Uncovering Hidden Market Regimes

I used to spend all day in front of my screens. Scrutinising every tick in the bund futures market back in 2008–2009. I had to be in the market, constantly trading in and out of positions. Being a prop trader never really suited my personality. Others found it exciting, I found it anxiety provoking. My emotions would flow with the orders. The first Friday of every month was always memorable, especially during the financial crisis. This was US non-farm payrolls day and the implications from the announcement would ripple around world markets. Watching the reaction to this and other major macroeconomic news was at first counter intuitive. A positive release that should have lifted markets would instead lead to a sell-off. Conversely, seemingly poor numbers could spark a rally that could last days.

I do not like environments where I lack control. The way I saw it, I had two choices; I could step aside and watch from the sidelines on days with high impact announcements, or I could try and quantify the news. Little did I know that my desire to model economic data and market reactions would become an obsession that continues to this day. It would lead me down a path of licencing my research to multi-billion-dollar hedge funds.

Last year a Non-Disclosure Agreement (NDA) expired with a major client. Instead of serving a small number of large clients, I’m now going to start writing about my methodology to bring it to a wider audience. This post is the first in a series where I’ll attempt to outline my concept of market regimes.