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Are we stuck in a Gamma Mill?
The dark side of the Hive
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The dark side of the Hive
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So we talked about waveforms earlier in the context of return profiles, and since then I’ve been thinking about how these might be causing some weird market behavior.
First, a quick reminder on how interference in waveforms works.
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First, a quick reminder on how interference in waveforms works.
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This is a sine wave. It’s got an up bit and a down bit, and they’re both important part of the wave.
Imagine a market in which things mean-revert over time around “fundamentals” which is sort of driven by buying and selling and cash needs of holders and… you know… whatever
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Imagine a market in which things mean-revert over time around “fundamentals” which is sort of driven by buying and selling and cash needs of holders and… you know… whatever
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If two of these sine waves overlay, they sort of cancel each other out. This is not unlike how market participants with different and timeframes work together to do “price discovery” converging on “fair value” as these layered incentives stack up.
Beautiful, really.
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Beautiful, really.
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Note that in the above, the action “nets out” as price meanders around a fair value, and the average of [T_1 … T_N] is fair value.
In other words, price spends an equal amount of time above and below fair value.
This is essentially where mean reversion comes from.
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In other words, price spends an equal amount of time above and below fair value.
This is essentially where mean reversion comes from.
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But what if there was a different type of waveform? Imagine a waveform that is still a sine wave, but differently shaped — more immediate, and concentrated.
Well the net price effect would be somewhat different…
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Well the net price effect would be somewhat different…
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So what's curious here is we’re actually NOT averaging out to equal time spent above and below the “fair value” here.
This overlap of waveforms leads to 50% of the time spent above fair pricing.
Which might gradually recalibrate what people think of as “fair value…”
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This overlap of waveforms leads to 50% of the time spent above fair pricing.
Which might gradually recalibrate what people think of as “fair value…”
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And we could imagine other, even more extreme expressions like the one below.
Choppier, but we’re still keeping it above the fair value line 50% of the time — if our goal were to drive prices up, this would be equally as good as the last one.
Now let’s add one more twist…
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Choppier, but we’re still keeping it above the fair value line 50% of the time — if our goal were to drive prices up, this would be equally as good as the last one.
Now let’s add one more twist…
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Imagine you’ve given a bunch of super smart computers;
1. A mandate to drive prices up to make money
2. The information below about pricing
What do you suppose they would do with that information?
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1. A mandate to drive prices up to make money
2. The information below about pricing
What do you suppose they would do with that information?
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I’m thinking that they
1. Use options instead of buying the underlying (though they buy some, depending on price dynamics).
2. Drive price progressively upward
3. Create a moderate-to-high volatility environment
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1. Use options instead of buying the underlying (though they buy some, depending on price dynamics).
2. Drive price progressively upward
3. Create a moderate-to-high volatility environment
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Okay now - what if we were to create a thick, progressively rolling wall of those dense price jammers? Say, if some specific segment of the population got REALLY into creating those for whatever reason.
Price just sort of keeps jamming upward right?
11/ https://twitter.com/hedgopia/status/1354420929280012288
Price just sort of keeps jamming upward right?
11/ https://twitter.com/hedgopia/status/1354420929280012288
Ants do this thing that I’m obsessed with — it’s called a ‘circular mill.’
Basically, when an ant finds food it gets so STOKED that it secrets pheromones on its way back to the hive, then all the other ants get STOKED and follow it to the food.
But sometimes they mess up.
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Basically, when an ant finds food it gets so STOKED that it secrets pheromones on its way back to the hive, then all the other ants get STOKED and follow it to the food.
But sometimes they mess up.
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Sometimes, for whatever reason, the pheromones loop in a circle, and the ants get caught in a loop. Like, all of them.
But they’re all so STOKED every fiber of their being tells them they must continue, so they do.
Forever.
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But they’re all so STOKED every fiber of their being tells them they must continue, so they do.
Forever.
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Ant_1 “This is insane — why are we doing this if we know it’s insane?”
Ant_2: “Queen will pull our funding if we don’t keep marching, right?”
And_1: “Wow this is fucked up.”
Ant_2: “Yup.”
…and on they march…
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Ant_2: “Queen will pull our funding if we don’t keep marching, right?”
And_1: “Wow this is fucked up.”
Ant_2: “Yup.”
…and on they march…
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