The Adaptive Genius of Rigged Markets
From Salient Partners:
David Byrne, of Talking Heads fame, is something of a personal hero
of mine for the way he handles the business of his music. Byrne is
famously protective of the copyrights associated with his work, in the
sense of controlling the uses of the music for long-term goals rather
than a short-term pay-off, and it’s a non-myopic approach to
intellectual property I’ve tried to adopt with my own work. I also appreciate Byrne’s ability to put on a show.
His music stands on its own, for sure, but Byrne was into multimedia
before it was a word, and part of his genius has been an ability to
reinvent consistently the experience of his music. I know it
sounds crazy to anyone under the age of 30 that a Big White Suit could
be both revolutionary and really cool as performance art, but there you
go. More to the point, Byrne knew when to move on from the Big White
Suit. He knew how to adapt to a world that was still hungry to hear what he had to say, but not if it were presented in the same way ad nauseam.
If you don’t adapt, you die. Or worse … for an artist, anyway … you
become uncool and passé. Your performance art becomes performance
shtick. And yes, I’m looking at you, Elvis Costello. There’s an adaptive genius to the David Byrne’s and the David Bowie’s of the world, quite separate from their musical genius, and that’s what I want to examine in this note.
Adaptive genius is not limited to the popularly beloved and the
socially respected. It’s not only, in zoo-keeping terms, the
“charismatic vertebrates” like elephants and giraffes who demonstrate
this quality, but also decidedly non-charismatic invertebrates like the
hookworm. I’ve written before about why I believe that parasites are
beautiful creatures from an evolutionary perspective, which is another
way of saying that they possess adaptive genius. It’s the same sort of beauty I see in parasitic market participants
who generate real alpha by feeding off a consistent informational edge
they identify from either non-economic or differently-economic market
participants. As I wrote in “Parasite Rex”,
a giant pension fund isn’t engaged in commodity markets because it has
an opinion on the contango curve of oil futures; it’s trying to find a
diversifying asset class for a massive portfolio that needs inflation
protection. If you’re an experienced trader in that market and you see
signs of the giant pension fund lumbering through the brush … well,
you’re in the wrong business if you can’t skin a few dimes here. This is what good traders DO,
and the really good ones have devised effective processes so that it’s
not just a one-off trade but an expression of a robust strategy.
Parasites, whether they exist in nature or in markets, are almost
always models of efficiency and adaptive genius. I may dislike them. I
may well be the host from which they suck out resources. I may want to
squash them without mercy. But I can’t help but respect their
evolutionary prowess and ability to carve out an informational
advantage. And if I get the chance, I’d like to invest money with them.
They’re not the only source of alpha in this world (you can also create
an informational advantage by perceiving the world differently and more
correctly than most), but they are, I believe the most consistent and
powerful source of alpha out there.
Or at least they provide the most consistent and powerful source of
alpha within the limitation of being a market participant, of being a
buyer or a seller of a security in order to express an opinion on
whether that security will go up or down in price in the future. Of
course, if you could hijack the entire infrastructure of the market, if
you could somehow develop an omniscient view of market communications
and intentions under the guise of market-making or liquidity provision …
then you’d be talking about some serious alpha.
Oh wait … that’s exactly what happened with Getco and Virtu and their High Frequency Trader (HFT) brethren....MORE
HT:
Ritholtz@Bloomberg