If you are a low volume, small time trader, the market isn't going to move as quickly to adapt to you. If you have $100,000, for example, and return 30% a year, you aren't on anyone's radar.
Ren Tech also has 200+ math and signal processing phds in its payroll. I'm not sure how well the individual trader does (maybe they do okay, but I have my doubts that I'm not going to be consumed by big sharks in the market)
Yes, everyone's heard of RenTec, particularly those of us in the industry. Their existence doesn't seem seem germane to my point.
You were claiming that a little guy's edge won't be rapidly eroded by the market. This is only true if his trading strategy is uncorrelated to every other little guy's trading strategy. But this is unlikely. The space of unsophisticated strategies is not all that large.
So what are those hundreds of people doing at RenTec if "the space of unsophisticated strategies is not all that large"? Do you think their $100 million algorithmic trades go unnoticed? A $10,000 trade is going to make someone take notice of a little guy?
At any rate, is there some reason that you are driving the discussion to "it's not possible". No one learns anything by saying "it's impossible". Perhaps we should have ignored the post.
Poster below is kind of right that you're never going to get an in depth answer for free...
But a few key points that separate the two:
1. It's very easy to make 50% percent a year on a few hundred thousand. If you can't even do that, it's not worth even bothering to compete. It's VERY hard to do the same with a few hundred million or worse, a billion.
2. With regards to #1, the key difference is market impact. When you start trading a non-trivial percentage of a symbol's average daily volume (eg; 10%+) you start having effects on the price. A dumb strategy would be to just place market orders for the full amount. Someone will just place a cascading set of limit orders that you'll hit as soon as you wipe out existing liquidity on the book. A slightly better strategy might hide the total order. A much better strategy will place thousands of small orders of random sizes at different times across different exchanges to simulate organic market activity and attract liquidity. This order sizing is probably based on both predictive models and analysis of the full exchange feeds (that are both very monetarily and computationally expensive to use)
3. Sophisticated algorithmic trading will either try and get the market to do something (eg; place orders in such a way as to elicit a reaction from the market) or use non-market data in combination with market data to make decisions. These approaches add external entropy and allow for more theoretical alpha than reacting to lagged market signals.
No one said that this was your full-time job. No one said that it has to be HFT either. Algorithms identify good trades at 4:01pm and you buy the next day. And no one is saying that you have to trade everyday.
Exactly. Plus let's remember you are adding nothing to life here. All you are doing is collecting 30k off other people with a slightly less optimal "strategy" than you.
And no I don't believe these people are "adding liquidity and assisting price discovery".
to the reply as I can't post as HN censors detractors of big finance:
I don't believe the benefits of liquidity added by HFT are worth the enormous costs firms sink into it.
>> And no I don't believe these people are "adding liquidity and assisting price discovery".
The nice thing about reality is that it remains even when your belief persists against it.
In large-cap stocks during rising markets, high frequency trading does improve liquidity[1]. While the effect may not be as prevalent during a downturn and it may not impact smaller stocks as much, I'd like to see your evidence that it actively harms the market or that the practice is vapid and produces nothing of value.
Or is that just a statement you made because it nicely aligns with your political conception of Wall St?
EDIT: It helps to point out that "algorithmic trading" and "high frequency trading" are not at all the same thing, especially as these terms are usually conflated on HN. An algorithmic trading system does not necessarily need to trade at high frequency. Some algorithmic trading systems make trades in intervals of days or weeks, not seconds or milliseconds. The paper cited here describes the market-making activities of what is traditionally called high frequency trading and the benefits it has over human brokers of the past, but it uses the umbrella term "algorithmic trading."
EDIT 2: The parent comment responded to this one by editing his original one, because "HN censors detractors of big finance." You also claimed you don't believe that the liquidity provided by HFT is worth the capital that large firms dump into it.
In 2013 the entire HFT industry made about $1B, down from $5B in 2009[2]. HFT is not a large industry. It is eating much of Wall Street's traditional market-making inefficiencies, which is why it is widely disliked, but it is not "big finance." Big Finance is generally opposed to HFT.
You still haven't provided evidence or numbers to prove or even quantify what you're claiming. Are you saying HFT is not worth the investment to firms, or are you saying it isn't providing some vague "value to society" relative to alternative uses of investor capital?
The first case is obviously nonsensical, as many firms generate profit using high frequency trading strategies. The second case is like saying we shouldn't do anything if it doesn't save impoverished children in Africa. The added liquidity has a material and beneficial impact on trading outcomes for buy-and-hold retail investors, which is shown in my first citation here. You have yet to satisfactorily refute this.
How about just making a transaction because you feel that you gain something from it? Does it need any other motivation? I mean, I buy food, go to a concert, rent a car, and buy a stock, not for the purpose of gifting something to society, but for my own sake.
Comments
"nature of markets is to adapt to kill your edge"
If you are a low volume, small time trader, the market isn't going to move as quickly to adapt to you. If you have $100,000, for example, and return 30% a year, you aren't on anyone's radar.
Provided you're the only one trading your strategy, which is unlikely.
There are trading firms that have made fortunes letting the algorithms do the trading:
http://www.fool.com/investing/general/2014/02/09/this-man-ma...
https://en.m.wikipedia.org/wiki/Renaissance_Technologies
Yes, you have to adapt but these guys play with billions.
Ren Tech also has 200+ math and signal processing phds in its payroll. I'm not sure how well the individual trader does (maybe they do okay, but I have my doubts that I'm not going to be consumed by big sharks in the market)
Yes, everyone's heard of RenTec, particularly those of us in the industry. Their existence doesn't seem seem germane to my point.
You were claiming that a little guy's edge won't be rapidly eroded by the market. This is only true if his trading strategy is uncorrelated to every other little guy's trading strategy. But this is unlikely. The space of unsophisticated strategies is not all that large.
So what are those hundreds of people doing at RenTec if "the space of unsophisticated strategies is not all that large"? Do you think their $100 million algorithmic trades go unnoticed? A $10,000 trade is going to make someone take notice of a little guy?
At any rate, is there some reason that you are driving the discussion to "it's not possible". No one learns anything by saying "it's impossible". Perhaps we should have ignored the post.
They're developing sophisticated strategies. Duh.
ok, what's the difference between sophisticated and unsophisticated algorithmic trading?
Poster below is kind of right that you're never going to get an in depth answer for free...
But a few key points that separate the two: 1. It's very easy to make 50% percent a year on a few hundred thousand. If you can't even do that, it's not worth even bothering to compete. It's VERY hard to do the same with a few hundred million or worse, a billion.
2. With regards to #1, the key difference is market impact. When you start trading a non-trivial percentage of a symbol's average daily volume (eg; 10%+) you start having effects on the price. A dumb strategy would be to just place market orders for the full amount. Someone will just place a cascading set of limit orders that you'll hit as soon as you wipe out existing liquidity on the book. A slightly better strategy might hide the total order. A much better strategy will place thousands of small orders of random sizes at different times across different exchanges to simulate organic market activity and attract liquidity. This order sizing is probably based on both predictive models and analysis of the full exchange feeds (that are both very monetarily and computationally expensive to use)
3. Sophisticated algorithmic trading will either try and get the market to do something (eg; place orders in such a way as to elicit a reaction from the market) or use non-market data in combination with market data to make decisions. These approaches add external entropy and allow for more theoretical alpha than reacting to lagged market signals.
That's not free advice. Good luck.
30% on 100k is 30k. You'd be better off getting a regular job unless you can sustain that for more than 10 years. Which you can't predict.
No one said that this was your full-time job. No one said that it has to be HFT either. Algorithms identify good trades at 4:01pm and you buy the next day. And no one is saying that you have to trade everyday.
Exactly. Plus let's remember you are adding nothing to life here. All you are doing is collecting 30k off other people with a slightly less optimal "strategy" than you.
And no I don't believe these people are "adding liquidity and assisting price discovery".
to the reply as I can't post as HN censors detractors of big finance:
I don't believe the benefits of liquidity added by HFT are worth the enormous costs firms sink into it.
>> And no I don't believe these people are "adding liquidity and assisting price discovery".
The nice thing about reality is that it remains even when your belief persists against it.
In large-cap stocks during rising markets, high frequency trading does improve liquidity[1]. While the effect may not be as prevalent during a downturn and it may not impact smaller stocks as much, I'd like to see your evidence that it actively harms the market or that the practice is vapid and produces nothing of value.
Or is that just a statement you made because it nicely aligns with your political conception of Wall St?
EDIT: It helps to point out that "algorithmic trading" and "high frequency trading" are not at all the same thing, especially as these terms are usually conflated on HN. An algorithmic trading system does not necessarily need to trade at high frequency. Some algorithmic trading systems make trades in intervals of days or weeks, not seconds or milliseconds. The paper cited here describes the market-making activities of what is traditionally called high frequency trading and the benefits it has over human brokers of the past, but it uses the umbrella term "algorithmic trading."
EDIT 2: The parent comment responded to this one by editing his original one, because "HN censors detractors of big finance." You also claimed you don't believe that the liquidity provided by HFT is worth the capital that large firms dump into it.
In 2013 the entire HFT industry made about $1B, down from $5B in 2009[2]. HFT is not a large industry. It is eating much of Wall Street's traditional market-making inefficiencies, which is why it is widely disliked, but it is not "big finance." Big Finance is generally opposed to HFT.
You still haven't provided evidence or numbers to prove or even quantify what you're claiming. Are you saying HFT is not worth the investment to firms, or are you saying it isn't providing some vague "value to society" relative to alternative uses of investor capital?
The first case is obviously nonsensical, as many firms generate profit using high frequency trading strategies. The second case is like saying we shouldn't do anything if it doesn't save impoverished children in Africa. The added liquidity has a material and beneficial impact on trading outcomes for buy-and-hold retail investors, which is shown in my first citation here. You have yet to satisfactorily refute this.
[1]: http://faculty.haas.berkeley.edu/hender/Algo.pdf
[2]: http://www.bloomberg.com/news/articles/2013-06-06/how-the-ro...
Generating a profit does not equate to generating wealth.
How about just making a transaction because you feel that you gain something from it? Does it need any other motivation? I mean, I buy food, go to a concert, rent a car, and buy a stock, not for the purpose of gifting something to society, but for my own sake.
This is the opposite - you don't buy and then resell food in a few seconds for gain.