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The problem is access to liquidity. People do do it themselves, but they can only trade very small amounts of money and thus make only a little return (albeit

by takrupp 16y ago

The problem is access to liquidity. People do do it themselves, but they can only trade very small amounts of money and thus make only a little return (albeit with pretty limited risk). If you have a good brokerage account (like most prop firms) or are a bank you can essentially trade for free. Your brokerage account will only charge you for the overnight holding as the cost of capital (you get charged transaction costs but no need to buy leverage). So, firms with a good amount of capital can use their balance on a brokerage account and who do not have overnight holding (common for these strategies) essentially don't need capital to trade. Its just how much you want to scale. Also, if something goes wrong, you can lose your capital very quickly. An easy risk to cover for a multi-strategy prop firm, but it could sink an independent trader. I've spoken to a lot of these guys, and a new strategy mysteriously losing 1MM+ in a couple minutes is pretty common. Back to access: The types of connections these firms have to exchanges are very expensive. If you dont have the scale necessary to cover 10k per month per connection than you can't compete with all of the other players in the market. Then it goes down to execution speed, colocation, etc - those are the things that make non-bank prop firms like Tradebot or Getco successful. The strategies are only a part of the equation, the trading systems are what really separates the pack. Most of these firms have way more developers than traders, and the developers they have would make Google jealous.

nl 16y ago
I agree about the liquidity. I'm not convinced about the access thing, though. http://www.interactivebrokers.com http://www.interactivebrokers.com has decent looking connections for non-crazy prices, and their brokerage fees are good too. I don't think you'd be able to do a pure HF strategy using it, but it's possible a strategy based on volatility trading could work maybe(?)
- tdmackey 16y ago
  You'd be pushing it to make any reasonable gains with a volatile trading strategy via interactive brokers. They target more run of the mill day trading strategies that your average at-home trader would employ.
- takrupp 16y ago
  Interactive Brokers has an internal prop fund, Timber Hill, that uses the trades happening on the brokerage to execute their trades (its a proprietary form of liquidity - every major electronic brokerage does this). Basically, you aren't just paying for the trade you are also paying for it in that you don't have direct access to the markets and IBKR will front run you before your trade is ever executed. Its like an implicit trading cost thats hidden. Volatility trading is more math-focused, but requires discretionary trading as well. Its less automated, and requires more specialized knowledge than other strategies. Volatility strategies aren't run by random people coming out of school or other industries. They are almost always run by a trader with a very well developed back-end including a quant (who is trained in volatility modelings - not as easy as the books lead you to believe) and still a very sophisticated trading system with access to both the options exchanges (which are unwieldy) and "normal" equities exchanges. Its all possible, but can you make a living at it? Its a big maybe. Can you actually make more than your normal job or even a fraction if you were with a well endowed quant fund? No way. Not unless you have been in the industry for a long time.
  - yummyfajitas 16y ago
    If IB front runs you, call the SEC. That's highly illegal. It's far more likely that they just use your trades to fill their orders. That's a good thing for both you and them. The mechanics: IB wants to buy X at $100, you want to sell $X at 100. Normally your order would be routed to the exchange and so would theirs. Both would go to the back of the queue: if Foo/Bar placed buy/sell orders at $100 before you, they get filled first. Instead, both you and IB get to bypass the queue by trading directly with you. The only real cost to you is that this probably incurs some latency.
    - takrupp 16y ago
      Front running is at most a grey area, and what is front running to you, the trader, is different than what the legally malicious definition is. Don't get me wrong: These firms do provide liquidity, which is great for anyone trading in the markets, but if you are going to try to play these firms' game of running liquidity providing strategies or even stat-arb style strategies, on their home court you just aren't going to be very effective. That is unless you are running something totally new. (Side note: I knew a guy trading MBS based off of an obscure NY state housing law. The strategy was totally unique, and ran like clock work. If you have something like that, than you could be marginally successful. He was making like 300k a year off of 60k in capital).

by takrupp 16y ago

nl 16y ago

I agree about the liquidity. I'm not convinced about the access thing, though. http://www.interactivebrokers.com http://www.interactivebrokers.com has decent looking connections for non-crazy prices, and their brokerage fees are good too. I don't think you'd be able to do a pure HF strategy using it, but it's possible a strategy based on volatility trading could work maybe(?)

tdmackey 16y ago
You'd be pushing it to make any reasonable gains with a volatile trading strategy via interactive brokers. They target more run of the mill day trading strategies that your average at-home trader would employ.
takrupp 16y ago
Interactive Brokers has an internal prop fund, Timber Hill, that uses the trades happening on the brokerage to execute their trades (its a proprietary form of liquidity - every major electronic brokerage does this). Basically, you aren't just paying for the trade you are also paying for it in that you don't have direct access to the markets and IBKR will front run you before your trade is ever executed. Its like an implicit trading cost thats hidden. Volatility trading is more math-focused, but requires discretionary trading as well. Its less automated, and requires more specialized knowledge than other strategies. Volatility strategies aren't run by random people coming out of school or other industries. They are almost always run by a trader with a very well developed back-end including a quant (who is trained in volatility modelings - not as easy as the books lead you to believe) and still a very sophisticated trading system with access to both the options exchanges (which are unwieldy) and "normal" equities exchanges. Its all possible, but can you make a living at it? Its a big maybe. Can you actually make more than your normal job or even a fraction if you were with a well endowed quant fund? No way. Not unless you have been in the industry for a long time.
- yummyfajitas 16y ago
  If IB front runs you, call the SEC. That's highly illegal. It's far more likely that they just use your trades to fill their orders. That's a good thing for both you and them. The mechanics: IB wants to buy X at $100, you want to sell $X at 100. Normally your order would be routed to the exchange and so would theirs. Both would go to the back of the queue: if Foo/Bar placed buy/sell orders at $100 before you, they get filled first. Instead, both you and IB get to bypass the queue by trading directly with you. The only real cost to you is that this probably incurs some latency.
  - takrupp 16y ago
    Front running is at most a grey area, and what is front running to you, the trader, is different than what the legally malicious definition is. Don't get me wrong: These firms do provide liquidity, which is great for anyone trading in the markets, but if you are going to try to play these firms' game of running liquidity providing strategies or even stat-arb style strategies, on their home court you just aren't going to be very effective. That is unless you are running something totally new. (Side note: I knew a guy trading MBS based off of an obscure NY state housing law. The strategy was totally unique, and ran like clock work. If you have something like that, than you could be marginally successful. He was making like 300k a year off of 60k in capital).