Lots of bad news about sovereign debt and the years it will take to resolve decades of accrued red. Interest rates still pushing ever so quietly lower. Reported hedge fund and mutual fund problems due to under performance in 2011.
Back in the early 00s I was a founding principal in a firm which looked to develop trading strategies to keep one step ahead of the market. Along with applying strategies to various markets ,we were also a market maker approved by the exchange to provide liquidity in a new contract. We were compensated in two ways ; any trading profits and payment for volume provided. We had a simple formula. Quickly pick off mispriced bids and offers. This was of coarse just as the latency arms race was picking up speed.
Now my point of telling this story is about the confusion individuals and markets make when they believe they are in control of all the important information which determines value and direction. In our trading operation, the market making desk was run primarily by a guy believed the particular market making strategy could be enhanced by his gaming the program. While the program was fully automated, he would override the system and hit bids or grab offers, anticipating the next move. When there is a larger latency spread, this works. When it closes, it does not.
His real ultimate problem however was his absolute aversion to losses. In fact, the first year there were only two or three losing days. But as the window closed on speed and other market makers step up their strategies, the firms strategy became less competitive.
Any strategy which requires less than normal distribution of losses is an eventual disaster. That goes for sovereign debt, hedge funds, and brand name stocks. Keeping things floating will eventually bring larger problems.
There is a saying which is the key to creating successful strategies and solutions. If it wasn't for the losses, you would never make any money.
