Gaining Momentum, In Two Flavors

Are firms finally ready—and able—to take advantage of Big 'Mo'?

A new analytics product focused on momentum trading leads this week's content, while a different kind of confidence, and some welcomed calmness, settles in as the second EMIR reporting deadline hits.

All momentum is fleeting, or so the pessimist would say. But the discussion around momentum trading has decidedly followed Newton's first law of motion, instead: objects in motion will tend to stay that way.

After all, the subject of a potential 'momentum effect' has received a lot of academic attention, most notably from Eugene Fama and Kenneth French's extensive research that has lasted two decades, and produced a lot of debate along the way.

Likewise, while 'daytrading'—with which momentum trading is closely intertwined—often gets a negative connotation, it remains a very useful option for many money managers and other buy sides, whether the more prestigious among them wish to admit to doing it or not, and the likes of BlackRock, Invesco, and AQR are now eyeing momentum-based indices, as well.

As my colleague Anthony Malakian reported this week, the surprising thing about momentum from a technology standpoint is that, despite the phenomenon's popular currency and intense quantitative scrutiny, it remains somewhat under-supported by the vendor community.

Enough, in fact, that Trendrating, a Swiss analytics startup, has jumped into the fray with a new modeling methodology, which it argues is faster in identifying real momentum (over the course of weeks, rather than the standard rate of change of 12 months) and incorporates several different indicators that it believes are better than those already available, which will often use outdated academic models.

For the second round of EMIR requirements, it seems this time around things have gone much more smoothly than the initial problems firms faced getting unified trade identifiers (UTIs) developed, matched, and consumed by their counterparties—which was, by most accounts, a disaster at first.

As Trendrating CEO Roco Pellegrinelli put it to Anthony, the problem isn't that shops don't want to incorporate momentum-based strategies into their portfolio; it's that they don't have the right factor analytics to do so. "Many fund managers have previously ignored momentum for one simple reason: they had no easy way to measure it. Now they can," he said.

And that could be. Of course, getting the correlation and balance right between size, value and momentum for this kind of rapid event- or technicals-based trading isn't exactly easy. And like any sophisticated market bet, extensive back-testing of data is required to properly understand the potential gains and losses risked.

Second Time's a Charm
Speaking of things that aren't so easy, a different kind of positive momentum seemed to be evident this week with the latest round of European Market Infrastructure Regulation (EMIR) reporting requirements that have kicked in for collateral and valuation data.

Interestingly, as our new reporter Dan DeFrancesco found, it seems this time around things have gone much more smoothly than the initial problems firms faced getting unified trade identifiers (UTIs) developed, matched, and consumed by their counterparties earlier in 2014—which was, by most accounts, a disaster.

Now, it might be that firms have learned to be a little more measured in their public views on the subject; it could also be that we're now just less surprised by the unique bumps in the road this particular regulation features, a few months on.

But the better bet is that education efforts within the industry, and coordination from the utilities and major tech providers like Bloomberg, are finally starting to pay some dividends as the buy side begins to understand what's required of it—like it or (mostly) not—and the technology catches up to the chaos.

File Under 'Bizarre'
Meanwhile in other more bizarre reporting-related news, the US Securities and Exchange Commission released an update on Form PF filings. The only verdict? The SEC has, apparently, analyzed data from its Form PF filings.

Fascinating stuff.

So when it comes to momentum, maybe there can be too much of a good thing. For now, portfolio managers and regulators alike will take what they can get, and we'll all wait on the SEC to make a little more sense of the data down the road.

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