Thursday, January 25, 2007
Friday, January 19, 2007
I've been trying to come up with something eloquent to say about weatherbill.com, but I'm just blown away: it's just so damn cool! It embodies everything that I see as driving the future of online marketplaces. Just as intrade.com is giving economic derivatives a run for their money, I see this trend continuing with weatherbill as compared to the more buttoned down offerrings at CME.
Working at Root Markets I can't truly appreciate the perspective of soemone who is taking on a pre-existing market place and attempting to replace it with something much better. I do, however, have some theories on what it takes to succeed.
Last year I was lucky enough to spend some time with one of the founders of intrade, and I was curious to learn more about what was driving their success against the incumbet economic statistics market. The lesson was simple: you need to offer contracts that serve real needs. The message that I heard was that the payoff structure of the CME Auctions Markets were not successful in doing so. Skimming over the contract specifications and current volumes, this doesn't appear to be the case now - but it was back then. The point still remains - serve a real need - design to hedge a real risk.
Closer to home, for me, is the mortgage market. An early story that our chairman shared with me was of the evolution of the CMO market. Prior to securitization there was very thin trading in whole loans as it was commonly believed that to understand your risk exposure you needed to understand the plethora of intangible factors that could possibly drive prepayment and default risk. Buying a whole loan was thought to expose you to the risk of what side of the street the house was on, etc. Of course, with the tranche structure of the new instruments, these risks fall out leaving the holder of a CMO with exposure to the right kind of risks. Understandable systematic risks. Portfolio theory 101 at work.
As the market evolved the models improved as can be see if you compare the book for a recent issue to that of a 1980's era issue. Nowadays, with liquidity chasing liquidity, savvy investors are seeking more specialized exposure and are slicing and these tranches looking for an edge and rebundling whole loans where once the market was super thin. Specialist funds are able to do this because of the modelling power afforded by new technology. The computer I am writing this on can do a gazillion calculations per second. Thems alotta calculations.
Compare the ability to slice, dice and model on weatherbill with the handful of contracts available on the CME. If I am a small business owner, I don't want to hire someone with a degree in financial engineering to work out how to best hedge my risks. And even then, the hedge will be imperfect when there are only a limited number of contracts to choose from. Businesses want to be able to trade specialized and differentiated contracts to best approximate their risk exposure. Yes it may be difficult for an army of broker dealers to make a market in millions of contracts, but this is the sort of problems that computing power can be thrown at. If you have the right pricing models, you should be able to scale to a silly number of contracts far more cheaply than if you had to hire high rent dealers to make the market.
This sort of scalability is not afforded to all types of markets. In futures markets, where the cost of carry is infeasible, a prediction market forms. This is the case for weather, and likewise it is the case for consumer leads (my speciality). Prediction markets are special in that there is no first-order linkage between trading activity on the derivative and the current spot price. Compare this to storable goods: if the spot price today decreases, I can always buy a little more today and hold the good for use later thus changing the value of a forward contract, and vice versa. However, if it is hot today, I can't store the weather for the purpose of changing the climate in 6 months time. If the price of leads decreases today, the rapid half life of consumer attention means that a marketer will have a difficult time realizing any value from a 6 month old lead, thus leads, like weather, can't be stored.
To understand why this is relevant in determining whether a market can scale to a large number of differentiated contracts we need to look at how market makers work. If I buy a contract for a the future delivery of some good, the market maker must find some way to hedge her risk of being the counterparty to your contract. And when the volume of sales effects the spot price, liquidity risk is present. In prediction markets you don't have to balance the effect of future market activity against spot underlying values. If you have an edge in pricing future movements, you can scale with diminished exposures to liquidity risk.
In short, prediction markets are different to standard futures markets. And there is little reason to not offer highly specialized contracts to participants. Weatherbill does this very well.
By offering the ability to upload historical revenue numbers, weatherbill makes it easy for unsophisticated businesses to asses their weather exposure and to specify a contract that exactly matches those risks. It is just so easy to use and there is something, dare I say, very Web 2.0 about it all. While it is technology that empowers this, weatherbill different from, say, hedgestreet in that there is amazing simplicity to what is otherwise a complex product.
It's just so damn cool!
My bio - 8 Years ago
I found this via the way back machine. I probably wouldn't be so candid today, nor would I use the same words. Nonetheless, I wrote it, and to some extent it still rings true and is available for the world to see.
response is the output of my occupation of this media volume, related to the (con/de)struction of one dimensional signals in time. or something like that. i dont really have a purpose to this site, its just a place for me to chuck my junk so that i can access it whilst i am away from my home base. i dont like going away from home, especially if i can not take at least one of my computers with me. i guess you could say i am not very well adjusted, socially. but thats ok, this is a new dawn, and there are probably many people out there like me, similarly lacking in interpersonal skills, in place for interprocess communication. why make love when you can make a remote procedure call. what is music about really ? as far as i can tell its just a tag that people can pin on them to make them different from other people, when in reality we are all very much the same. thats why if what was traditionally an 'underground' piece of music, finds itself into the 'mainstream' - the people who originally liked the music will deny that, and claim to hate it, when they are only doing so because they have been put in the position of no longer being able to use that music to make themselves special. why do people want to be special? its alot easier to become special by developing a personality than it is to become special by becoming physically attractive, or going to the gym, or cleaning behind ones ears. thats why i dont write music any more. im not very special, you see, hence any music i produce would not help others be special - hence it would fail its ultimate purpose in our consumer society. of course music can be fun to listen to and can provide enjoyment. its easy to listen to music with lyrics and walk away with a very concrete understanding of why you feel like you do after experiencing that music. when ones moves to instrumental music, certain musical constructs have evolved amongst the genres so that people can walk away easily satisified that the music that they have heard is good. howevere for the poor sods who listen to 'experimental' music its much harder for them to justify both to themselves and more importantly to others why the music is 'good' as it may not have the same constructs such melody or rhythm that allow people to judge conventional music. too often people like this 'experimental' music because it allows people to label themselves, as listeners of this music, as intellectual/special/different/horny(?). personally i like 'experimental' music for all the previously stated reasons, but also in addition, i (as a programmer and a theoritisiticsix) i like to thing about the process that was involved in the creation of the final piece. for me creation is art. i write software as art, no specific goal, just write because it allows me to hide from reality. i have no desire to earn my living from writing software. no constraints. my software does not even have to work to satisfy my. it doesnt even have to be broken in a clever way. it just has to involve me, and thinking, because, after all, its what i do best. but no better than most people.
Tuesday, December 26, 2006
What follows is a letter I wrote in high school in response to a comment made by my religious studies teacher about the absence of ghosts in Judaism. As one of the few Jews at my Anglican school, I found myself taking more pride in my roots than when I was only one of about 1,000 at my Jewish school.
I'm posting it here with a slight reference to Joel Spolsky's latest post (which briefly talks about my current employer) and also because I am amazed that I managed to find this essay lurking in the depths of i2pi.com
It is very true to say that Judaism has very little historical associations with ghosts in the spooky spiritual sense, but to use this in the formation of the conclusion that there were simply no Jewish ghosts is pure adulteration of facts. This may seem a bold statement, but one must be so when dealing with a topic that is so ‘iffy’.
The first if in the iffiness is the definition of a ghost. To resort to a dictionary, The Macquarie defines a ghost as ‘a disembodied spirit of a dead person’ or ‘a spiritual being’; That will suffice.
I feel that there is enough evidence in traditional Jewish literature to support the claim that there were or are Jewish ghosts. But before one goes jumping into the five books one must firstly realise that the Torah only forms part of a small part of the Tanach textual trinity, containing the Torah, the Nevi’im and the Kethuvim; The Bible, The Prophets and The Writings. These three form, together with the commentaries of commentators like Rashi, the basis of Jewish ritual, custom and tradition. Without its counterparts the Torah is very much a vague thing, and it is probably in this fact where the beginnings of many a war are buried. So to form an opinion on any matter of Judaism one must at least consult the Tanach in its entirety.
If we draw our attentions to the Torah, we can find many references to spiritual beings, most of them classed under the broad heading of ‘god’, and by the second definition of ghost, we can classify these ‘beings’ as ghosts. The prime suspect for such a labelling of god himself (he is referred to as he not she in the Torah, so I will stick to that convention). Take Deuteronomy 4:12, ‘You heard the sound of words, but see no form...’. Here we have a description of god as sort of presence, who can make himself appear ghostlike to people. Now one may argue that this is a tenuous basis for supporting my aforementioned claim, and I agree, but wait, there is more.
In addition to the myriad of ghostlike appearances of god, we have the angels. These group of lucky souls have reached the court of god, and their duty is to appear on earth to carry out duties for god. In his 12th century Guide for the Perplexed, Maimonides opposed the idea that such angels are corporeal beings. So if they are not physical they must be metaphysical: ghosts. These beings pop up all through the Torah usually acting as schleppers for god. See Genesis 18:2, 3:2, and 13:6. In these references the angels appear as messengers, fire and in the last case in the form of a person; Not quite white sheet and chains material, but definitely ghosts.
It has been stated that the idea of ghosts as being merely the risen dead is just a recent concept, but if we cast our minds back to Eziekel 37 we find a very such references. In this chapter, to cut a long story short, god leads Ezi down to a valley of dry bones, whereby Ezi asks god if the bones shall every live again and god replies ‘I will cause breath to enter you and you shall live again, I will lay sinews upon you, and cover you with flesh, and form skin over you. And I will put breath into you and you shall live again’. After this Ezi was disturbed by the sounds of rising bones as they formed ghostlike human figures. Also in Daniel 12:2-3 we find further references to the dead rising from ‘sleep in the dust of the earth’ to inhabit the Earth evermore in a ghostlike presence.
So far we have had god , angels and the dead appearing in human form, or some spiritual sense inline with the conditions of the definitions stated above; We have seen ghosts, but one ghost is probably more well known within the Jewish faith than any other, Elijahu. Elijahu was a prophet, and his greatness was such that he was appointed to appear alive again before the judgment, and coming of the Messiah to prepare humanity and resurrect the dead, see Malachi 3:23. But until his appearance he is supposed to appear in Jewish custom, derived from the commentaries, annually at the household of each Jew, signified with the ritual doorpost, the Mezzuzah, where upon he would enter the house during the Passover service to drink a sip of wine especially left out for him, in his own glass. Each year Jewish children sit with one eye poised over the cup to see that fraction of a drop disappear, and each year the same joke is made countless times globally in over a hundred different languages, about how drunk Elijahu will be by the time he has drunk from so many cups, and each year the joke becomes less funny. All of this for a ghost that some suppose does not exist.
We have jumped around from one book of the Tanach to another, some pointing the finger to pillars of fire that lead the Jewish people in Ba’Midbar, others feature messengers of god coming to Earth in human manifestations. We also have god appearing to Ezikel and resurrecting the dead as ghosts. Finally we saw how Elijahu, the archetype when it comes to Jewish ghosts, and his worldwide trek drinking from the cups of Jews in apprehension of the coming of the Messiah, will be the final Jewish ghost, and with his appearance all will be revealed. Until then we will are forced to resort to one of the most holy of Jewish sources, Woody Allen; ‘There is no question that there is an unseen world. The problem is, how far is it from midtown, and how late is it open ? Unexplainable events occur constantly. One man will see a spirit. Another will hear voices, A third will wake up and find himself running in the Preakness... What is behind these experiences ? Or in front of them, for that matter? Is it true that some men can foresee the future or communicate with ghosts? And after death is it still possible to take showers?’
Thursday, December 21, 2006
5 things you don't know about me.
Greg just meme-tagged me! The unwavering rules of the internet now compel me to reveal five things you didn't know about me.
Here we go!
 Wow. meme-tag, that's Web 2.0++
Here we go!
- In the late 80's, my family went on a European vacation. Just prior to leaving, I was in the process of becoming a cool guitarist (pre-Guitar Hero days). Of course, my interpretation of cool was slightly different to other preteens. Cool for me involved making my own guitar pickup, which involved wrapping very fine wire around little ferrite cores and encasing them in hand molded plastic. The resulting pickup was a misshapen blob with wires dangling out of it. For some reason it got stuck to the bottom of my bag and traveled around the world with me, unnoticed at any of the previous security checkpoints that we passed through on our journey.
At Heathrow Airport security was stepped up, as a few months earlier the Lockerbie Bombing occurred. (Of course, in the 1980's high-security at an airport post a successful terrorist attack was mild compared to the mess I recently had to go through after the foiling of the speculated liquid bomb attack a few month ago...) When my device of questionable intent was discovered by an X-ray inspection, my entire family was quickly surrounded by soldiers wielding M-16s. Upon manually searching my bag, they found my plastic explosive and a triggering device. The triggering device was a very neat Casio PB-700 calculator that my family bought me in Hong Kong a few weeks earlier. Being a nerd, by the time we arrived in London, I was half way through taking it apart. It was easy to understand how my innocent guitar pickup and disassembled calculator looked rather nefarious.
After a damn stringent examination of all of our possessions and individual interviews we were allowed on the plane (which I single-handedly delayed by a few hours) to continue on our flight to Paris. My parents weren't too happy about this. The other passengers on the flight were fuming. The staff on the plane refused to serve us. Meanwhile, I was pissed that they took my calculator.
- Needless to say, my family wasn't happy when, the following week, I demagnetized our boarding passes at Charles De Gaulle.
- In Year 9 of school (or, as you Americans call it, Middle Junior High Sophomore?!), I was placed in the remedial math class. I had just transferred schools and I clearly didn't do so well on my placement tests. What struck me as peculiar was that rather than giving the role of remedial math teacher to someone who could impart math knowledge, instead the school had our rowing coach teach the class. What I didn't learn about simultaneous equations was more than compensated for by my practical education in how to smoke in class without getting caught. I did manage to do well enough on the semester quiz to get placed in the advanced course, but by the time I graduated I was back to being a failure of the university system. My first exam, which happened to fall on my 18th birthday, ended in a dramatic failure when for the long essay portion the only words I wrote in the answer booklet were "Schwann Cells." Despite my 51% grade average, it took me 5 more years to realize that I didn't actually want to be a doctor.
- At an age when I was old enough to know better, but young enough to be foolish, I was caught hacking into a phone system. Somehow I got out of that one without charges being laid. *Phew*
- I despise musical theatre. I am more than happy to sit through a 12 hour production of Angels In America, but I walked out of Rent ASAP.
 Wow. meme-tag, that's Web 2.0++
Sunday, December 10, 2006
Friday, December 08, 2006
In the spirit of releasing early and releasing often, here is a new service I have been tinkering with the last few nights. Fredwatch sucks data down from the St. Louis fed and looks for interesting points in recently updated series and compiles 10 observations per day in a handy RSS feed. The feed is pretty clunky right now, but have at it.
Thursday, December 07, 2006
I'm the operator with my pocket calculator
Thirteen years ago I pestered my father enough to fork out and buy me an HP-42S calculator. To this day I love it, and feel uncomfortable when its not by my side. Not in a wierd start-developing-tics-when-its-not-around kind of way, but rather unfortable with the tought that a random calculation will go unaswered. I am terrible at mental arithmetic, and frequently need to multiply numbers. And occasionally find the next prime number larger than N. Or invert a matrix.
Infact I loved the calculator so much that a few months ago it started dying. I opened her up a few weeks ago and the PCB was quite tattered. My cleaning gave her enough life to give me time to decide on my next calculator purchase. This was a big decsision, because while I had bought calculators in the past (including a slew of HP's), nothing stacked up to the 42S. I simply couldn't buy an identical replacement unit, because that would be cheating.
The only thing missing from my 42S was inbuilt finance functions. While I had programmed everything I needed into it, I always dread the thought of losing my programs when I fail to replace the batteries in time. Given this, I decided on a 17BII. Its the same form-factor that my brain is wired to, provides most of my commonly used functions, and is significantly cheaper than a vintage 42S which is now a collectors item.
It will take a while for me to get used to not having access to trig functions, hex and binary, and programming modes. I don't think I will miss the integration, programming, stats or matrices, as these are better done on a computer. It irks me that they have included a 'BUS'iness menu which gives you basically nothing. For example, if you want to know what percent 5 is of 8, on any normal RPN calculator you type '5 ENTER 8 /' - a total of four keystrokes. Or you could use the fancy BUSiness menu and type 'BUS %TOTL 8 TOTL 5 PART %T' - seven keystrokes!?! How silly is that?
What really kills me, however, is the thought of having to see ugly buttons dedicated to parentheses when they are completely reduntant in RPN mode. (See here if you have no idea what I am talking about.)
Basically, HP introduced the 17B as an algebraic calculator with no RPN mode to appeal to business users. Of course, everyone in finance who needed to get answers as fast as possible loved RPN because you could enter calculations with fewer keystrokes than on algebraic calculators, and the method of entry was less error-prone as the operator has no need for using, or keeping track of, pesky parentheses. Of course, the 17B was a flop until re-released as the 17BII, with an optional RPN mode, but the ( and ) buttons remain to support the underwhelming algebraic mode.
The good news is that given how close the layout is to the 42S, I should be back to touch-typing on the calculator soon and won't have cope with those parentheses staring at me like the eyes of a dim-witted child. But until then, I'll probably find some cute stickers to put on the buttons so I never have to see them again.
I am such a dork.