“If you know the enemy and yourself, you will win a hundred battles out of a hundred.”
知己知彼,百战百胜 –Sun Tzu
In Breaking Bad (BB), the highly acclaimed 5-season-long tv-series with IMDB rating of 9.4, Heisenberg, the series’ main character, run methamphetamine laboratories that produced “blue” of exquisite 97 % purity leaving their dope competitors in the desert dust. Literally. Heisenberg’s blue beat the market with a rushed home-brewed cooking setup. Adrenaline +1.
To approach the 100 % purity asymptote, several trials and near-lethal errors were made over the course of the 5 seasons. Only by a fair amount of skill and luck, the process of producing their superior blue was mastered, which, we should realize, was intricately a man-made process: Heisenberg learned through his mistakes, many of which were also quite necessary.
With the right machinery, it would not have taken 5 exhilarating seasons. Maybe just 1. Should Heisenberg have had an immediate access to an impeccable lab equipment, logistics, and a lawyer – who, by the way, gained a spin-off tv-show “Better Call Saul” (more about Law, Man, and Machines in another article) – the asymptote could have been proxied a lot faster.
In quantitative trading, a laboratory producing superior algorithms is the Holy Grail of Matter. Exceptionally profitable trading algorithms are hard to produce. A human trader might learn to cook 1 batch in 5 years – not unlike Heisenberg’s protégé, Jesse Pinkman, who learned to cook blue in 5. The Crux of the Matter: in dynamically changing conditions, you have to adapt.
But it is not that Black or (Mr.) White, nor Pink(man). You may just learn too slowly. Should you learn too slowly, you will end up in the dust fast. And should you learn very fast, you should seriously ask yourself: “Is what I found only cheap, sub-standard, piece of junk?” And that brings us to Gray Matter – actually the most successful business venture in the BB series.
“Wait.” It may not be really true that an exceptionally successful trading algorithm would be that hard and costly to do. “You could get lucky – that is possible, right?” There is a caveat: in quantitative trading, how would you know when you have hit a Jackpot if you do not know how you made it? To cash in, you would need to orchestrate the whole algorithm production.
In quantitative trading, Gray Matter stands for the right mixture of human intelligence and machine precise process orchestration. This is to be understood broadly enough: it includes the learning part that would be automated, while the logic of the trading algorithm would be designed by human intelligence. Gray Matter is like a doped-up algorithm production process.
Machines can assist us humans to do it better and faster: BB’s season 5 ends in a bittersweet, Man-designed, but M-60 automated machine gun orchestrated battle; the meth imperium falls due to a series of human errors. Human adrenaline in works. Yet it may be just a Matter of Time before machines learn from us humans what drama is and how to optimally revenge.
But the fourth dimension, Time, may also be Man’s best friend, a shield against the otherwise imminent loss: Randomly change the rules of the game, leave no trace, no fingerprints, and you may just remain unidentified like Gus Fring, or, better yet, Vamonos Pest. If you do not, you get machine-detected, your trading alpha quickly arbitraged away, as will be you, the fly.
In the end (of Time), it boils down to the Gray Substance Matter and its production process. Wondered about the numbers 5 and 1? They could denote Area 51 – after all, BB was mostly shot in desert and this article is spaced –– but they could also mean Fifty Shades of Grey +1. Crays (-1) alone cannot cook abstractions that pay back like White does. To revenge is human.
You may participate in Man vs. Machine high-frequency (HF) trading algorithm battles at our soon-to-be-launched trading algorithm development site. You may hand-craft your algorithms or leave the learning part to be orchestrated by an algorithm. And we are not talking about ordinary slow trading, but HF M-60 type of trading. Just beware, you might become addicted!