been reconfirmed with other occasions since then as well, that there are some very strong moves

in the overnight. So from a US perspective, if you only trade intraday, you would not be able to capture the downwards move because the entire S&P downwards move or US equity markets downwards move in March 2020 was overnight. However, trading globally in Asia and Europe now gives you the opportunity to use these markets as a proxy to access the movements which are expressing themselves in the US overnight session. And sometimes because you were asking for drivers, certain news are evolving while the US in the overnight. So it's not specifically that actors are active in the overnight

and that's driving it, but it's just new news are coming in. So on a regular basis, corporate news, certainly in the off hours, which have this effect that there's a lot of movement overnight. And historically, not just in the US, but globally, the majority of the upwards move in the equity markets is driven by the overnight. So equity markets have a very strong upwards drift. I've seen that report that it was like the day session was essentially flat and there were 80, 100% gains during all the overnight sessions. Correct.

Which is mind boggling, right? Like how, it doesn't seem like that could be the case, but. Yeah, it is, it is, it is that the news, the news I expressed overnight and materialized in a gap, gap up or gap down. And then some other folks are coming in and are second guessing or reinterpreting. And then there's a battle in what direction the instrument or the market actually goes from that point. But overall, the drift is downwards in today. And this specifically goes for crises. So panic, fear, emotions, that's expressed in very strong downwards modes. If you go, if you analyze the, the large, um, um, drawdowns in the SMP, uh, since the birth of the dot com bubble, and even earlier, it's, it's all very pronounced intraday, but it wasn't like that in the day session.

Correct. It's in. So you're saying that the past 20 years, the normal profile has been up overnight down in the day session. March 2020, flip that down overnight. And then, so as I think of it, right, if Amazon comes out at 415 or whatever, after the market closed and announces record earnings, their stock jumps 15%. The S&P futures jump gap 5% or whatever. Like, can you even trade that, that? It just gaps to that level. How do you trade that? So even if you recognize that all this movement happens overnight,

can you capture it because it just gaps, right? Yeah. If you talk single stocks or very narrow, basically, it's getting more difficult in comparison to finding proxy. So if Amazon comes out with very good news, it will not materialize itself in the Hang Seng or the Nikkei, or not to the degree that you can actually capture it. So in terms of proxies and diversifying the US overnight via Asia and Europe, we are talking larger market, overall market driving events.

But the systemic moves, basically. Yeah, we'll dig into that because you used to call it the global relay and this news happens and it's going to realize in all these different markets. So dig into how you look at that. Yeah. But if you're long Amazon and you already have it in the book, then you're able to capture that. But it is quite likely that there will be another push, if it's really good news, another push once the session

opens because certain participants are way too large to act in the overnight because the liquidity overnight is generally very thin. So you don't have as much room for the very large players. So they are predominantly active on the fringes of the day session, at the open and at the close, or they VWAP throughout the entire day. And certain players, they are constantly on the buying side. If you think about all this passive investment, ETF discussion, very well researched and much better explained by my green focus

than what I could say here. But they have done a lot of work there, which basically shows that you have this constant support of this upwards drift. And this is certainly also kicking in if you have really big news for a certain single stock or company. But we have become quite active on the research side on single stock trading as well. And actually just in the process of applying our momentum signal on single

stocks. And we see that it's very beneficial to trade them into a day as well, despite the fact that these big drivers are overnight because you get a lot of, a lot of momentum from time to time, not very often, but if it's large also in these single stocks, but we can talk about that later for sure. And come back to that global relay concept so that you want that proxy exposure in Hong Kong to capture those down move, those tail events.

And the global relay race is a term which refers to that something large is happening, and it may start to play out first in Asia, and then it's followed through in Europe, and it falls through in the US, or maybe just in two, let's say, the US overnight is aware what has happened during the day in Japan and early morning hours then in Europe, but still may follow through, gapping, but then still follow through, still a larger movement. And this doesn't happen very often that you have a global real race around the globe, but you have it in very large systemic crises. So when something really big is happening, because then everybody is panicking around the globe. And if you trade intraday, you have certain advantages in comparison to buy and hold if you have positions overnight as well. Because the intraday program goes out at the end of the session. So at the end of the session in Japan or in Hong Kong, you're flat again. And you may enter new positions now in Europe if the relay is handed over and the market follows through, or you don't, and the next thing in the US.

Because of that, you have intraday compounding, which can be very strong in cases of a complete relay race, or even when there are two geographies where you trade your capital multiple times per day. And because capital requirements are usually defined by margin, which you're holding overnight. So the clearing brokers asking for margin specifically, if you have positions overnight, you need certain buffer as well when you're trading intraday, but intraday margins are also not as high as overnight. And as such, this is one of the key advantages of intraday programs, not specific to ours. So it's generally speaking, if somebody trades intraday, they have the advantage of extreme capital efficiency. And you don't have to come up with new capital when you add such

a program to a portfolio. Normally, you have to say, well, where do I reduce or where do I get new money in order to allocate to a strategy? And with intraday strategies, as long as they have the desirable characteristics, uncollated and things like that, you can just add them. And this is also the case when you trade globally. So you don't need three times your capital in order to trade your capital three times per day when you trade globally. That's a unique advantage. And what has certainly been helpful, even when the relay race is not around, is diversification. Because we said earlier that the predominant pattern is rather noise and mean reversion in markets

from an intraday perspective. And now if you focus on momentum, as we do, you have quite some challenges. But if you have a challenge in a certain geography, there may be momentum in another geography so that you can start compensating. And we have seen that very strongly in the very choppy environments in the past couple of months as well, where one geography has difficulties because it's always chopped around

or very often chopped around, but you have very strong capture in another. So for example, if I look year to date, ICA has been quite strong in Asia. So we have seen that the Chinese tech has been pushed down heavily by a series of crackdowns from a regulatory side. And on top of it, you have also aspects of the zero COVID policy in China being put at test at the moment with Shanghai currently on lockdown. And prior to that, you had Shenzhen as well. And you have, I think, Shenyang as well in the north as well. So a lot of difficult news for Asia, which basically pushed the market down heavily. And this could be captured with short momentum in the Asian session.

Europe got chopped around a lot because Europe, obviously, because of the tragedy happening not far away from here between Ukraine and Russia, you had overall a negative connotation, of course. People got worried and market were pushed down. But the US very often reversed what has happened in Europe. So we had a lot of choppiness in the European session in the past couple of weeks, resulting in it being negative year to date at the moment, but positive Asia. And the US is actually now stronger again, because we have seen more degree of follow through in the US. So you see that the global diversification helps in that regards. It's not always a relay race,

but it's helpful if you already have a little bit under your belt before you get chopped, or if you've been chopped in the morning, that you have an opportunity. So we never call it a day until 4 p.m. Eastern. Then the day is over. Even when you wake up in the morning and you see a loss in Japan,

I say, ah, I still have three sessions to make it up. And I always see when I see, right, the US market gaps down 3% and you guys go short. And I'm like, oh no, here we go. Here comes the reversal. Have you done any research on that of like how big of a gap down is too much of a gap down to go short that gap? Yes. It's not as direct that you say, well, this is too large and now you don't go short. It has an impact on the degree of position sizing, for example, and on the quality of signal strengths you require. For example, January 24th,

that's basically where VIX went up heavily and the S&P was down 4% roughly, I think around 4% and then rallied up complete reversal. And yes, that's exactly when you wake up and say, oh no, Bastion just got short. The good thing on that day, despite seeing this is a massive reversal. So the S&P is down close to 4% and then closes the day up in the positive. I don't know, really 5% or something like that. This is like the most difficult environment for momentum because this is

hardcore mean reversion, but we had capture in Asia and in Europe. And we were actually flat on the day. And you may recall that research on the interday momentum side led from ICA employing a signal with ranges to one which also has no ranges, the active interday momentum. And there's a signal diversification following the idea of an ensemble approach

that you combine different path dependencies. And the path dependency of the classic signal with ranges and the aim signal without was very helpful there because they took positions at different levels and were only marginally down in the US, not as strongly. And the overall session was actually flat, despite that being probably the most violent or hostile environment for momentum. On the next day, the 25th, we even have this situation. This was like a repetition. So you wake up and you say again, and it was again, gap down and again, a reversal and again in the positive. But this time there was a reversal of the reversal.

But we even got a long signal there. If the reversal is strong enough, there may be situations where specifically aim can enter because it says, well, I understand that I was active on the short side earlier this morning, but this is a very strong upwards momentum. And then aim gets a signal. Classic can't really do that or not to that degree, because if you have a range and basically you're active on the short side, you break the range, and then there's a reversal. Classic has to travel through the entire range in order to potentially get a long signal, but aim doesn't require that. And so you saw that the signal diversification certainly helped there as well. But going back

to your question, there are a lot of factors on a very short-term look back window, looking at how is volatility evolving at the moment? How large is the gap? Which informs the decision when to take a position and how large the position should be. And without that, you would be even more exposed. And at the end of the day, you're trying to have a small risk in order for the volatility to expand. And then you capture the expansion typically to the downside. Yeah. So as things are whipsawing around that, that's no good because the risk has now blown out too. Yeah. If the whipsaw is large enough, it becomes the trend again or the momentum. And so it is, but if, if it's, if it's too narrow and you get stopped all twice or three times, then it's an issue. We have seen a lot of very exciting new data coming in in the past three months.

Situations where we had two short entries stopped out and short again, and then along at the end. And maybe we were flat even on the day, but you say, oh, all this work. And despite the fact that you're systematic, you're still there. And on these days, you're always in front of the screen. And I already know that I got some calls later on and people ask, why this, why that? Yeah. And so I already have the idea. Okay. Well, I need a chart for that. That's very exciting. Three times trying your luck on the short side and then on the long side, but positive at the end of the day. But it could be or flat. So it has certainly, the last three months have been quite special in

that regard, but we are happy. So overall, we saw that global diversification works by geography. Signal diversification is very helpful. AIM has been the strongest signal since implementation in February last year. And the research on AIM has informed a new cash equity program, trading AIM, called AIMS now, Active Interim Momentum Stocks. And it shows that it's always important to not rest, but to continue your research. AIM has been built on the data of the COVID and liquidity crisis

because there we saw very massive swings intraday as well. We already had the argument earlier today that, well, it was an overnight crisis. So you could rest and say, well, we are US intraday. So how should we capture that if the sell-off is overnight? But still intraday, there were some very large attractive moves still being considered in a momentum move from our perspective. So our research focused on that and said,

how can we capture something like that? And the aim is the answer to it. But as reflected in the past couple of weeks and months, it's still, it's always work in progress. So we were grateful that the large down days, if you look Q1 2022, the large down days in the S&P, the majority of them, we were positive with decent capture. So we provided these positive uncoordinated returns. But at the same time, we also saw that the equity markets were down heavily, and it's not that we were up heavily. And if you look at the VIX complex as well, this was even more tricky,

because VIX also had the pattern of a lot of overnight action, overnight expansion, and then a reversal intraday. If you take the 24th of January, you discussed earlier, the front months rose by close to 20% on that day. Very strong, long signal on the VIX side. But then when the S&P reversed as strongly, it completely crushed 17% or 18% down. And this is very difficult to trade as well in the VIX complex itself.

But you can always learn. And there were a lot of interesting observations in the past couple of weeks, or even the last two weeks. We're coming from a VIX in the range of 30. I think the candle earlier

today um was 18 one of the candles and um this is in two weeks this is a tremendous crush complete reversal um we're back in contango and it's not that the world has substantially changed that now everything is fine yeah so we have we have this tragedy still going on, it's not solved. Yes, we have more clarity in regards to what the Fed is telling us at the moment, what they think they will do going forward. But it's still surprising how quickly we changed in a matter of two weeks from a type of cautious and crisis mode into a certain degree of complacency again. But ultimately for us, it's still interesting.

You have these, because of these changes, you have these moves and overreactions and the last couple of days have also been helpful for us. So I think people did the, sell the VIX. If there's a nuclear war, we people did the sell the VIX. If there's a nuclear war, we die, right? The VIX will spike, but we'll be dead anyway.

If there's no nuclear war, it'll sell off heavily. So they just did that quick equation. And talk about, we're still on microstructure here a little bit. Talk about the liquidity in these markets, right? So I've seen a lot of reports that e-mini liquidity is at near all-time lows. I have questions on how they measure that, right? And with a lot of algo execution stuff, a lot of size gets hidden. So what are your thoughts there?

Do you see it as a problem? Do you see it as getting worse, getting better, the same? It's a very interesting topic, but difficult to measure, as you already hinted in your question and statement. So with one of your heads, certainly partially having expertise on the execution side, right? Yeah. With some news I followed the other day. Some good news, hopefully, for you.

And looking at liquidity, and yes, the S&P, for example, if you look at order book death and top of book death, as an example, what kind of volume can you trade for a certain price without substantially impacting the market? And there have been, Goldman did a lot of research or pushed it at least. And one could definitely see that until 2018, order book death on the first level, on the top level was substantially larger in terms of how much notional you could actually get in there without impacting. And that has come down substantially after 2018. And since then we have seen three or four cycles where it's somewhere in the range of,

I think, was it 30 billion, 25, 30 billion, but has dropped substantially, for example, during the COVID liquidity crisis in March. So what you see specifically that however you measure that, that this is dropping substantially exactly when you need liquidity most. So it is reconfirming the observation that liquidity can evaporate very quickly. Like if you try to grasp sand, the stronger you press, the quicker you lose it. And so it's not only thin, but it's also fragile. So liquidity disappears very quickly. And I think even if we incorporate very fair arguments, you made that the way you measure it, that a lot of participants are not presenting themselves on top of the book, but they're basically using all kinds of different

algos in order to slice in, to hide how much size, whatever they they have there and they want to get in the market. You can make the argument execution algos and the idea to use these techniques are not new to us and haven't evolved over the past four years, but they have been around prior to that. So there's still a remarkable drop if you incorporate the aspect that this has been around for longer. And they should still show a footprint, right? Yeah. So even if it's reduced the overall footprint, even if it's still decreasing, their footprint is decreased. Yeah, it's an occurrence.

It's basically something which is there. And the degree how bad it is differs from person to person. Sorry, do you see the same thing in Hong Kong and Hang Seng and in Euro stocks? Or what do you see across those different geographies? It is a pattern specifically in times of crisis, which is also happening then. It's not necessary throughout the entire time, but when stress hits the market, liquidity gets thinner very, very quickly. And this leads to higher volatility. And there are certain market participants who, when volatility gets higher, they're pulling out. So they're actually pulling liquidity.

And that's a reinforcing loop. And this is not just happening in the US. What do you mean, certain? There used to be a time when a market maker was a market maker because the market maker made the market. I heard an interesting podcast. Maybe it was you and Chris Cole. I'm not quite sure. But basically, there was a story that somebody talked about his experience in the pit.

And that even in the pit, if the heat hit the market well, you really needed to go to the restroom. It's not your fault. Oh, you feel so sick. So this is also pulling liquidity. So you could argue, well, even historically, people pulled liquidity in times when they didn't want to provide it. But this has become substantially stronger. And that means that whatever you see in terms of liquidity is just not there.

And when you need it most, it disappears. And this reinforces or even strengthens the crisis. And you have loops which are pushing markets down even quicker. For us, it's beneficial because the overreactions in the market are more pronounced because of that. But ultimately it, it leads to a higher degree of fragility in the markets and make catch various people by surprise. Yeah. My view on that is the risk departments have gotten a lot more technical and improved, right? So in the old days, that guy in the pit could just keep putting on size and the the guys and girls upstairs didn't even know what his size was until the paper

tickets came through the clerk got upstairs and they're doing the math right and now that's near real time of they know their exposure and they know hey that that person needs to be cut off and it's regulatory as well certain folks are not allowed to put as much risk on the book anymore. And as such, it's missing now. But do you view it as a hindrance or an opportunity for your programs? Because you're kind of a liquidity provider at those times, or a taker, right? So if people are rushing to get out the exit, you can hold back and be like, here we go. Here we go. Yeah, it's, it is, it's an opportunity because it leads to overreactions. It's a, it's a reinforcing loop, pushing volatility higher and liquidity even lower. So it's as a result, the market moves become more extreme. And when you focus on intraday momentum, it is beneficial.

Certainly, you may have less capacity in these times as well, because we still want to get out at the end of the day as well. But that has been addressed by a lot of work on the execution side. So utilizing professional third party execution algorithms while we focus on signal generation. So we realized that despite the fact of having traded our own money for the last 25 or even 30 years, depending on the team member, and having a decent understanding how to execute things, If someone is really specialized in that and does it as a day-to-day job, they will always do better, almost always.

And that's why we would always, we would recommend to utilize the knowledge and experience of specialists wherever you can and stick to what you can do best. And in our case, it's the research on generating signals and not the intelligence on auto execution.

So switching gears, I love, love, love when I email you asking why this trade or that trade behaved the way it did. You don't answer with a sentence or a paragraph, but a full seven page report

with graphs and stats and data. So talk to us a bit about how you approach the science of what you do, how you've built this research team and tech that doesn't just inform how you build the trading strategies, but how you answer emails as well. Stig Brodersen But doesn't it beg the question if you actually read the seven pages? Sometimes even more, right? Our quant report is like 60 or 70 pages. I'll admit to skimming every now and then. But that's good.

It can be overwhelming for sure. It is an interesting, or maybe not interesting, but it is an insight in how we do research and how we look at our programs and signals as well. So in many cases, all these pages are views on how a program behaves in a certain market environment on a certain day. What are the interdependencies? And these perspectives have been developed and collected over the past 20 years. So we said, wait a moment, what happens if volatility rises or falls? At the starting point, probably what was, here's the S&P, most important market in the world. And what does my signal do, my program do when the S&P is up or S&P is down?

And that's a good starting point for everyone, basically. Yeah. So look at your portfolio and do a day-by-day analysis, not monthly, but day-by-day. If the S&P is up and S&P is down, do you usually make money when the S&P is up or lose money or the other way around? More importantly, do you lose when the S&P is losing? And this very quickly leads to conditional correlations. Right, because we already said it's not even simple if the market was up or down that day.

Was it up overnight? Was it up intraday? That's one layer deeper that you start out with the first analysis day by day, different asset classes against your program or your portfolio, then you can divide between intraday and overnight. And so very quickly, you get a lot of different perspectives, which you can now run across all these different signals. And the majority of investment strategies, they are very strongly aligned with what the S&P is doing. And so a lot of these strategies basically lose when the S&P is down, have an undesirable correlation to the S&P in these times.

And so it can be very helpful if you can analyze that. Being a vol manager or basically utilizing volatility to your favor. All our programs have these desirable anti-correlation to the S&P. And that's one view to look at it. But the next step is basically to categorize different environments. Only because the S&P is down or up. Well, you can say, well, usually I make money when the S&P is down. And I also from time to time make money when the S&P is down or up, well, you can say, well, usually I make money when the S&P is down. And I also from time to time make money when the S&P is up.

But what kind of environment was this specific day? And that's where we categorize or have developed certain categories of days. So very, one we referred to earlier, mean reversion intraday. So you look, is the market, was it a mean reversing market today or a momentum market day? mean reversion intraday. So you look, is the market, was it a mean reverting market today or an intra momentum market day, or was it a low volatility day? In our perspective, roughly 60% of the time, it's so low vol and not really moving anywhere that it's not even categorizing as a very strong mean reversion or a momentum. It's basically just really noise. Is that measured range based? Like the range isn't big enough as a percent of its past

X ranges or something of that nature? Correct. That's for example, a very good, that's very good for a starting point. If you categorize what kind of range did I have on a given day and how does it compare to the average of the past months, year or the entire data set. And if it's a low, a certain threshold, then you say, well, this is a low ball day, not much movement and not much action. And even if I close at the low of that day, if it's inside that range, it still wasn't a momentum day per se.

Exactly. Exactly. Yeah. And if you, if you have a large range, then the next step would be, um, or range beyond a certain threshold to say, uh, was it momentum or mean reversion? And though you can look at open and close, um, uh, how, how did that work out? Um, even when you have certainly a certain degree of choppiness, it is a good starting point and measure to categorize the day. And then you can do analysis across your programs.

If you have an intraday momentum program, you usually more often than not would like to see positive returns on days you categorize as an intraday momentum day. And we needed to come up with these analyses by ourselves because the majority of the world out there is not as short-term. So the classical risk measures and the classical perspectives on how programs do are longer-term. I'm still surprised when investors are interested to allocate to our portfolio, to add one of our programs to their portfolio, that they are asking for data, but they ask for monthly data. Because it's not as helpful specifically if you would like to look at the interdependencies

or the relationships between a new component, a new portfolio building block you would like to add to the others if you just look on a monthly basis. Specifically, some of the strategies don't even have such a long track record. So it becomes substantially more helpful if you go deeper and look on a day-to-day basis, if not intraday. And this is more complex and the tool sets are not as easily available. And as such, because we are on the intraday space and we are so short-term, we needed to come up with our own analysis. But it has been built over a very long period of time. And a lot of these analyses are very helpful for every other investor as well. We have from time to time, if an investor wants to look at this entire portfolio, we have done some work for them by asking them, well, you can give us the return streams of your 20 portfolio holdings and let's have a look what

you actually have there. And there have been various occasions where people got caught by surprise because they thought, well, I'm diversified. But then they see, oh, no, I'm a larger part of what I have. But you perform closely on these types of days. Yeah, yeah. And it can be quite shocking if somebody says, I'm well prepared for crisis. But then you see over the past 10 years on crisis, you have these positive correlations and everything or larger part of your portfolio goes down. And then you very quickly come to the question, how large do long wall components in your

portfolio have to be in order to actually drive the needle? If you have a minuscule allocation to anti-correlation or long wall or other strategies, which could be beneficial in these circumstances. And the larger part of your portfolio is short wall, 90%. It's very difficult to really do something there. And that's how it is used internally and externally. What percent of the days do you identify as those momentum days that you kind of target that you like to see? Roughly 20%.

Roughly 20%. You have like 11 and a half, 10, 11 and a half on a long momentum side and also 10, 10, 11 on the short momentum side. And so how do you, right? A lot of people I feel like would be like why forget that 20 right let's focus on the 80 which we touched on in the beginning but how do you avoid that getting into that trap of like hey there's let's figure out how to make money in this other 80 of the time as well yeah you you lose you lose your um usp no you lose it you lose your USP. No, you lose your characteristics,

the long ball component. The focus on momentum on the divergent trait creates the smiley of all these different programs. And that's where you have a very strong proposition, what you can bring to the table. Whereas- Okay, so it's kind of like our mandate is X. So that's why we're focusing on Y over here. Correct. Correct. But do you think you could

positive skew and convexity there? And that's, if it works to your favor, it's very exciting. It is, you can argue, well, 80% of the time, it's not really as exciting, isn't it? It is buffered because we're trading globally. So we talked about the global relay race earlier, but what you also have when you trade globally, you have locally confined crises. So the tech crunch in China, yes, it now played out in a larger picture because there were some crises here as well,

but it was still something local. This is a government regulatory driven crackdown on tech. And it already played out in July 2021. So last year, you all already had that. And these are opportunities which are just existing there and can bring something to the table when you trade globally and you do not necessarily have to squeeze more out of the 80% in the U S which are not favorable to you. You can trade momentum somewhere else when it's securing there.

So you have to be patient ultimately. Right. Which drives me crazy sometimes when people who are just trading the U S and don't see that larger opportunity set. And I'm like, we might wait 20 more years for the volatility, for the movement to come back in the intraday session, right? The US has been very difficult to trade for a longer part. But as I said, currently, in all our momentum signals, it's positive year to date.

So it has come back. Why not trade the overnight session in the e-mini to a liquid? It is an interesting point. There are opportunities you can filter for when is it liquid enough and you can enter theoretically. So there are opportunities, but we are accessing via the proxy, via Asia, Europe. So you'd be able to double that. And you would lose your edge, not to use USP,

being an intraday program. Because once you start overnight, this kicks in other capital requirements. And a lot of our investors utilize the intraday programs as an overlay to the rest of the book. Very often they have, I don't know, equity beta, S&P exposure, and then they add this. And you don't have to cut down your original allocation in order to invest as long as it's intraday. But once you hold overnight, you have to make certain compromises. You can still structure it in an interesting way, but it's a different game. And as such, we are currently not interested in that.

We look at the data and try to analyze if there's more to it, but are currently not focusing on accessing it in the global session outside the regular trading hours. And then when I think of research, right, how do you avoid the trap of like, okay, every Wednesday after the market was up on a Tuesday, we lose money. So let's not trade on Wednesdays, right? So how do you kind of match it back with reality to say, here's what the testing shows. But is that something we actually want to do?

Or maybe you don't trade on Wednesdays. Never. Because you just said why. Yeah. Data is something very interesting. You can play with it. you can dig and find stuff, but they're always at the risk of becoming too specialized on a very specific setting.

If it's always when Tuesday is down and Wednesday, but only when there's full moon or something like that, well, there could be the idea or a feeling of a meaningful relation, but I would argue that it doesn't, it's always a risk that it doesn't hold. And the key focus point of the momentum strategies on the shoulders and tails,

they are focusing on omnipresent behavioral aspects. So if the market shows a certain pattern and fear kicks in, this is very often very similar. And it doesn't hold on Tuesdays or Wednesdays because there was a certain pattern in the past. So we focus on these more stable and more pronounced characteristics. But that's going before you apply the research or after the research, right? So you're kind of pointing the research towards that philosophy. Yeah, it's a reinforcing loop because if you are specialized in that area, your curiosity

is most likely also there. If you're not caught by surprise that you find something, say, wait a moment, I didn't expect that. Such as the overnight crisis in March, 2020. This was new for us in that magnitude expressed in the S&P sell-off, but also if you look at the VIX, it was like amazing. Just also overnight. Yeah. And compare that to the Walmart get on where if you differ between intraday and overnight, the entire move and Walmart get on was intraday and overnight, the entire move in Balmagadon was intraday.

And so it was like, bam, on that day. And it's completely explained by the intraday driving forces. But there it triggered curiosity. And we said, OK, we acknowledge that this took place overnight. But at the same time, we see interesting data that the moves intraday were still large enough. They were not proper for our way of trading it back at the time with the classic signal. But the aim signal should deal with that quite well based on what we see on the research side. And that's why you certainly see a tendency in our overall evolution that we add different

signals and they may all be from a certain family or momentum signals, but with different angles to it. We haven't yet add one which doesn't trade on Wednesday, could be, that's a very pronounced case to be made, but the focus on the shoulders and tails, on the behavioral aspects, gives you a comfortable high degree of persistent alpha. So it's not as much alpha decay because it will not go away. Even when people program algos or set their stops

and it's all automatically, it's still our monkey brains. Sorry, poor monkeys probably have much better yeah uh it's still it's still us it's still us yeah um um right like we talked about even if it's the risk department mandating it and it's not someone panicking it's still the same conceptual thing yeah uh and and why not just have bring in a machine learning team and say click a button and have it, right? Give it the parameters of, hey, we want to be on the shoulders and the tails and tell us the 10 best ideas to capture alpha there. Machine learning, generally speaking, is a very exciting field.

AI and all the other things. And we have, the team has ventured into this space multiple times over the past years. Arne, our chief investment officer, already did generic programming like 15 years ago. But there have been many cases where there were signals,

but once you start trying to implement it, it disappears. And it's not repeatable. And also not with size and things like that. We struggle a bit to implement things where we can't explain why it's there and where it's coming from. And we can do that quite well, including utilizing our seven or 70 pages reports. I can tell you why we lost money there and why we will lose money again, or why we will make money in a certain setting. That's the problem with certain setting. Which investors like. That's the problem with AI funds.

The investors can't pin anything on anything. Exactly, yeah. And we are interested about what's happening there. We always try to look what other people are doing. And we have tested things, even in the past couple of two, three years, tested certain machine learning techniques and tools there, but so far haven't, haven't found something which

justified spending more time on it. You almost have to accept there's some hidden gem that the machine can find versus you're saying, I don't think there are really any hidden gems in there. It's noise. Let's just stay on the, on the, if, if, if, if they enough signals and if, if it's scalable as well as a lot of these things disappear as soon as you start applying size, we have, we have, we have traded and test traded

certain machine learning AI generated signals. But in the majority of cases, it was just not as stable enough. We always test new things with our capital first. And even we had a site research project or two projects there in the past couple of years where we bought software or we rented software in order to see if, if we find something interesting there. But it was, we didn't find something which fitted our long wall profile.

It could be that on the short wall side that you have more success there, which would add in terms of exposure to what the majority of investors already have in the portfolio. Then it's a new, different way, machine learning generated signal on the short wall side, but it's not our turf.

On the long wall side with SKU, something which would fit nicely side by side with the rest of the strategies, we didn't find anything. I haven't found anything. Chalk one up for the humans. You mentioned VIX. You have the VIX trading program.

That's kind of taking the same concepts, but utilizing it on the VIX. Talk about some of the challenges there. You mentioned the VIX was crazy on that Jan 24 that one seems to be has been harder than the others this year so far so what are you seeing in the VIX in particular that comes to mind yeah generally speaking VIX is already quite difficult VIX futures so we are trading the futures VX1 VX22, the first two expiries. And it's a very difficult instrument to trade because of trading cost, large minimum tick moves. So you have to overcome this hurdle first.

At the same time, it's interesting to be active in that space because we have seen an increase in VIX spikes over the past years. So if you do an analysis on the magnitude and the frequency of large moves, there has been a pattern that these occur more often. And as such, it makes sense to focus on it. Some of the moves also initially start overnight. So we talked about that, that March 2020, from a VIX perspective, was also predominantly driven overnight. And we also had some of these observations now in the first three months of this year, so that the overnight played a strong role. But you still had sufficient and strong momentum, volatility expansion intraday as well. The tricky part over the past couple of weeks was that the reversals were stronger. And in line with what you saw in the equity market,

there were certain observations which were very interesting that, for example, sorry, while the S&P was already grinding down in January, the VIX term structure was still very strongly in contangle. It was very juicy contangle. And if you do an analysis and compare, when do the term structure actually flip? So when you have the inversion, then you have backwardation with the front ones being higher than the ones further out.

This has historically been quicker. So we saw in January that the VIX complex was rather relaxed. What does it mean? It means that the necessity to hedge further, to get protection on your book, wasn't there, while the market was grinding down. So it was way below S&P already being down more than 5% that you actually saw the flip.

What we could also see, if you look at the spread between the VX30, so constant 30 and the 30 days realized volatility, what you see historically in times of crisis, when there's really fear and panic kicking in, you see that the realized wall is surpassing the implied wall. So the implied is caught by surprise. And then it's rallying as well. It wasn't there. January and February, with all the tragedy and human misery and the fears of what the Fed is doing and all the other things, panic never kicked in. So from that standpoint, it was not a crisis,

it was more like a correction, but still quite sizable. If you look at where the Nasdaq stood at a given point in time or the S&P, this is quite a sizable downwards move, but not expressed in panic. It was very orderly. And the spread never went negative, VX30 against Realized, which differs quite clearly from previous crises. So from that standpoint, going back into the quant report with 70 pages, it tells you, well, there were certain opportunities for our VIX intraday momentum or the VIX short-term momentum, which

can hold overnight. But at the same time, they were not as juicy. And the days where we tried to make money and we didn't make any money on the 21st of January, for example, this is a vol contraction of 17, 18% after intraday, also substantial move upwards. You would expect to get stopped out there if your objective is to go along at a certain point. What was beautiful, or not beautiful, but certainly positive,

the VIX shorter momentum, the VSDM, the newer signal, which can hold positions overnight, had its first overnight position going into March 7th. And this was positive because the S&P dropped quite substantially on March 7th and VIX rallied further. So we had, for the first time now live, the confirmation that even when you trade very, very short-term and from time to when you trade very, very short term and from time to time you hold overnight, that there are certain information in the structure, which informs that it can be more beneficial to keep the position instead of closing it and being purely intraday. Except that takes away from your USP. Yes.

That's true. But within the Volar program, which utilizes the intraday VIX overnight, it is just one sub-strategy. So it's not as high in terms of margin. And this happens very rarely. So both

the VIX intraday momentum, VIX short-term momentum, they only trade in less than 6% of the time anyway. So it's very rarely that you see the substantial upwards moves in VX1 and VX2. And then that the setting at the end of the day is still as juicy and informative for what's happening further out that you want to keep that position. It's happening even rarely. So most of the time when ICC and VSTM have an intraday position, they both exit at the end of the day. So we were quite relieved to see that it took a position and it worked well. And what's the path dependency if I've already have the

ICA, I've already have the, say I've gone short Asia and made that money. What's the path dependence you're covering for that VIX spike at the same time? Yeah, the... It seems to me like somewhat I already have it covered with the other programs. Is it kind of adding on? Yeah, in terms of BSTM, the overnight, you have the proxy potentially in your favor in Asia and in Europe, which could capture the expansion. But VIX futures as an instrument are more convex.

So I would rather capture a nice run in VX1 than being short the Hang Seng. It's very nice to have both, but it puts a certain more boom for the buck to it and provides an additional pass dependency to the portfolio. It is additive because it's a different way of expressing a long ball trade, which can occur in the overnight from the US perspective. And as said earlier, even when it's a global crisis,

it is absorbed and processed differently in Asia and in Europe, even when it's the same idea, which may drive whatever's happening in the VIX overnight. And if you look at the cross correlations between ICA in Asia and Europe, they don't have very strong correlations to whatever's happening in BSTM overnight. So it's additive because they are uncorrelated return streams. They're not correlated. And just talking in terms of VIX points, the goal of that is VIX is spiked to 25 and I'm going to grab 25 to 30?

Or is it I'm getting value at 15 and waiting for it to spike to 20? Depends where you start the day, right? Because we're intraday, we're intraday. So if, if previous day was at 15, now we're opening at 25. Well, that's already quite sizable and tricky, but it also, that would be a very, very strong move. And it shows that how is loose and the both ICC and VSDM most likely would take a long position there being exposed to a reversal but also being positioned to capture a continuation of the wallet expansion let's close it up with two truths and a lie you got to give me three things two of which are true

one of which is false and i'm going to try and suss them out got anything good oh um two truths and a lie yeah okay um uh I once went to a wedding dressed as Chewbacca. Wedding ceremony. That's good for you as a Star Wars fan. All right. Chewie? My only action figure

as a child was Prince Adam with the violet leggings and the wine red velvet vest. Do you know? I don't even know who Prince Adam is. No. Prince Adam from He-Man, He-Man, Master of the Universe. And Prince Adam would be the one which hasn't changed into He-Man and just is a prince with the violet leggings. And what else would be truth? I make it easy and I speak Chinese.

Okay. Well, I know that you actually do speak Chinese and lived over there. So that's true. And I'm going to go. The action figure is true. Yes. Yeah. action figure is true? Yes. It's not true because luckily, it was

my first, and I was so disappointed that I got a second one. Because can you imagine when everybody, I don't know if you know Skeletor and He-Man, and they all have muscles and swords, and you have the prince with the velvet vest. And I got Skelet skeleton, I think, lucky me. But he said, Come on, man, what am I supposed to do with this?

But Chewbacca is true. Chewbacca is true. Chewbacca is true. Yeah. Wow. Where was that? It was the wedding of my brother in law-law. And it was the entire thing. So it was even the mask. Wow. Do you know the mask? Yeah. Perfect. Love it.

I knew that you liked that. I got that around here somewhere. It was the mask and the entire costume. So it was a little hot. Yeah. Luckily, it was the mask and the entire costume so um was a little hot and yeah luckily it was an autumn wedding and um you don't have to wear much under it um to be discreet it's just between you and me here so anyway and um my my son he was also he was a little jubaka i was jubaka and you couldn't tell that it's us because it was complete, the entire costume. And my wife and my

daughter, they were Princess and Leia. And the entire wedding was Star Wars and other action figures. It was amazing. I haven't had something like that before. I'm upset I wasn't invited. But yes. I can send you some pictures. Not knowing your sister.

Well, thanks so much, Bion. This has been fun. Let everyone know where they can find you on the web. We're getting you on Twitter now, right? You're on Twitter, but you don't do anything. Yeah, I'm on Twitter, but I'm more a reader than a writer in that sense. Um, but yes, on Twitter, uh, and, um, uh, definitely, uh, deep field capital. Um, there's a webpage under construction

for various years already. But you can send me an email at info at deepfieldcapital.com for sure. And we're happy to share research and some insights on the quant reports and things like that as well, which we discussed for sure. They're great.

Highly recommend. Well, thanks, Sebastian. It's been fun best thank you very much have a good evening there in switzerland thank you stay safe and healthy will too are you going to come to miami next year do we get to see you again yes hopefully maybe so we are registered we already registered for one conference and um it was a pity that we couldn't travel but uh the pictures we have seen of you and the other folks were quite supportive in the argument that we missed something. Exactly. It was fun. We missed you.

All right. Thanks so much. We'll talk to you soon. Thank you. Bye. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants

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