Topic · Systematic Strategies & Alpha
← All topicsHistorical & Decayed Alpha
50 articles · 8 checkpoints · 30 deeper reads · 12 reference notes
A standalone topic: it is on no roadmap, so read it on its own terms.
Every article, in reading order
plant a flag as you finish eachRead these first
For about two decades, European traders exploited a gap between how fast shares settled and how fast withholding-tax records were updated to have two different owners each claim a refund on the same dividend tax. It was not a market inefficiency, it was a paperwork exploit, and once regulators closed it, it became Europe's largest tax-fraud scandal.
In 2001, U.S. stock prices switched from trading in sixteenths of a dollar to pennies, and the minimum bid-ask spread fell by roughly 85% overnight, a single regulatory change that erased a reliable market-making profit source and forced an entire industry to compete on speed instead of tick size.
Being fast has meant something different every decade, a phone call before the wire did, a private line before microwave did, microwave before colocation shaved the last microseconds. Each generation of speed edge got competed away by the next, and the survivors moved from racing to positioning.
In the 1980s, futures on stock indices sometimes traded meaningfully out of line with the cash basket underneath them, and program trading desks could lock in the gap by buying one side and selling the other. It was the cleanest arbitrage in finance for a decade, and it was also blamed, fairly or not, for accelerating the 1987 crash.
A hedge fund manager's tip to New York's Attorney General exposed a widespread practice of letting favoured clients trade mutual funds after the 4pm pricing cutoff at that day's stale price, alongside a related practice of rapid in-and-out "market timing" that ordinary shareholders were barred from. The fallout reshaped fund pricing and settlement practices industry-wide.
Small-cap stocks used to reliably outperform in the first days of January, a pattern with a clean, well-understood mechanism, tax-loss selling in December, reversed in January, that quietly stopped delivering meaningful excess return once enough capital showed up specifically to front-run it.
When a stock joined the S&P 500, index funds had to buy it, and for decades that mechanical demand pushed the price up before and after the announcement. The effect was real, well documented, and has been shrinking for twenty years, a clean case study in an edge that arbitrage eventually eats.
Before electronic trading, one person per NYSE-listed stock saw every resting order before anyone else did, and was legally required to trade against the public, a privileged information edge worth real money for decades, until electronic order books made it structurally impossible.
Then the rest