Ink Tracing the Storm at Greenwich
The anemometer atop the Royal Hospital at Greenwich recorded a series of erratic oscillations during the gale of last October, producing a trace of ink that the clerks might mistake for a narrative of the storm. These markings constitute a signal, by which we mean a raw registration of force upon an instrument, devoid of the causal architecture required to sustain a theory. The recent bulletin regarding the three-and-a-half tenths of a percent return premium during the expiration of equity index options occupies a similar taxonomic layer. Traders observe this recurrence and name it a signal; however, a signal is merely a localized coincidence of data points until it passes the test of consilience.
What the market describes as a structural alpha source is, in its present state, an uncollated observation. To transform this signal into a story - or what I have termed a colligation of facts - the mind must provide the connective conception that binds the mechanical rebalancing of market makers to the specific periodicity of the premium. A story is the induction ladder whereby we ascend from the isolated datum of a monthly return to a general law of market microstructure. If this 0.35% premium is a true law, it must predict phenomena beyond its own training data, such as specific distortions in the volatility surface of unrelated assets during the same window.
The movement of the pressure gauge does not explain the cyclone; the gauge merely reacts to the air. We often find that what is called a persistent signal is actually a failure of nomenclature, masking a deeper, unnamed mechanism of liquidity provision. Before we can determine if these signals converge, we must define the fundamental force they are meant to represent. If the mechanical hedging of gamma is the cause, then the premium should vanish when the hedging mechanism is altered by new exchange rules. The clerks are still recording the ink traces on the Greenwich charts. I shall wait to see if the next gale produces the same deviation in the barometric pressure before I draft the formal classification of this force.