FIRST PERSON
Perfect Asymmetry?
Dalton H Mota runs Asymmetrica, a research
consultancy in Brazil. Hes a trader as well
as a researcher, and nds time to hold down
a professorship too. An engineer by (early)
training, hes consulted by global investors and
corporations, and he got his start trading popcorn
futures. David Dungay went to meet him.
David Dungay: Tell us about yourself and how you got
into quantitative research.
Dalton H Mota:I studied engineering at rst, then
switched to business school. I did business analysis
for a global consulting rm for a few years, then I
was approached by a big nancial-risk consulting
shop to create and develop custom quantitative tools
for large asset managers. After four years of this,
and completing a Masters in Finance, I planned to
apply for a quant PHD in the US or UK, but began
trading my own money instead. I already had quant
experience, my trading went well, and some consulting
projects were happening, so I just kept going. My
research shop, Asymmetrica, brings together the
things I love doing, nancial research, statistics and
computers, and trading. By trading real money I can
become a better nancial researcher. By doing high
level applied research I become a better trader. And by
interacting with global clients I share my experience
and learn too.
I use my quant models and research to trade my own
and close friends money. My trading activity currently David Dungay: How do you generate your ideas and do
generates the bulk ofmy income. I am not ahedge-
Ifund or institutional
am not registered toasset manager,
manage and
clients right now,
money. I am
also a nance professor at FGV Mba (Getulio Vargas
Foundation) in Rio and Sao Paulo, teaching executive
nance classes since 2005.
David Dungay: You started trading very early,
I believe?
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Dalton H Mota:Growing up in the eighties, in a
country with tremendous economic volatility, had
advantages. I had a premature nancial education.
When I was around 11 years old, Brazil was
experiencing hyperination, like 15% a month.
Amazed by the price increases, I began tracking in my
old Lotus 1-2-3 the prices of the goods I consumed
every week. Tis was my rst quantitative analysis. I
realized
soft popcorn
drink. In my prices were naivety,
childhood going upI had
morethethan
ideathe
of negotiating with the street seller to buy popcorn
for three-month delivery in the future, locking in
the price, just to sell at the future date and be able to
buy more drinks. Tat was my rst futures trading. I
actually did this , but the price momentum switched,
and I ended up being able to buy fewer drinks than
I had expected. Tat was my rst encounter with
nancial risk.
David Dungay: How do you distinguish between what
you do and algorithmic trading?
Dalton H Mota:We do quantitative nancial s
research. In lower frequencies, we use models to
identify the market regime for an asset: is it a bull,
bear or sideways market? Is volatility more likely to
go higher or lower from current levels? Conditioned
on these variables, the system chooses an appropriate
higher-frequency model. So, conditioned on a lower-
frequency model, we trade the signals generated
in higher frequencies. What we do is algorithmic
in the sense that we strictly follow our own rules,
implemented in software.
you have a formal pipeline process for taking those ideas
into production? Tell us about your back-testing methods
also.
Dalton H Mota:As a small research house, we have a
lot of exibility to do new things, but a really robust
trading process is not easily built. I read a lot and
observe a lot. You cant forget the fact that a market is
essentially a human expression. Context is important.
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Perfect Asymmetry?

David Dungay: What is your preferred programming

language? Why?

Dalton H Mota:I have been using MatLab since

college, and I am very impressed with the evolution of
the product over the years. Since we dont do ultra-
high frequency, it is suitable to our research needs and
trading systems.

David Dungay: How do you quantify risk into your

models. Also, how have recent global events aected their
performance? Do you have metrics to adjust to events like
Libya and Japan or do you just stop the model trading?

Dalton H Mota:We use some simple metrics,

like average true range, and we also do scenario
simulations. We have a few other proprietary market-
When I have an idea, it usually takes some time to wide risk models. Our signal-processing model
mature. I do all the backtesting in MatLab. Te has been useful in anticipating changes in short-
backtesting process is done using commonsense goals, term volatility behaviour. We dont use parametric
prot factor, risk of ruin, et cetera. We also walk Gaussian methods.
forward every system, and paper-trade them in real-
time. So, its a very intensive process before we start In volatility spikes that we can attribute to well-
trading with real money. dened global events, such as Lybia/Japan, the whole
process switches to a dierent type of trading where What is short-term price volatility from a fundamental Dalton H Mota:Models generate signals at an hourly
David Dungay: Which markets and products do you economic analysis plays a greater role; that is, we see if point of view? For me, its the degree of disagreement frequency, but the holding or at period can be a few
trade? Why these markets and do you have plans to we have any edge based on information we have, among agents in a given time window, adjusted by hours or days. Volatility trading with options can have
branch out into other areas? and look at how we could exploit statistical liquidity. A higher volume of transactions happens unt il a longer time frame. I would have to think a lot about
opportunities opened by the event. short-term prices clear the change in risk aversion of one doing HF, because its a whole dierent game from
Dalton H Mota:We trade index futures group of agents ( the sellers ), with the end vector being what I do, and I would probably need much more
and strategies with vanilla options. We have another group of agents ( the buyers ) holding the assets, capital, so it would be a very dierent business from
found these instruments to be suitable the event risk, and a higher expected return; that is, a the one I have now, which is essentially an applied
for the type of trading we do, essentially premium for bearing the additional perceived risk. Te research business.
volatility trading and trend-following risk-neutral probability may become very divergent from
variations. We currently have plans the true real probability. David Dungay: How instrumental is agent-based
to extend trading to other modelling in your quantitative systems and can you tell us
areas, but thats always a So, it opens room for you to make a good return, how it has helped you pioneer new strategies?
possibility. if you have a dierent opinion, based on a dierent
information set or dierent quantitative insights, and Dalton H Mota:For an applied researcher who also
David Dungay: Do some kind of quantiable edge. trades, agent-based modelling is an essential simulation
you buy or build your tool to change perspectives. It is a more realistic map of
technology? Why? David Dungay: What is the average life expectancy of reality than conventionaleconomic theory.
your models?
Dalton H Mota: rading and real business investing is very dicult.
We code every piece Dalton H Mota:A few models died very early. As a ABM helps on the soft side, in terms of a better
of software we use, basic rule, the more parameters one model has, the understanding of the underlying forces that shape the
from collection of shorter the expected life, because the probability you world we see now. And when you think outside the
nancialand
analysis data, to
generation are overtting
essential data
themes, increases
deeply rooteda lot. So if youmarket
in observed identied box,
ideas,you increase your
or connecting odds ofunrelated
seemingly coming dots.
up with
So, new
of trading signals. As for characteristics that persist over time, and adapted a my experience shows me that real decisions and agent
hardware, we simply dont robust model to exploit this behaviour, theres a higher simulations feed on each other.
need a very expensive hardware probability it can survive.
infrastructure for what we do. David Dungay: Please tell us more about how you
A few fast computers will do David Dungay: What time frames do you trade in, and use low-frequency fundamental models in calculating s
the trick. do you have any plans to delve into HFT? economic risk in real time?

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Perfect Asymmetry?
Dalton H Mota:o my approach, a fundamental
economic model is an essential component. I think it
is important to understand why people make money
through trading, what kind of risks they are being
paid to hold, how their strategies t into the great
scheme of things. Everything has an economic
purpose, even if ones not aware. As I see it, theres
very little true alpha in the global market, only
multiple betas, most we dont even understand and
cant estimate.
And I try to understand the beta I want to be exposed
to. For example, when you provide liquidity buying
stocks for low prices at the depths of recessions
when fear is tremendous, banks are failing, people
being laid-o, cutting expenses, et cetera you are
performing the legitimate real economic function of
being an insurer; that is, holding risks other people
are happy (or need ) to transfer to you. For that task
you receive a premium in the form of a huge expected
return.
As agents see the situation stabilising and risk fading,
stock prices go up, because agents see premiums
implied into stocks as attractive, buying the assets
and lowering expected returns in the process. If you
bought at the lows and held, you pocketed the
change in prices that resulted from the change
in expected returns and perceived risk. If
you traded in the months between the
low and the recovery, economic risk
awareness would have kept you on the
right side of the trend, and your quant
model would have behaved according to
this market regime.
So, we map a few economic and market
indicators to estimate
the broad economic
expectations more likely
being priced into asset
risk premiums at a
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given point in time, and this model helps us assess
the more probable market regime. Te pricing of
economic risk is mostly a low-frequency process, and
it is reected in practice in what traders call a bull or
bear market. From a theoretical point of view, it is all
a repricing of economic risk, even if risk is myopically
priced, like it is in bubbles.
David Dungay: How does your approach to
quantitative trading systems give you that edge over the
eld? Is there more opportunity in the way you analyse
data than perhaps a typical quant would nd?
Dalton H Mota:I dont know, what is a typical
quant? I am only concerned with doing the best I can.
rading is so dicult that every year you make money A bit of terminology here. I understand automating the
is also a year you learned something about survival
and adaptation. Our research has a lot of number
crunching, but with a lot of understanding too.
Te quantitative framework structures the thinking,
the information, the features of behaviour, and
generates the signals. But the most important thing is
a scientic mind, to look at the world in a scientic
way, and be always open to the realities of the market.
Human intuition is essential, but betrays you a lot,
so quantitative trading keeps noise and emotional
bias out.
David Dungay:What is a typical consulting
project for you?
Dalton H Mota:We are approached by
global investors and corporations. o
the rst group, we extend some of the
proprietary quantitative research and
economic analysis we do for ourselves.
Also, we can develop custom-made quantitative tools
if needed. Non-nancial businesses look for broad
nancial and economic perspectives, and specic high-
tech decision-making tools.
David Dungay: How automated is your end product?
Can you explain the dierences between automating the
process but not necessarily the order placement?
Dalton H Mota:We are a quantitative nancial
research shop, that develops, tests and uses strategies,
and shares knowledge and analysis with other agents
through consulting. We are more onthe intelligence
side of things.
parameters or dierent sets of xed parameters
process as feeding all the information to the computers
and generating a signal, a position-sizing, a stop-loss,
a probability distribution of prots, et cetera. As we
do not trade very high frequencies, nor trade a large
number of assets, we dont have the need directly to
automate the order placement, although we could do so,
and probably will do so to some degree in the future, if
the number of instruments we trade grows.
FIRST PERSON
I am a small prop trader, nancial researcher and
consultant, and so far things are under control this
way.
David Dungay: Do your models have any self-adaptive
elements to them?
Dalton H Mota:Tey all change with the
environment, so in a sense, you can say they self-
adapt.
David Dungay: Do you deliberately avoid or minimise
the use of xed parameters in your models?
Dalton H Mota:Yes. We try to use variable
when possible. Economic risk modelling uses time-
varying parameters. Short-term trading with futures
uses xed parameters, but they are only xed for a
given identied market and volatility regime. When
these change, the model uses a dierent set of xed
parameters.
David Dungay: Dalton, thank you very much.