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It depends. Each company makes the rules here explicit and visible, as it is the most important thing for any trader. E.g. at BlueCrest, each trader used to st
by atemerev 10y ago
It depends. Each company makes the rules here explicit and visible, as it is the most important thing for any trader.
E.g. at BlueCrest, each trader used to start a year with clean track record and some allocated capital. If you lose 2%, your allocation is halved. If you lose another 2%, you are out. However, if you won 5%, you can risk it, only the initial allocation matters.
For me, this policy is strange, as it clearly incentivizes people to take more risks at the end of the year (and risks are the currency here, you don't want to be predictable), so I assume the policy is different now. But it is always explicit.
- qwrusz 10y agosorry just curious why you say this policy incentivizes more risk at the end of the year? is there an upside? explicit bonus/P&L part of it?
- atemerev 10y agoBecause at the beginning of the year, you have to be extra careful and take more cautious trades to not step outside your 2% loss limit, but at the end of the year, assuming you are successful, you can afford e.g. 5% loss limit, as you have already made 10% in profit, so you are able to engage in more risky trades. As this policy were made public at some point, and you usually don't disclose your working risk management profile to the outside world (as it can and will be analyzed and exploited), I can assume that BlueCrest now uses a different approach internally.
- qwrusz 10y agoGot it. Thanks. The assuming successful by end of the year is an important part. At the same time, some traders hit a profit number during the year they are happy with and then try to lock it in, choose to go risk off and just coast till the end of the year. Especially if a trader feels they don't get paid for risk towards year end - this option is even more attractive. Assuming the goal is to make profit and not just don't get kicked out. Traders who got lucky mid year not taking enough Q4 risk happens. Some firms step in if they see too little risk from a desk. Very few funds are able to keep risk management info private for very long. People move. People talk. Some trading rules can be reverse engineered in data but this is easily spoofed. BlueCrest closed last year and returned outside capital, so I agree things probably look very different there now.
- samuraijs 10y agoYou could have different end-of-year dates for each trader...
- pc86 10y agoIf you lost 2% last year and you're down 2.01% on 12/1, you are out. At that point everything is roulette and you have no incentive to make conservative trades. You're out anyway so it's go big or go home, because you're probably going home.
- qwrusz 10y agoBut if you are down only 1.99% you get to stay and get a totally clean slate in a couple weeks. That is one incentive. Also there is no go big or go home as you approach these thresholds, VaR scales back and trades are stop lossed to prevent exactly what you describe. Some traders would just bet it all the first day and go home in January if they lost. Why wait till the end of the year? Do it now! Coin flips are coin flips. The finance industry has attracted people with gambling issues. Risk Management rules are in place to prevent that kind of risk taking. But obviously some traders slip through risk procedures and lose huge amounts of money on bad trades, they also go to jail for it.
- naveen99 10y agoThat's also how taxes work. If you are profitable, you can risk your taxes in addition to your profits after taxes in a business venture.
- cloudjacker 10y agoI hated prop trading desks like this. All that leverage and no tolerance for it!