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Speaker 1: Welcome to the Fearing Greed Summer series, brought to you

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Speaker 1: by Montgomery Investment Management. I'm Sean Almer. High frequency trading algorithms?

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Speaker 2: What are they?

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Speaker 1: How do they work? Are they actually a worthwhile investment strategy?

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Speaker 1: Roger Montgomery is the founder and chief investment officer of

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Speaker 1: Montgomery Investment Management. Roger, welcome back to Fear and Greed.

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Speaker 2: Thanks Sean, good to be with you.

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Speaker 1: Dumb it down for me, explain these high frequency trading

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Speaker 1: models and arbitrage.

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Speaker 2: A lot of people think that Warren Buffett was the

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Speaker 2: most profitable investor in history. You know, he built the

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Speaker 2: Apokel fortune. That's actually not correct. There is a guy

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Speaker 2: named Jim Simon's who built a business called Renaissance Technologies.

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Speaker 2: Renaissance Technologies is a high frequency arbitrage trading firm. They

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Speaker 2: use big data. This is long before AI existed, and

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Speaker 2: what they do is they look for correlations. They look

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Speaker 2: for things to try.

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Speaker 1: Before we go even further when we talk high frequency arbitrage,

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Speaker 1: high frequency regular.

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Speaker 2: So trading thousands of times a day to capture fractions

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Speaker 2: of a cent multiple multiple times and building a fortune

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Speaker 2: in that way. In arbitrage, arbitrage is where I go

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Speaker 2: to a fruit market and I see a stand that

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Speaker 2: has run out of apples. They're looking to buy apples

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Speaker 2: for a dollar, and I see another stand across the

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Speaker 2: way they're selling apples for ninety cents. So if I

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Speaker 2: can immediately buy the apples for ninety cents and sell

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Speaker 2: them to the one, the one who doesn't have any

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Speaker 2: apples for a dollar, I've locked in ten cents, yep,

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Speaker 2: and there's no risk.

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Speaker 1: So high frequency arbitrage and with high frequency albtrage.

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Speaker 2: Okay, So you think about a business like Renaissance Technologies,

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Speaker 2: which many people have not heard of. When I tell

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Speaker 2: you the performance of their fund over the last forty

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Speaker 2: five years, it'll knock your socks off. They've done sixty

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Speaker 2: three percent per annum, wow, for forty five years. Now.

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Speaker 2: What that means is that they've turned ten thousand dollars.

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Speaker 2: If you put ten thousand dollars in forty five years ago,

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Speaker 2: it's worth about one hundred and eighty million dollars today. Now.

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Speaker 2: They don't have any clients. They only trade staff money.

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Speaker 2: And the only way you can get access to that

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Speaker 2: investment strategy is to become a staff member. There are

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Speaker 2: businesses in Australia that do similar things. They're high frequency traders.

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Speaker 2: There's Optava, there's Tibra, there's Susquehanna, there's MCT Trading, and

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Speaker 2: there's ARC. Now you can't access any of those firms.

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Speaker 2: You have to be a staff member to participate in

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Speaker 2: the profits that those firms generate, except for ARC. Some

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Speaker 2: years ago, Ark, who are based in Darling Harbor, they

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Speaker 2: saw an opportunity to arbitrage futures on cryptocurrencies and they

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Speaker 2: realized that all their money was tied up arbitraging and

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Speaker 2: high frequency trading everything else. That they invited friends and

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Speaker 2: family to trade this strategy, arbitraging futures on Bitcoin and

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Speaker 2: Solana and ethereum.

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Speaker 1: So I'm going to jump in here. When you're arbitraging

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Speaker 1: a market's not efficient enough, not.

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Speaker 2: In cryptocurrencies, it's incredibly difficult, as anyone would know who's

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Speaker 2: tried to trade a cryptocurrency. It's a big pilava to

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Speaker 2: open up an account and then to have a wallet

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Speaker 2: and passwords and so on and so forth and transfer

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Speaker 2: money between currencies and stable coins and so on. So

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Speaker 2: if you've built great algorithms and great systems, and these

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Speaker 2: guys have a team of over thirty people doing all

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Speaker 2: of this. They were able to extract pretty good profits.

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Speaker 2: In fact, they set up a fund called the Digital

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Speaker 2: Asset Funds Management Digital Income Fund. It's been running for

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Speaker 2: four years. In that time, it's done a little bit

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Speaker 2: over twenty two and a half percent per year for

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Speaker 2: the last four years. It's had one negative month in

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Speaker 2: that time. And it's available to wholesale investors. It's not

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Speaker 2: available to retail investors at the moment, but it is

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Speaker 2: available to wholesale investors. So getting access to this very secretive, algorithmic,

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Speaker 2: high frequency trading kind of strategy, you know, there's really

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Speaker 2: only one that I can think of immediately that has that.

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Speaker 1: Can you get it through your business?

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Speaker 2: Well, we've partnered with them, so we don't charge any

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Speaker 2: fees on top of the fees that they charge, but

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Speaker 2: we've partnered with them to distribute this fund in Australia

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Speaker 2: because we think it's unique from a diversification perspective. So

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Speaker 2: in the last four years, every single time the S

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Speaker 2: and P five hundred has fallen, they've generated a positive return.

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Speaker 2: In fact, they've generated positive returns every month except for one,

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Speaker 2: and so That is proper diversification. That's proper rebalancing of portfolios.

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Speaker 2: If you want to take some profits from the AI

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Speaker 2: boom or bubble, well where would you put it. You

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Speaker 2: don't want to put it back into something else that

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Speaker 2: has stock market exposure or stock market risk. You want

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Speaker 2: to put it into something that is truly diversifying for

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Speaker 2: your portfolio. And this could be a sort.

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Speaker 1: So don't throw all your money at it. It is

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Speaker 1: just part of your portfolio, is what we're talking about here.

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Speaker 2: It's called an alternative asset. And what's unique about it

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Speaker 2: is that it's it's doing something that is very very

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Speaker 2: hard to access anywhere else and working, and it's being working.

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Speaker 1: Roger, thank you for talking to Fear and Greed summer series.

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Speaker 2: It's a pleasure that.

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Speaker 1: Was Roger Montgomery from Montgomery Investment Management. To learn more,

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Speaker 1: visit mont invest M O N T I n V

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Speaker 1: E s T wont invest dot com and you can

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Speaker 1: sign up for Roger's insights at Roger Montgomery. That's r

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Speaker 1: O G here, I forget the d R O G

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Speaker 1: E R Montgomery dot com. Fear and Greed is not

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Speaker 1: a financial advice podcast. If you want to invest, we

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Speaker 1: always recommend you visit a financial advisor who can tailor

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Speaker 1: investments to your needs. Don't forget to follow on the podcast.

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Speaker 1: I'm Sean Almer and this is Fear and Greed, brought

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Speaker 1: to you by Montgomery Investment Management,