9 ms·

The main issue I found in algo and financial aspects of programming is that the market is a zero sum game, and my intro knowledge of finance and algorithms, eve

by lowpro 9y ago

The main issue I found in algo and financial aspects of programming is that the market is a zero sum game, and my intro knowledge of finance and algorithms, even when I know python, are no match for MIT PHD Quants who does it full time. There's no real way to compete with that, and therefore I would lose money, even if the data showed it might be successful in the future, firms and full time workers on algo trading would simply be faster, more focused, have more funding, and be able to quickly and constantly adapt at the scale an individual could not. So despite the fact that the subject is interesting, I'd consider it a waste of time to try and gain anything but a basic understanding of the industry and how algo trading works.

jlg23 9y ago
You are oversimplifying and overcomplicating at the same time. If it was an easy/obvious zero-sum game, we'd not have people going into finance at all. MIT does not teach "HFT", those "MIT PHD Quants" are just as untrained in finance as you are. The rest is math, something that requires time to study but not necessarily a certificate. And creativity. I've only seen a single HFT-algo that made me say "wow, that's creative"; all others were just straight implementations of finance "wisdom".
- _e 9y ago
  1.) Bet what you can afford to lose 2.) The less you know the better
SirLJ 9y ago
Sorry, but this is like saying those CalTech PHD in Computers Science are the best, so no point for me to go into that field... This is like everything in life, not easy, but if you work on it it'll pay out in the end
- zootam 9y ago
  >but if you work on it it'll pay out in the end unless its one of the many things in your life that don't
  - chronic940 9y ago
    Like machine learning. Too many on HN are trying to get into it but will be outgunned by the Stanford PhDs et al.
- martinko 9y ago
  Not really, since trading is a winner take all game, whereas work in other fields does not have to be.
etep 9y ago
If the market is a zero sum game, then for every winning trade, there must be a losing trade. Obviously some teams must be winning consistently, which implies that some are losing consistently. This says that the consistent losers go out of business. So who are the winners going to trade with? By contradiction, it is not zero sum.
- vageli 9y ago
  > Obviously some teams must be winning consistently, which implies that some are losing consistently. That does not necessarily follow; markets are not static and players are free to enter and leave.
  - etep 9y ago
    People like to say the market is a zero sum game, but I have always been suspicious of this truism. Its fair to say that participants can leave the market, but in practice that isn't what we see. In practice there are firms doing this trading, and they are staying in business, and obviously making money. Are they fleecing the little guy then? This explanation falls flat for me, i.e. for the amount of money they seem to be making, it would take a lot of small time participants losing everything every day. Most people I know aren't even active traders. So why is it an accepted truism that the market is zero sum?
    - sidlls 9y ago
      >Are they fleecing the little guy then? Yes, more or less (although that's just one way they make money, and probably not the most lucrative) And fortunately for them there are plenty of "little guys" ready to enter the market on a regular basis.
      - etep 9y ago
        My point exactly, not the most lucrative. So what remains is the implicit assertion they are fleecing the big time guys. And somehow the big time guys remain in business... so what's going on?
dsacco 9y ago
I agree with most of what you're saying in principle, but it is very possible to identify alpha or acquire an edge that institutional market participants don't have. If you have access to data that most of the market does not, you can effectively trade on it. You can also effectively trade on a novel insight on a combination of data sources. There is a lot of information asymmetry, and an individual is capable of capturing that without requiring a PhD or the resources of a large firm. That's not to say it's easy per se, but it's not hopeless. It requires special expertise or an unconventional approach. Otherwise I agree that most people probably shouldn't attempt it (for risk tolerance reasons).
- deleted 9y ago
  [deleted]
- SirLJ 9y ago
  Dsacco, I really like your way of thinking, too bad we cannot agree on the cheap data sources :-) My hope is that one day you can see the world trough my glasses :-)
  - sumedh 9y ago
    > My hope is that one day you can see the world trough my glasses :-) Why?
- gnaritas 9y ago
  > If you have access to data that most of the market does not, you can effectively trade on it. Yes, but you aren't going to have any such data. If the information is available to you, it's available to other participants of the market as well and you're not the only one trading on it.
  - dsacco 9y ago
    I used to believe that as well. But it's fully possible to have data no one else does if you source it yourself (and I do). Furthermore, it's alright if a small number of other participants have the data as long as it's not yet priced in to market consensus.
yonkshi 9y ago
Even if it's a zero sum game (which it's not), most participants are not quant/algo based. As long as you can beat 50% percentile, you can make a profit. Sure you may not be as profitable as top quant companies, but do you really mind that much?
- tryitnow 9y ago
  Why on earth do you think the top quant companies will leave alpha on the table for you to snatch up? That sounds too much like wishful thinking to me. Furthermore, if someone is really smart enough to beat the market consistently why on earth would they trade just on their own personal account? Work for a hedge fund and use other people's money to leverage your bets.
  - dsacco 9y ago
    > Furthermore, if someone is really smart enough to beat the market consistently why on earth would they trade just on their own personal account? Alternatively, if you have a strategy that empirically works, and a strategy for identifying such strategies, why take on investors to share the risk? You can scale up your own investment and leverage yourself with less regulatory oversight. Why on earth do you think the top quant companies will leave alpha on the table for you to snatch up? It's not so much that they leave alpha on the table, rather that there is so much alpha available, and the capacity constraints and reward profiles are so different for many of them, that individuals can prosper outside of a firm. They just normally don't, because they lack the same training (and because it's very competitive).
  - SomeStupidPoint 9y ago
    Some strategies only work with small investment sizes or require a lot of effort, so don't scale well. Big firms leave tons of (for them) small opportunities on the table, because it's not worth their time. Similarly, there are people who can regularly beat the market that don't have much to offer large funds because their methods don't scale.
    - ant6n 9y ago
empath75 9y ago
You can get an advantage if you focus on smaller markets or industries where it's not worth the time for the big quants to play in.
- danieltillett 9y ago
  The is the only place the small guy can get alpha. Too small for the big guys to worry about and lots of fun to boot. The downside is the insider trading problem is really bad.
milcron 9y ago
An economist and a normal person are walking down the street together. The normal person says “Hey, look, there’s a $20 bill on the sidewalk!” The economist replies by saying “That’s impossible- if it were really a $20 bill, it would have been picked up by now.”
- Berobero 9y ago
  This quiq seems to support the original posters thesis, though, no? No one's going to make a living wandering the streets in search of $20 bills.
  - rxhernandez 9y ago
    I think you might be extending this model beyond its boundaries of usefulness.
  - candiodari 9y ago
    Well it's a theoretical economics concept. The $20 bill is an opportunity, nothing more. A pretty good deal of course, but if you are pedantic you could defend the standpoint that you did have to do something to get it: first, get lucky enough to be there, notice it, then bend over and maybe clean it. So it's not "free", just a pretty good deal. The same thing applies to getting a job for instance. Take job X. If job X was available and worth doing at wage $, someone would be doing it. So why bother applying ? So what it really means is that the semi-strong and strong form of the efficient market hypothesis is bullshit: there are plenty of opportunities in the market, you're just not seeing most of them. I would argue that nearly everyone doesn't even try to see opportunities.
- _e 9y ago
  This is why models are just for starting a conversation and not for predicting the future. Life has too many variables.
  - cwyers 9y ago
    Wall Street isn't paying all those quants to start conversations.
neximo64 9y ago
I'm curious to know who the loser was with the cryptocurrency rally this year? You've forgotten you can introduce new units of whatever is being traded and quite often is & there are additional complications such as dividends, stock options, etc which makes your oversimplification lacking substance.
osrec 9y ago
Why do you say it's a zero sum game? If I've learnt anything from my time in finance, it's that the market is definitely not zero sum. The prices you see represent sentiment, not a hard valuation, and someone isn't necessarily losing when you gain. If you really think about it, even entire economies aren't really zero sum as our method of valuation is intrinsically subjective!
- legolas2412 9y ago
  If you aren't changing the sentiment, then it is a zero sum game based on the current sentiment. Adjusted to average growth of stock market (and inflation), it is a zero sum game. You aren't creating value by predicting the future. Just like you don't create value when you predict which lottery ticket will win.
  - lrem 9y ago
    As it turns out, there are at least 2 ways you can create value to society here: 1) Reduce spreads. 2) Stabilise prices. Now, whether it makes any sense to put to work all those bright minds for these purposes, is a question the society should have asked some time ago...
- danmaz74 9y ago
  I think that the OP meant that the speculation part (trying to buy low and sell high to beat the market) is a zero-sum game. On the other hand, this zero-sum game helps companies raise capital to make real investments with real returns, and that part isn't zero-sum.
  - lowpro 9y ago
    What I meant was HFT as I (and how I think the 'common person') understands it is that trading is basically a zero sum game since trading doesn't really help a company raise money over very short time periods, but investing is not a zero sum game where you're looking for stocks to go up over the long term. Where I think HFT is zero sum is your competing against other HFT people to more accurately and quickly predict the future in the very near term, then buy & sell in a very short period. And since the market changes all the time, these algos must change to stay profitable over time as the competition improves their algos to beat you. Algo trading might work in markets where HFT isn't big yet, but most people won't know which markets that is or how to actually trade there, and if you get good enough to make successful models, you're basically in the industry, it's probably way more than a hobby at that point.
bobbington 9y ago
First, the market is 0 sum only in the very short term. But over the long term it always goes up, even when accounting for inflation. Secondly, you can still use this because there are many trades that the big guys just can't profit enough from. For example if your algorithm can make only $200 a day, the big guys won't bother with it. So look for small stuff that doesn't scale and you may be able to do it.
cocoablazing 9y ago
You are painting with an extremely broad brush. Before you give up on this idea, just try this exercise: enumerate the markets and financial instruments that you could potentially trade in, and characterize the current trading environment in that market. An ultra-HFT liquidity provider being profitable has little bearing on the potential profitability of quantitative trading on significantly larger timescales. There isn't sufficient volatility in most products for these actors to eat the lunch of actors who have alpha on trades that can hold for significant periods.
keithalewis 9y ago
This. But it does give python weenies an excuse to fool themselves into believing they are "programmers."

by lowpro 9y ago

jlg23 9y ago

You are oversimplifying and overcomplicating at the same time. If it was an easy/obvious zero-sum game, we'd not have people going into finance at all. MIT does not teach "HFT", those "MIT PHD Quants" are just as untrained in finance as you are. The rest is math, something that requires time to study but not necessarily a certificate. And creativity. I've only seen a single HFT-algo that made me say "wow, that's creative"; all others were just straight implementations of finance "wisdom".

_e 9y ago
1.) Bet what you can afford to lose 2.) The less you know the better

SirLJ 9y ago

Sorry, but this is like saying those CalTech PHD in Computers Science are the best, so no point for me to go into that field... This is like everything in life, not easy, but if you work on it it'll pay out in the end

zootam 9y ago
>but if you work on it it'll pay out in the end unless its one of the many things in your life that don't
- chronic940 9y ago
  Like machine learning. Too many on HN are trying to get into it but will be outgunned by the Stanford PhDs et al.
martinko 9y ago
Not really, since trading is a winner take all game, whereas work in other fields does not have to be.

etep 9y ago

If the market is a zero sum game, then for every winning trade, there must be a losing trade. Obviously some teams must be winning consistently, which implies that some are losing consistently. This says that the consistent losers go out of business. So who are the winners going to trade with? By contradiction, it is not zero sum.

vageli 9y ago
> Obviously some teams must be winning consistently, which implies that some are losing consistently. That does not necessarily follow; markets are not static and players are free to enter and leave.
- etep 9y ago
  People like to say the market is a zero sum game, but I have always been suspicious of this truism. Its fair to say that participants can leave the market, but in practice that isn't what we see. In practice there are firms doing this trading, and they are staying in business, and obviously making money. Are they fleecing the little guy then? This explanation falls flat for me, i.e. for the amount of money they seem to be making, it would take a lot of small time participants losing everything every day. Most people I know aren't even active traders. So why is it an accepted truism that the market is zero sum?
  - sidlls 9y ago
    >Are they fleecing the little guy then? Yes, more or less (although that's just one way they make money, and probably not the most lucrative) And fortunately for them there are plenty of "little guys" ready to enter the market on a regular basis.
    - etep 9y ago
      My point exactly, not the most lucrative. So what remains is the implicit assertion they are fleecing the big time guys. And somehow the big time guys remain in business... so what's going on?

dsacco 9y ago

I agree with most of what you're saying in principle, but it is very possible to identify alpha or acquire an edge that institutional market participants don't have. If you have access to data that most of the market does not, you can effectively trade on it. You can also effectively trade on a novel insight on a combination of data sources. There is a lot of information asymmetry, and an individual is capable of capturing that without requiring a PhD or the resources of a large firm. That's not to say it's easy per se, but it's not hopeless. It requires special expertise or an unconventional approach. Otherwise I agree that most people probably shouldn't attempt it (for risk tolerance reasons).

deleted 9y ago
[deleted]
SirLJ 9y ago
Dsacco, I really like your way of thinking, too bad we cannot agree on the cheap data sources :-) My hope is that one day you can see the world trough my glasses :-)
- sumedh 9y ago
  > My hope is that one day you can see the world trough my glasses :-) Why?
gnaritas 9y ago
> If you have access to data that most of the market does not, you can effectively trade on it. Yes, but you aren't going to have any such data. If the information is available to you, it's available to other participants of the market as well and you're not the only one trading on it.
- dsacco 9y ago
  I used to believe that as well. But it's fully possible to have data no one else does if you source it yourself (and I do). Furthermore, it's alright if a small number of other participants have the data as long as it's not yet priced in to market consensus.

yonkshi 9y ago

Even if it's a zero sum game (which it's not), most participants are not quant/algo based. As long as you can beat 50% percentile, you can make a profit. Sure you may not be as profitable as top quant companies, but do you really mind that much?

tryitnow 9y ago
Why on earth do you think the top quant companies will leave alpha on the table for you to snatch up? That sounds too much like wishful thinking to me. Furthermore, if someone is really smart enough to beat the market consistently why on earth would they trade just on their own personal account? Work for a hedge fund and use other people's money to leverage your bets.
- dsacco 9y ago
  > Furthermore, if someone is really smart enough to beat the market consistently why on earth would they trade just on their own personal account? Alternatively, if you have a strategy that empirically works, and a strategy for identifying such strategies, why take on investors to share the risk? You can scale up your own investment and leverage yourself with less regulatory oversight. Why on earth do you think the top quant companies will leave alpha on the table for you to snatch up? It's not so much that they leave alpha on the table, rather that there is so much alpha available, and the capacity constraints and reward profiles are so different for many of them, that individuals can prosper outside of a firm. They just normally don't, because they lack the same training (and because it's very competitive).
- SomeStupidPoint 9y ago
  Some strategies only work with small investment sizes or require a lot of effort, so don't scale well. Big firms leave tons of (for them) small opportunities on the table, because it's not worth their time. Similarly, there are people who can regularly beat the market that don't have much to offer large funds because their methods don't scale.
  - ant6n 9y ago

empath75 9y ago

You can get an advantage if you focus on smaller markets or industries where it's not worth the time for the big quants to play in.

danieltillett 9y ago
The is the only place the small guy can get alpha. Too small for the big guys to worry about and lots of fun to boot. The downside is the insider trading problem is really bad.

milcron 9y ago

An economist and a normal person are walking down the street together. The normal person says “Hey, look, there’s a $20 bill on the sidewalk!” The economist replies by saying “That’s impossible- if it were really a $20 bill, it would have been picked up by now.”

Berobero 9y ago
This quiq seems to support the original posters thesis, though, no? No one's going to make a living wandering the streets in search of $20 bills.
- rxhernandez 9y ago
  I think you might be extending this model beyond its boundaries of usefulness.
- candiodari 9y ago
  Well it's a theoretical economics concept. The $20 bill is an opportunity, nothing more. A pretty good deal of course, but if you are pedantic you could defend the standpoint that you did have to do something to get it: first, get lucky enough to be there, notice it, then bend over and maybe clean it. So it's not "free", just a pretty good deal. The same thing applies to getting a job for instance. Take job X. If job X was available and worth doing at wage $, someone would be doing it. So why bother applying ? So what it really means is that the semi-strong and strong form of the efficient market hypothesis is bullshit: there are plenty of opportunities in the market, you're just not seeing most of them. I would argue that nearly everyone doesn't even try to see opportunities.
_e 9y ago
This is why models are just for starting a conversation and not for predicting the future. Life has too many variables.
- cwyers 9y ago
  Wall Street isn't paying all those quants to start conversations.

neximo64 9y ago

I'm curious to know who the loser was with the cryptocurrency rally this year? You've forgotten you can introduce new units of whatever is being traded and quite often is & there are additional complications such as dividends, stock options, etc which makes your oversimplification lacking substance.

osrec 9y ago

Why do you say it's a zero sum game? If I've learnt anything from my time in finance, it's that the market is definitely not zero sum. The prices you see represent sentiment, not a hard valuation, and someone isn't necessarily losing when you gain. If you really think about it, even entire economies aren't really zero sum as our method of valuation is intrinsically subjective!

legolas2412 9y ago
If you aren't changing the sentiment, then it is a zero sum game based on the current sentiment. Adjusted to average growth of stock market (and inflation), it is a zero sum game. You aren't creating value by predicting the future. Just like you don't create value when you predict which lottery ticket will win.
- lrem 9y ago
  As it turns out, there are at least 2 ways you can create value to society here: 1) Reduce spreads. 2) Stabilise prices. Now, whether it makes any sense to put to work all those bright minds for these purposes, is a question the society should have asked some time ago...
danmaz74 9y ago
I think that the OP meant that the speculation part (trying to buy low and sell high to beat the market) is a zero-sum game. On the other hand, this zero-sum game helps companies raise capital to make real investments with real returns, and that part isn't zero-sum.
- lowpro 9y ago
  What I meant was HFT as I (and how I think the 'common person') understands it is that trading is basically a zero sum game since trading doesn't really help a company raise money over very short time periods, but investing is not a zero sum game where you're looking for stocks to go up over the long term. Where I think HFT is zero sum is your competing against other HFT people to more accurately and quickly predict the future in the very near term, then buy & sell in a very short period. And since the market changes all the time, these algos must change to stay profitable over time as the competition improves their algos to beat you. Algo trading might work in markets where HFT isn't big yet, but most people won't know which markets that is or how to actually trade there, and if you get good enough to make successful models, you're basically in the industry, it's probably way more than a hobby at that point.

bobbington 9y ago

First, the market is 0 sum only in the very short term. But over the long term it always goes up, even when accounting for inflation. Secondly, you can still use this because there are many trades that the big guys just can't profit enough from. For example if your algorithm can make only $200 a day, the big guys won't bother with it. So look for small stuff that doesn't scale and you may be able to do it.

cocoablazing 9y ago

You are painting with an extremely broad brush. Before you give up on this idea, just try this exercise: enumerate the markets and financial instruments that you could potentially trade in, and characterize the current trading environment in that market. An ultra-HFT liquidity provider being profitable has little bearing on the potential profitability of quantitative trading on significantly larger timescales. There isn't sufficient volatility in most products for these actors to eat the lunch of actors who have alpha on trades that can hold for significant periods.

keithalewis 9y ago

This. But it does give python weenies an excuse to fool themselves into believing they are "programmers."