New(?) encryption algorithm

[cooper at cadsys.enet.dec.com]

This is in regards to whether to count discrete or overlapping digrams.

I'm surprised that no one seems to have pointed out the "answer" to
this, since it is
part of standard statistics.

It depends on the nature of the tests which you are performing on them. 
Overlapping
digrams give you twice as much data, but the frequencies obtained are
not independent.
For example, it is not valid to use a chi-square test on overlapping
digrams to determine
if the digrams deviate significantly from chance distribution, since the
chi-square
test assumes that the frequencies are independent.  On the other hand it
is perfectly
valid to estimate the probability that an X will be followed by a Y on
the basis of
overlapping digrams.

In practice, except for a few hard-and-fast yes/no automatic procedures,
in cryptographic
work the increase in information from using overlapping digrams (and
trigrams, etc.)
will generally overshadow the slight loss in pure validity, since the
information
collected is likely to be leavened with a large dose of intuitive,
trial-and-error
adjustment by the cryptoanalyist in later phases of the work.

						Topher Cooper