- Evolving trading systems along with technology is always essential to maintain competitiveness, particularly in short-term trading.
- Tony Kaiser says that some strategies are classics for a reason, but they’re definitely not one-size-fits-all.
- Why are some trading tactics suited to certain market environments and not others? What are the short-term strategies that work best today? Tony weighs in with his investment philosophies — and some hot takes as well.
In a world where the only constant is change, especially in the high-stakes game of short-term trading, wisdom comes not only from the hard data but also from the nuanced understanding of market dynamics.
“One of the benefits of being in markets for so long … is the intuitive feel,” says Tony Kaiser, the CEO and founder of Kaiser Trading Group, a short-term systematic fund based in Melbourne, Australia.
He can definitely describe what doesn’t work in today’s era of algorithms: thinking, I’ve got a model, and I'm going to run it on 50-odd markets, and it’s going to work all the time.
“That’s not true. That model [only] works when the market dynamics suit it. Therefore, the smarter thing is [to] understand what market dynamics suit the characteristics of the model. That’s the million-dollar question.”
Tony joined host Moritz Seibert on an Open Interest episode of Top Traders Unplugged to discuss how the short-term trading space has evolved over the years, why short-term models are even shorter than the ones he traded decades ago — and how his firm leverages technology to “harvest the noise.” Read on for highlights of their conversation.
Models and market dynamics
Adaptability and specificity have always been key for Tony. After all, trading models are not universally effective across all time periods or market conditions. They’re contingent upon the presence of certain market dynamics.
A volatility (vol) breakout trading model is predicated on the assumption that after a period of compression, the market is poised for a significant movement (breakout). Capitalizing on the sudden increase in price movement is the whole point.
But the effectiveness of this model is inherently linked to the market, specifically a “moving state environment,” Tony says. The potential for volatility has to exist. Consider a stagnant market like Japanese government bonds, which became “untradeable” when interest rates fell to zero. So even if a trade meets the theoretical criteria put forth in the model, it’s unlikely to succeed. The essential dynamic — the breakout — just isn’t there. That’s why frequent evolution is a priority for Kaiser Trading.
‘Harvesting the noise’
Certain trading strategies will always have limitations in the face of long-term market trends, particularly short selling, which is unlikely to be successful in a predominantly bullish market.
“It doesn’t matter how much you want to be a short seller, it’s not going to work … because of the bias of the data,” says Tony. So while many hedge funds rely on historical data and use those trends to predict future market dynamics, that’s only a viable strategy if the model they use is appropriate for the current market environment. He cautions against relying too much on history when considering potential unforeseen market shifts. For Kaiser Trading, adjusting trading models is vital in response to changing economic winds, like interest rates.
“The effect of carry on any asset class is huge. So if you’ve got 7% or 8% on a model, and you’ve got negative carry of 3% or 4%, there’s not much edge on that model left,” Tony notes.
But there are plenty of small gains to win — at scale.
“There’s so much information in the minutes to ticks to sub-daily [minute-by-minute fluctuations and individual transaction data, in very short time frames] that we are now very invested in harvesting that noise in our models,” he says. “Why do we do that? I think the answer is: I like it.”
Mean reversion and the modern trading landscape
Moritz asks Tony whether “harvesting the noise” — that is, actively incorporating the random or unexplained variations in stock prices as valuable data — is essentially a mean reversion style of trading.
“Yes and no,” Tony replies. “I always say … if you stand in front of a train, you’re gonna get run over. The reality is, if you’ve got to try the noise, you’ve [got to be] meaner.”
However, “trading mean reversion into even short-term momentum or strong momentum, you’re gonna get slaughtered,” he adds. “It’s really a case of putting all those pieces together.”
In other words, trying to apply a mean reversion strategy during a period of strong short-term momentum can lead to significant losses because prices might continue to move away from the mean for longer than the investor can remain solvent. Integrating several strategies requires a sophisticated understanding of the market conditions under which each strategy is likely to succeed or fail. And after more than 30 years in trading, Tony has that in abundance.
Endurance and adaptation
Moritz wonders whether the models Tony uses today are mostly unchanged since the beginning of his career, or whether technology has required him to reinvent the wheel.
Again, the answer is a bit of both. Certain trading strategies continue to be effective as long as we apply them in a suitable market environment. That’s true for both short-term and long-term strategies, including one of our favorites here at Top Traders, trend following.
But in Tony’s estimation, the markets have become less conducive to trend following in recent years compared to previous decades, when we saw much more pronounced trends. Why? More market noise, for one. And there are also more frequent V-shaped (sharp reversal) and W-shaped (double bottom) price actions.
(“I wonder if that’s because … there’s more players in the system [who] are trying to do the same thing,” he muses.)
Tony uses the U.S. dollar/Japanese yen currency pair as an example. Specific market conditions, such as a significant interest rate differential between the two countries, can create favorable conditions for certain trading models. But the same conditions aren’t present all the time, making it challenging to consistently profit from the same strategy without adapting to the current state of the market.
“When [dollar/yen trading] took off a couple of years ago on the fact that U.S. rates were 5% and USD/yen rates were at nothing … any model at all would perform well, because it was in a highly moving state. If you looked at dollar/yen for the preceding years, you would have had a pretty tough time making money out of that market.”
The more things change, the more they stay the same
Is what Kaiser Trading does proprietary?
Not exactly — the secret sauce, so to speak, is simply Tony’s extensive experience and understanding of the markets, although “a lot of the ideas come from discretionary thought process[es] that we code up and then try and prove [out] the dynamics,” he says.
“Hindsight is a wonderful tool,” Tony adds. He notes that from 2009 onward, market dynamics have radically changed several times. During the era of zero-percent interest rates, “the impact on the markets for that extended period — we still made money, but not as much — was huge,” he says. “Now, the fundamental dynamics since ’22 have changed. So I think you would expect to see market behavior more similar to the 1990s and early 2000s than what we’ve experienced in the past 12 or 14 years.”
Does that mean today’s market environment is good for longer-term trend following traders? Moritz notes that “recently, they’ve hit it out of the park.”
“No doubt,” Tony replies. “I think the move last year, and [the] first quarter of this year has been really good for long-term trend followers. But the question I would ask is, How much are they going to give back on the reversal of trend in equities? Potentially starting from now … the good thing for them is they will readjust.”
That’s the name of the game, isn’t it? Always adjusting as needed.
Trading is always unpredictable, so let’s keep our eyes open, our models flexible and our spirits high. Who’s to say what thrilling plot twists lie ahead?
This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.