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Using Math to Bet on the Futures
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SEPTEMBER 20, 2004 -- Semantics are important to Igor Kliakhandler. "The word 'predict' is not a good word," he says, choosing his own words with care. "It's a reasonable system of betting."
Kliakhandler, an associate professor of mathematical sciences, has developed sophisticated algorithms to study, not predict, the futures market. He uses the information to bet, or, in the parlance of money managers, to speculate. Futures speculators buy and sell contracts to purchase products at some specific time in the future for a specific price. With this expertise, he manages small funds for himself and a handful of acquaintances.
Though the words "speculation" and "futures" have a negative cultural connotation, the activity of speculators willing to take the risks are critically necessary for the functioning of modern financial markets, Kliakhandler notes.
It's an investment activity not without its risks. Novices reputedly have about as much chance of making money on futures as they do of winning Powerball. However, Kliakhandler prefers the tumultuous futures market to the tamer world of equities.
"I'm afraid to deal with stocks for logistics reasons," he says. "Futures are easier. Collecting data for stocks is much trickier."
Kliakhandler uses robots--computer programs that perform one narrow task--to gather and analyze information from a variety of databases relating to the price of commodities. At the end of each trading day, the entire set of market information is automatically retrieved. On the basis of that, he decides whether to buy, sell or do nothing.
This does not mean that he's shouting orders into two phones every evening for a couple hours. What's his latest trade? "Three days ago, I shorted lumber," Kliakhandler says.
"Houghton is a very good place to do this," he adds. "Today you don't have to be in Chicago or New York. There are people doing sophisticated trading right here in Houghton."
Unlike daytraders of the recent past, he says he's not in this to get rich quick.
"I'm doing this because I love it," he says. "Many mathematicians are getting into finance." High-end math has become a big deal in all major trading firms: You're almost as likely to see a PhD in financial mathematics walking the halls as an MBA.
Thus, in addition to his entrepreneurial effort, Kliakhandler involves graduate students in his work. While MTU does not offer a degree in financial mathematics, the skills his students learn give them an introduction to the burgeoning new field.
And because it takes more than a calculating intelligence to succeed in the futures market, Kliakhandler has one unusual prerequisite for students wanting to work on his project. "Open an account and make a few trades," he says. "Common sense is overlooked as a value when you are trying to make it as a business. It's an invaluable skill."
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