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I'm an ex algo trader (currencies and metals) myself, and found this article interesting and mostly accurate. A key takeaway is: "One of the fallacies that pe

by osrec 8y ago

I'm an ex algo trader (currencies and metals) myself, and found this article interesting and mostly accurate. A key takeaway is: "One of the fallacies that people have is the assumption that because the people who are working at certain firms are smart, they must be successful." The number of times a new hotshot hedge fund moved in to office building where I rent, only to be gone without a trace in a month is staggering. Usually, they'll raise money from an unsuspecting family office or two, employ a techy and an admin person to do the heavy lifting, whilst the smooth talking CEO alt-tabs between Bloomberg and reddit all day. Most have terrible risk management strategies, and the majority are simply trend following (sorry, machine learning/AI). Some of these firms are also my clients, and I have often needed to write off money they owe because they've literally gone bankrupt overnight.

xiphias2 8y ago
Why are you ex algo trader? It still seems like a growing market, so it's interesting that you stopped doing it. I'm right now working on optimizing my long term investment strategy, but the hardest thing is that there's nobody to talk to it about it (unlike when I have other coding problems), and I have no idea when I'm doing something totally stupid in my code base. Getting the right metrics to optimize is really hard, as mostly I'm just looking at numbers and graphs.
- osrec 8y ago
  It's a crowded market, but not necessarily a lucrative one. I worked for a large investment bank, was paid well, but was also rather unhappy. I'm not a fan of office politics and also hated the fact that what we were doing was actually quite unsophisticated, yet we dressed it up like the most complicated thing ever to clients. We were using wavelets for analysing market micro-structure and using any generated signals to influence our trades. Wavelets were the topic of my thesis, so I was a good fit for the team. I know it sounds complicated, but if you looked at the signals we generated, they looked awfully similar to a rather basic trend-following style regression model. I believe we found a very complicated way to compute signals that a simple trend follower would compute in far fewer CPU cycles. Anyway, I got a fairly decent bonus one year (because markets were trending nicely), and decided I want to set up my own tech company. I was always a nerdy guy, and I thought I could contribute more in the tech space. With hindsight it was a good move, and financially I believe I am now better off than most of my trading colleagues. My advice to new guys joining our desk (maybe it helps you a bit): focus on your exit, more than your entry, and if you can help it, be really, really, really lucky :P
  - _cs2017_ 8y ago
    > what we were doing was actually quite unsophisticated, yet we dressed it up like the most complicated thing ever to clients. Doesn't this describe nearly all of the financial industry? Do you happen to know of any exceptions?
    - osrec 8y ago
      Yep, and nope.
  - dbancajas 8y ago
    how long did you work in that space and how much income you got over that span?
- inference 8y ago
  I bet he/she.they either 1. made fuck-you-money and retired 2. burnt-out from the stress and decided to make slightly less large piles of money in return for less stress.
  - osrec 8y ago
    Somewhere between 1 and 2, but very good guesses :)
- rjf72 8y ago
  Perhaps the most important paragraph in the article: "Everyone is competing against everyone else. If one firm succeeds in making the market more efficient through quantitative techniques, then there’s less money left over for other people to make exceptional investment returns. There will be one or two firms that are good at innovation and recognizing things that other people haven’t recognized. But everyone else will be fighting over scraps." The market is, in theory, not a zero sum game. Algorithmic systems, in practice, are. In theory the only way you can genuinely beat the market is when you find an inefficiency in it. And inefficiencies are generally based on a lack of knowledge. If everybody knows what you know, that inefficiency will no longer exist. And now pair this with the reality that most (and it's probably safe to say all) algorithmic systems are not really especially complex. That doesn't mean they're easy to make though. The 'secret sauce' is in exactly what data is used, how the pieces you have interoperate, the way inputs and outputs are massaged, and so on. But this drives a huge need for secrecy. Nobody who is successful is going to want to talk about how their system is designed largely because most would not be especially difficult to replicate if they provided more than very abstract details.
  - awongh 8y ago
    Is this always true? One thing I wonder is, given that the amount of money needed to move the needle in a market could be actually quite large, how much money woyuld you need to make off a given inefficiency before it becomes a zero-sum game? Is it 10s of thousands? Hundreds of thusands? Millions? And given some metric like trading volume how much does that affect that number? I've heard of some hedge funds raising way less than they could have, maybe because their strategies would be killed much faster with 500mm than with 50mm ?
    - blackflame7000 8y ago
      It's not a zero-sum game because debt is limitless. Imagine an extreme example where you rigged the game and literally won all the money in the world and then kept winning, what would happen next? People would find another form of payment via services and the money is worthless if you are the only one who has it. Therefore you might lend them money in exchange for a service so that they will keep playing your rigged game now accruing a credit of services in addition to money.
- benj111 8y ago
  I'm trying to parse your comment. It sounds like you're basically trying to do part time what dozens of large companies spend large amounts of time and money trying to do, and then expecting them to discuss with you what they've done? You know those books that show you how to get rich doing X? Those writers make far more money from the book than they do from X. No doubt you can find corners of the investing internet that will discuss these things, but you'll probably find an awful lot of chaff in your wheat, because the successful ones won't be chatting about it on forums. Now on a more constructive note, optimising your long term investment strategy is probably best achieved by getting a pension with some cheap trackers, and a savings account. If you're already doing that then great because that's 95% of your optimisations there. I wont recommend any web sites, because the details will depend on the country where you live.
quietthrow 8y ago
Why did you quit ? (Assuming you did cos you said you are an ex alto trader). How long did you do it? Is it possible to make a living as an algo trader?
- osrec 8y ago
  See response above. I was officially trading (i.e. coding the strategy) for just under 3 years, then got offered a senior non-trading role (but my pay was heavily linked to the desk's performance). Can you make a living? Yes, if you're doing it as a salaried employee at a reputable institution. If you're going to try and algo trade with your 50k of savings, I would say "unlikely", and you might cause yourself a lot of anxiety.
  - quietthrow 8y ago
    Thx for replying. When you say yes to making a living but as an employee is that because of at an institution you are trading with much larger sum of money and hence there is enough return to pay for your salary bonus and then some or something else like getting a regular paycheck in a other wise very volatile return world? Essentially is the amount capital the key thing or something else. Also how do traders typically come up with a strategy? Original insight or mostly copying the herd with their own variations?
    - osrec 8y ago
      More capital is obviously better. But more importantly, what happens when you're not making money? How do you control your anxieties when your broker ac balance halves due to a trend reversing? Are you prepared to monitor your strategy 24/7? At a firm, there's probably someone there to do it for you - at home, it's just you. Trading is a casino and the emotions it imparts are similar - euphoria when you win, depression when you lose. If you have a job, you at least have a base salary that will bolster your living standard - without it, you're going to struggle in the bad times (unless, of course, you're already rich). Regarding strategy generation, it's a mix. Quants like me almost always take the systematic, research like approach - analyse data, see if you can ascertain any predictable patterns and then paper trade them in the live market. If it makes money on paper, it might make money in the real market. Then just iterate and refine. Some guys do trade with their gut, but are rarely successful.
lordnacho 8y ago
Gone in a month? That sounds crazy fast. I'm an algo trading guy myself, and I can't imagine being up and running within a month of starting. You have to code: - Feed handlers - Back office - Research platform - Strategy execution - GUI You need to have: - PB agreements - Network access (telco the world over suck as doing this in a reasonable time) - Exchange memberships / ISDAs (depends what you're up to) I guess you could have spun out from a larger group with some of this stuff, but then you'd probably not crash and burn that fast. I do agree with the sentiment that fast talkers get more money than they can handle.
- osrec 8y ago
  There are a lot of firms that can get you up and running in a few weeks. They sell generic hedge fund formation packages, which give you all the tech/PB access. It's very rudimentary, but a lot of people do seem to opt for them, especially those that don't know what they're doing.

by osrec 8y ago

xiphias2 8y ago

Why are you ex algo trader? It still seems like a growing market, so it's interesting that you stopped doing it. I'm right now working on optimizing my long term investment strategy, but the hardest thing is that there's nobody to talk to it about it (unlike when I have other coding problems), and I have no idea when I'm doing something totally stupid in my code base. Getting the right metrics to optimize is really hard, as mostly I'm just looking at numbers and graphs.

osrec 8y ago
It's a crowded market, but not necessarily a lucrative one. I worked for a large investment bank, was paid well, but was also rather unhappy. I'm not a fan of office politics and also hated the fact that what we were doing was actually quite unsophisticated, yet we dressed it up like the most complicated thing ever to clients. We were using wavelets for analysing market micro-structure and using any generated signals to influence our trades. Wavelets were the topic of my thesis, so I was a good fit for the team. I know it sounds complicated, but if you looked at the signals we generated, they looked awfully similar to a rather basic trend-following style regression model. I believe we found a very complicated way to compute signals that a simple trend follower would compute in far fewer CPU cycles. Anyway, I got a fairly decent bonus one year (because markets were trending nicely), and decided I want to set up my own tech company. I was always a nerdy guy, and I thought I could contribute more in the tech space. With hindsight it was a good move, and financially I believe I am now better off than most of my trading colleagues. My advice to new guys joining our desk (maybe it helps you a bit): focus on your exit, more than your entry, and if you can help it, be really, really, really lucky :P
- _cs2017_ 8y ago
  > what we were doing was actually quite unsophisticated, yet we dressed it up like the most complicated thing ever to clients. Doesn't this describe nearly all of the financial industry? Do you happen to know of any exceptions?
  - osrec 8y ago
    Yep, and nope.
- dbancajas 8y ago
  how long did you work in that space and how much income you got over that span?
inference 8y ago
I bet he/she.they either 1. made fuck-you-money and retired 2. burnt-out from the stress and decided to make slightly less large piles of money in return for less stress.
- osrec 8y ago
  Somewhere between 1 and 2, but very good guesses :)
rjf72 8y ago
Perhaps the most important paragraph in the article: "Everyone is competing against everyone else. If one firm succeeds in making the market more efficient through quantitative techniques, then there’s less money left over for other people to make exceptional investment returns. There will be one or two firms that are good at innovation and recognizing things that other people haven’t recognized. But everyone else will be fighting over scraps." The market is, in theory, not a zero sum game. Algorithmic systems, in practice, are. In theory the only way you can genuinely beat the market is when you find an inefficiency in it. And inefficiencies are generally based on a lack of knowledge. If everybody knows what you know, that inefficiency will no longer exist. And now pair this with the reality that most (and it's probably safe to say all) algorithmic systems are not really especially complex. That doesn't mean they're easy to make though. The 'secret sauce' is in exactly what data is used, how the pieces you have interoperate, the way inputs and outputs are massaged, and so on. But this drives a huge need for secrecy. Nobody who is successful is going to want to talk about how their system is designed largely because most would not be especially difficult to replicate if they provided more than very abstract details.
- awongh 8y ago
  Is this always true? One thing I wonder is, given that the amount of money needed to move the needle in a market could be actually quite large, how much money woyuld you need to make off a given inefficiency before it becomes a zero-sum game? Is it 10s of thousands? Hundreds of thusands? Millions? And given some metric like trading volume how much does that affect that number? I've heard of some hedge funds raising way less than they could have, maybe because their strategies would be killed much faster with 500mm than with 50mm ?
  - blackflame7000 8y ago
    It's not a zero-sum game because debt is limitless. Imagine an extreme example where you rigged the game and literally won all the money in the world and then kept winning, what would happen next? People would find another form of payment via services and the money is worthless if you are the only one who has it. Therefore you might lend them money in exchange for a service so that they will keep playing your rigged game now accruing a credit of services in addition to money.
benj111 8y ago
I'm trying to parse your comment. It sounds like you're basically trying to do part time what dozens of large companies spend large amounts of time and money trying to do, and then expecting them to discuss with you what they've done? You know those books that show you how to get rich doing X? Those writers make far more money from the book than they do from X. No doubt you can find corners of the investing internet that will discuss these things, but you'll probably find an awful lot of chaff in your wheat, because the successful ones won't be chatting about it on forums. Now on a more constructive note, optimising your long term investment strategy is probably best achieved by getting a pension with some cheap trackers, and a savings account. If you're already doing that then great because that's 95% of your optimisations there. I wont recommend any web sites, because the details will depend on the country where you live.

quietthrow 8y ago

Why did you quit ? (Assuming you did cos you said you are an ex alto trader). How long did you do it? Is it possible to make a living as an algo trader?

osrec 8y ago
See response above. I was officially trading (i.e. coding the strategy) for just under 3 years, then got offered a senior non-trading role (but my pay was heavily linked to the desk's performance). Can you make a living? Yes, if you're doing it as a salaried employee at a reputable institution. If you're going to try and algo trade with your 50k of savings, I would say "unlikely", and you might cause yourself a lot of anxiety.
- quietthrow 8y ago
  Thx for replying. When you say yes to making a living but as an employee is that because of at an institution you are trading with much larger sum of money and hence there is enough return to pay for your salary bonus and then some or something else like getting a regular paycheck in a other wise very volatile return world? Essentially is the amount capital the key thing or something else. Also how do traders typically come up with a strategy? Original insight or mostly copying the herd with their own variations?
  - osrec 8y ago
    More capital is obviously better. But more importantly, what happens when you're not making money? How do you control your anxieties when your broker ac balance halves due to a trend reversing? Are you prepared to monitor your strategy 24/7? At a firm, there's probably someone there to do it for you - at home, it's just you. Trading is a casino and the emotions it imparts are similar - euphoria when you win, depression when you lose. If you have a job, you at least have a base salary that will bolster your living standard - without it, you're going to struggle in the bad times (unless, of course, you're already rich). Regarding strategy generation, it's a mix. Quants like me almost always take the systematic, research like approach - analyse data, see if you can ascertain any predictable patterns and then paper trade them in the live market. If it makes money on paper, it might make money in the real market. Then just iterate and refine. Some guys do trade with their gut, but are rarely successful.

lordnacho 8y ago

Gone in a month? That sounds crazy fast. I'm an algo trading guy myself, and I can't imagine being up and running within a month of starting. You have to code: - Feed handlers - Back office - Research platform - Strategy execution - GUI You need to have: - PB agreements - Network access (telco the world over suck as doing this in a reasonable time) - Exchange memberships / ISDAs (depends what you're up to) I guess you could have spun out from a larger group with some of this stuff, but then you'd probably not crash and burn that fast. I do agree with the sentiment that fast talkers get more money than they can handle.

osrec 8y ago
There are a lot of firms that can get you up and running in a few weeks. They sell generic hedge fund formation packages, which give you all the tech/PB access. It's very rudimentary, but a lot of people do seem to opt for them, especially those that don't know what they're doing.