Brainstorms: Identifying Edge

Find the silo, structural risks and market volatility

This Substack has really been focused on the entire process I use for managing capital. It starts with research and learning, moves to strategy development, and then finalizes with execution and risk management.

Most people learn one of these and dig in very deep. For example, you have analysts who do research all day and never think about risk management. On the other hand, you have traders who will never read a single SSRN paper.

Why does this even matter? Well when you are thinking opportunistically, markets are about identifying silos of knowledge. Markets and liquidity make explicit what is implicit in the rest of life:

In the information age, you simply need to be at the right place, at the right time, with the right information to succeed

I spent the month of January really broadening my research to Japan, Mexico, Brazil, Argentina, and India. I consistently identify domains where the majority of people are unlikely to have knowledge and develop an understanding there. You can always specialize but you can also be a generalist that identifies silos of knowledge. The one thing you need to ensure is that you don’t take the other side of a specialist in their domain when you don’t have a clear edge.

If you are reading this then you are someone who has an insatiable desire to learn and be curious. Whether you are an active trader at a hedge fund or just started in markets yesterday, imagine what your life would look like in 6 months if you dedicated 100% focus to mastering the skill of executing well in your domain.

If you read all the book recommendations I have shared (link) and the following SSRN papers, imagine the person you would be on the other side.

• Bonds

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3232721

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1709636

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2136820

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=637481

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458006

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=292979

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=966227

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=92568

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=809346

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3385579

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2055346

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1851854

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1738401

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2242280

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2281808

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2838667

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2005178

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=38460

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1340854

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=982

https://www.newyorkfed.org/research/capital_markets/ycfaq#/

https://www.newyorkfed.org/research/current_issues/ci12-5.html

• Intraday liquidity papers:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2668277

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=488422

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1712822

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2549739

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2878945

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=569982

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1913982

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4259584

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3900141

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2852760

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3305277

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3687746

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1127744

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3551166

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=675665

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=741365

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3479741

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=965674

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3497001

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=241728

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=988886

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1342228

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1787625

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1373762

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3714230

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=229959

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2996221

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4320775

https://www.smallake.kr/wp-content/uploads/2015/11/SSRN-id2668277.pdf

https://hagstromer.org/wp/

https://www.amf-france.org/sites/institutionnel/files/private/2022-01/1_Cross-Venue%20Liquidity%20Provision%20%28C.Gresse%29.pdf

https://media.crai.com/wp-content/uploads/2022/03/29091030/Insider-Trading-Market-Manipulation-Literature-Watch-Q42021.pdf

https://ericbudish.org/wp-content/uploads/2022/06/Flow-Trading-June-23-2022.pdf

https://www.researchgate.net/publication/314510860_Effects_of_the_Limit_Order_Book_on_Price_Dynamics

https://www.readcube.com/articles/10.2139%2Fssrn.1914293

https://finance.unibocconi.eu/sites/default/files/files/media/attachments/ssrn-id385309620220919124357.pdf

https://docs.lib.purdue.edu/cgi/viewcontent.cgi?article=3209&context=open_access_dissertations

https://research.amanote.com/publication/_5Kv13MBKQvf0Bhi8mRM/limit-order-book-as-a-market-for-liquidity

https://hal.science/hal-00397652v3/document

http://www.abarbon.com/papers

https://www.semanticscholar.org/paper/Trading-Costs-on-a-Limit-Order-Book-Market%3A-from-Declerck/a6f4c96ab2cb57970860cec509fc2f05c7331011

https://www.cambridge.org/core/books/abs/handbook-on-systemic-risk/dynamical-models-of-market-impact-and-algorithms-for-order-execution/707D2CABDA4D0874007ECAFDCE6A6CBF

https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/orderflow-segmentation-liquidity-and-price-discovery-the-role-of-latency-delays/524F0B00D8E9BAC8723956A6E2187E57

https://epubs.siam.org/doi/10.1137/130911196

https://hughchristensen.com/papers/academic_papers/SSRN-id1499209.pdf

https://www.hindawi.com/journals/sp/2021/9949565/

https://www.financialresearch.gov/working-papers/files/OFRwp-19_04_cross-asset-market-order-flow-liquidity-and-price-discovery.pdf

https://www.nber.org/system/files/working_papers/w25855/w25855.pdf

https://mpra.ub.uni-muenchen.de/101684/2/MPRA_paper_101684.pdf

http://tesi.luiss.it/27169/1/701851_PECCHIARI_MATTEO.pdf

https://edoc.hu-berlin.de/bitstream/handle/18452/4997/57.pdf?sequence=1

https://hughchristensen.com/papers/academic_papers/SSRN-id1433488.pdf

https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=dae9f45ca522784547e634685970d5b5d122b5c5

https://www.academia.edu/967214/On_the_Dark_Side_of_the_Market_Identifying_and_Analyzing_Hidden_Order_Placements

https://www.sciencegate.app/document/10.2139/ssrn.2022650

https://acfr.aut.ac.nz/__data/assets/pdf_file/0016/222037/ROBERTO-Massot-Samarpan-and-Pascual-2018-BVC-and-NOF-Preliminary-and-incomplete.pdf

https://www.tse-fr.eu/sites/default/files/medias/doc/wp/fit/10-147.pdf

https://www.unibocconi.eu/wps/wcm/connect/aff80f23-9082-4c33-8bba-5399f2c01efb/rindi.pdf?MOD=AJPERES

https://sciendo.com/article/10.2478/fiqf-2020-0004?tab=references

https://arxiv.org/pdf/1312.3349.pdf

https://davidpublisher.com/Public/uploads/Contribute/5b1a2dbbe1a79.pdf

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1108485

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1108485

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=459000

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2238087

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=956476

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1997092

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=676564

https://onlinelibrary.wiley.com/doi/10.1111/agec.12642

https://www.researchgate.net/publication/228469567_Optimal_display_of_iceberg_orders

https://link.springer.com/article/10.1007/s10436-017-0304-1

https://www.researchgate.net/publication/228261446_Optimal_Dipslay_of_Iceberg_Orders

https://openaccess.city.ac.uk/id/eprint/17333/14/10.1007%252Fs10436-017-0304-1.pdf

https://www.readcube.com/articles/10.2139%2Fssrn.3074049

https://www.stern.nyu.edu/sites/default/files/assets/documents/Chakrabarty%20Hendershott%20Nawn%20Pascual%202019%20-%20Order%20Exposure%20in%20High%20Frequency%20Markets%20%281%29.pdf

https://www.semanticscholar.org/paper/The-Impact-of-Iceberg-Orders-in-Limit-Order-Books-Frey-Sand%CC%8Aas/cb4f83f7a3abc5f1272a02a63d989341531633fd

http://fmwww.bc.edu/repec/esLATM04/up.23536.1081939804.pdf

https://www.econstor.eu/bitstream/10419/266836/1/1100.pdf

• Regime recognition papers:

https://www.twosigma.com/wp-content/uploads/2021/10/Machine-Learning-Approach-to-Regime-Modeling_.pdf

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1714016

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2845809

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1138782

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=49240

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3406068

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2472768

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3759243

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2557236 (this is a good one)

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4217513

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=532122

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1081337

Lots of papers to read :)

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Self-initiated preparation is the only thing that will allow you to capitalize on the next market event. Here is the deal, we all know there is going to be another market crash one day. Oil went negative during COVID and Nat gas blew out to the upside during the invasion. The next event will be different but there will be massive moves.

These types of charts don’t happen a lot but they can make a career:

CL

NG:

EURRUB:

SPX in 1987:

DOGE: (yes this was an amazing trading opportunity)

And then there was ICP at the top of the crypto market:

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Let me explain how I think about risk:

There is ALWAYS an asset-liability mismatch. Large mismatches cause market corrections. Check out the article I did on it:

However, this happens on the upside as well! Think about what we are seeing in the most recent SLOOS data. There is a marginal loosening in lending standards at the same time nominal growth is elevated and real rates are falling from their high.

All you need is a small opening in the credit valve while nominal growth is positive and the regime will flood with credit. At the same time, the higher LEVEL of rates is causing debt service payments as a % of personal outlays to rest at highs:

Household debt to GDP is much lower than the 2008 GFC which is why you shouldn’t be looking for an exact parallel:

However, there are significant risks in the underlying economic system.

Michael W. Green

touched on them in our podcast with him:

Mike Green, SpearPoint, and Capital Flows Podcast

MAIN IDEA: “You wouldn’t be a very good risk manager if you let what you think was going to happen have too great an influence on what you plan for and protect against.”

80% of the work you do in any domain will be preparation. This is one of the main reasons I started this Subtack. I am showing my constant preparation so that we can be ready for the big moves that take place. I have no doubt that you could be in a completely different place in life if you dedicated 6 months of your life to completely focusing on being exceptional in your domain.

As always, keep your seat at the table:

As I stated in the last article, I opened the free trial option of the Substack for the next week because I think we are entering an important period of time (link).