Information Brokerage in Financial Services
InvestorEducation / Learn to Trade Sep 12, 2010 - 03:42 PM GMTBy: Elite_E_Services
This article is largely a response and elaboration on an excellent point made by Nadeem Walayat of Market Oracle about the ‘reason why 90% of traders lose’. Largely, trading is an information brokerage business. Data collection, storage (classification and identification), and analysis, is the process of decision making of any trade. Data can be price data, economic data, or other data, used to determine trades, with an expectation of future profit.
New day-traders are taught that for every hour trading, you should spend an equal amount of time, the night before, researching (1 hour trading = 1 hour researching). When the markets are open, it’s too late: you need to be informed and have as many facts as possible in your mind before making decisions when the price is moving. What is the float? How much is held by institutions? What’s the P/E? Dividend? Dividend yield? Support & Resistance?
There are many solutions how to collect, quantify, and classify market information, provided by Information Theory, Knowledge Management, and Cybernetics. In an interesting parallel, the founder of information theory, Claude Shannon, used his game theory to gamble in Las Vegas and eventually in the stock markets.
Shannon and his wife Betty also used to go on weekends to Las Vegas with M.I.T. mathematician Ed Thorp,[22] and made very successful forays in blackjack using game theory type methods co-developed with fellow Bell Labs associate, physicist John L. Kelly Jr. based on principles of information theory.[23] They made a fortune, as detailed in the book Fortune's Formula by William Poundstone and corroborated by the writings of Elwyn Berlekamp,[24] Kelly's research assistant in 1960 and 1962.[2] Shannon and Thorp also applied the same theory, later known as the Kelly criterion, to the stock market with even better results.[25]
Why hasn’t this approach to trading been more proliferated? It’s the same answer why 90% of traders lose, why investors mostly lose, and why it’s still to this day with the internet and information at our fingertips, difficult to find high quality, unbiased information about finance, investing, and trading.
Problem with information dissemination in financial industry
First, we assume that any author, publisher, or vendor has knowledge about the market or topic he is covering. This is more times than not, NOT the case, as there is no qualification process to get published, especially with the internet. Anyone can register for a wordpress blog and start writing about the markets. An editor of a financial magazine, or book publisher, can take a liking to a particular author, and choose to use his work even though he may not be qualified or educated on the topic. Sounds good though. And usually, it is the 90% losers who do write about it, because the 10% winners are usually either busy trading and then after trading doing other things rather than writing a blog about it. This is not always the case, there are of course excellent publications written by proving winning traders, but we are speaking about the general population, the majority.
Second, compliance issues play a large role in the dissemination of information. For example, NFA members are required to submit any marketing material to NFA 21 days prior to its first use. The problem is that any information, including articles such as this one, may be considered marketing material, as the nature of an article is to promote the author’s point of view, which in the case of finance, may recommend certain actions (i.e. buy government bonds) which can be considered investment advice.
Third, authors may charge for their information as a service. Professional analysis services such as Stratfor.com sell information and analysis as their primary business. Hedge Fund vendors may sell information to hedge funds as their primary business. They are selling quality information and analysis as their primary product. But again, this may be highly topical, and they may have their own biased viewpoint or narrow approach towards a specific part of a system much more complex than their analysis applies to.
Why is there a lack of quality information
- Quality information doesn’t exist: Part of trading strategy is information, if you have information that a CEO will quit because of a scandal, you know the price will go down, thus you can profit from information. This is the case with analysis of any market. So part of market information is the dissemination of false information. How to determine ‘real’ analysis from a marketing message?
- Information obfuscation: Traders and other market participants intentionally distort facts to further their agendas. For example, if you are long an equity, and there is negative news about it, a trader may downplay it as insignificant.
- No centralization, no central database: Like searching Google vs. searching IBM’s archives, there are many great resources on the net for specific topics, but no public ‘knowledgebase’ for information about finance and trading, a ‘Wikipedia’ of finance, with a complete history and knowledge about finance.
To a large extent, we can blame the user. Because of our laziness and complacency, no demand for better information is sufficient to cause a movement for a ‘Wikipedia of finance’ – we are happy to buy packaged information products digestible in bite size pieces.
Also, as is the case with Market Oracle readers, highly motivated readers can research the markets much more thoroughly just by reading Market Oracle, a site that basically posts articles written by a plethora of authors from diverse backgrounds, for free. That means there are answers out there, and the more users that seek those answers, the more accessible they will become to the general public.
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Elite E Services is an electronic boutique brokerage specializing in currency trading, intelligence, and technology surrounding foreign exchange markets. EES offers FX trading systems for clients and investors, FX consulting, technology and tools for trading, system development, custom programming, and FX solutions for businesses.
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