re algo & hft , page-8

Stat Arb

This will be interesting for your trading.

I suggest if you have an edge, or shall we say a market inefficiency somewhere, keep your cards close to your chest.

Your edge exploitation will become efficient otherwise.


http://en.wikipedia.org/wiki/Statistical_arbitrage

One paragraph from the above link.

"Stat-Arb and systemic risk: events of summer 2007

During July and August 2007, a number of StatArb (and other Quant type) hedge funds experienced significant losses at the same time, which is difficult to explain unless there was a common risk factor. While the reasons are not yet fully understood, several published accounts blame the emergency liquidation of a fund that experienced capital withdrawals or margin calls. By closing out its positions quickly, the fund put pressure on the prices of the stocks it was long/short. Because other StatArb funds had similar positions, due to the similarity of their alpha models and risk-reduction models, the other funds experienced adverse returns.[5] One of the versions of the events describes how Morgan Stanley's highly successful StatArb fund, PDT, decided to reduce its positions in response to stresses in other parts of the firm, and how this contributed to several days of hectic trading.[6]

In a sense, the fact of a stock being heavily involved in StatArb is itself a risk factor, one that is relatively new and thus was not taken into account by the StatArb models. These events showed that StatArb has developed to a point where it is a significant factor in the marketplace, that existing funds have similar positions and are in effect competing for the same returns. Simulations of simple StatArb strategies by Khandani and Lo show that the returns to such strategies have been reduced considerably from 1998 to 2007, presumably because of competition.[5]

It has also been argued that the events during August 2007 were linked to reduction of liquidity, possibly due to risk reduction by high-frequency market-makers during that time.[7]"