5 ms·

> people who are actually "good" at trading don't publish papers, they silently make money I've long understood that this was true. It makes intuitive sense.

by jawns 7y ago

> people who are actually "good" at trading don't publish papers, they silently make money I've long understood that this was true. It makes intuitive sense. But are there any cases where it is not true? Is it possible to "spread the wealth" when it comes to trading, or any money-making endeavor? Or does it always reduce down to "I win only because you lose"?

traK6Dcm 7y ago
I don't think it necessarily has to be true. I also built a profitable system and wrote about it, but I didn't share all the details. Not even close. There are just too many small details that must be "just right" that they would fill a whole book. It's kind of like building an operating system from scratch. It's not something you can put into a single post or paper. There isn't one "trick" that suddenly makes it all profitable - it's a combination of so many small details. Then there is the cultural aspect. People who are working in trading are just not used to sharing openly. They don't write online, or anywhere. They are not even allowed to write due to their employers. And people who work in academia are naturally not working on "production" systems - their only job is to write, not to build. So you almost never see people in the intersection of: writes-online & understands-trading & is-not-in-academia
amiga_500 7y ago
> Or does it always reduce down to "I win only because you lose"? It is a zero sum game. Nobody is producing anything, therefore for one to win another must lose.
- solotronics 7y ago
  this would only be true if it was a closed system. the central banks essentially magic money into existence and put it into the market through convoluted methods.
  - whymauri 7y ago
    My understanding is that while all markets are not zero-sum, that high-frequency trade amongst trading firms approaches zero-sum.
- traderthrow454 7y ago
  I think thats an overly simplistic view of things. The market is big and many participants trade at different frequencies. Large pension funds need liquidity to move big blocks of stock for their quarterly and monthly rebalances, and the big medium term statistical arbitrage traders provide liquidity for them to do so. HFT players provide liquidity for the stat arb players. The classes of participants with different frequencies actually help one another, while there is competition for alpha within strategies with similar holding periods. Overall the system creates an extremely efficient and liquid system for valuing and exchanging equity - the very system that empowers YCombinator and other Venture investors to make VC investments knowing that their winners will eventually IPO or be bought by public companies.
  - amiga_500 7y ago
    I knew someone would come in with "liquidity". Many HFT jump out when things get volatile, when liquidity is actually required. Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero. Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world. The costs required to compete at the lowest latencies are large, and forcing small/medium players out the game, as the investment cost is large, which is also bad. The system is hugely inefficient. The costs as latencies get lower are ever higher, for an extremely similar end result. The law of diminishing returns.
    - traderthrow454 7y ago
      My initial comment was discussing speculative trading in general, but since you mostly brought up some common anti-HFT tropes I might as well address them. > Many HFT jump out when things get volatile, when liquidity is actually required. Do you have a citation on that? If you look the preliminary Q1 results of Virtu Financial [0] (only publicly traded HFT) they seem to be doing more trading than ever in these volatile markets. > Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero. HFT is a mature industry. Latencies have mostly stabilized, and profitability is way down in the last few years. Many firms are merging/consolidating. So in the past few years society is actually spending fewer resources - both financially and from a human capital standpoint on HFT than it did in the past. > Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world. IEX is doing something relatively similar to that for a few years now. They have ~3% of US equities market share. People have the option of trading there but they mostly choose not to. > The system is hugely inefficient. The costs as latencies get lower are ever higher, for an extremely similar end result. The law of diminishing returns. Due to consolidation, costs are actually decreasing. Could it be that the market is... working? [0] - https://ir.virtu.com/press-releases/press-release-details/2020/Virtu-Announces-450-Million-of-Additional-Broker-Dealer-Borrowing-Capacity-and-Preliminary-Quarter-to-Date-Results/default.aspx https://ir.virtu.com/press-releases/press-release-details/20...
- traK6Dcm 7y ago
  That's overly simplistic. While the overall system may be zero-system over an infinitely long time horizon, this doesn't typically matter in practice. It can be positive sum for participants over some time horizon they care about. For example, an HFT trader make pennies from each trade by exploiting tiny price inefficiencies. He essentially takes money from a "stupid" retail investor who does not know how to optimize his trades. However, the retail investor may not actually care about optimizing trades and just wants to liquidate assets or make a long-term (10+ years) bet. He is totally fine with throwing away a few dollars because optimizing his trades through complex algorithms would be too much work. Here, both parties win, the HFT trades gets paid because he provides convenience, or liquidity, to the retail trader. The same would apply to any human market maker, it doesn't have to be HFT. And yes, HFT liquidity may disappear during HUGE market movements due to risk, but it doesn't disappear as long as both parties get what they want and the risk is manageable, which is "most of the time". Of course, HFT has other issues such as the race to zero and unfair advantages for a few central players, and I don't want to defend HFT. But saying that "it's all zero sum" is not correct. An analogy is your nearest grocery store. They're a market maker because they buy from the manufacturer and sell to the consumer and profit from the spread. Do you also argue that these are all zero-sum and we should cut them all out and connect all consumers and farmers directly? And their liquidity also disappears when black swans (corona) happens :)
- mattkrause 7y ago
  Is that always true? Melon Usk (say) wants to make cars, but he can’t pay for the factory himself, so he forms a company, sells shares in it, and uses the proceeds to build a factory. Now he and his shareholders can make cars, so the shares are worth more. Who lost money?
Qworg 7y ago
Trading is inherently zero sum.
- nightski 7y ago
  That's only true in the sense of opportunity cost. I may buy something at $10 and sell it at $15 making a $5 profit. Then it may go to $20. Did I lose $5/share? Sure. But in reality I wasn't a "loser". I find that in reality opportunity cost rarely matters.
  - yorwba 7y ago
    If you buy something at $10 and sell it at $15, where are the $5 profit coming from? From the other market participants, e.g. someone selling to you for $10 and later buying it back for $15, losing $5 in the process. Your profit and their loss sum to zero, which is what "zero-sum" means. It has absolutely nothing to do with opportunity cost, or whether you, personally, are a "loser". But if you're a "winner", someone else must be the "loser".
    - traK6Dcm 7y ago
      In this simple example, yes, but you are assuming that monetary value = utility. That's not always the case. People have all kinds of different incentives for participating in the markets. Let's say I am a market maker offering to buy Apple shares at $99 and sell them at $100. Let's take an ex-Apple employee who owns some shares. He just had a family emergency and wants to liquidate his shares to get cash, and he needs it quickly. He doesn't care about paying a few dollars extra in exchange for a quick trade because he needs to pay a bill tomorrow. I buy his shares for $99. He is happy because he immediately got his cash. On the other side, there is a a retail investor doing long-term investment and wants to add Apple to their portfolio. They also don't care about a few cents because they're holding the stock for a decade and love the new CEO. They buy my Apple shares from me for 100.0. They are happy because I can guarantee them a stable price for a decent number of shares. All participants are happy. I just made $1 from the spread for providing liquidity, the investor got the long-term investment they wanted, and the ex-Apple employee got his cash. Sure, both sides of the market could have made more optimal trades if they had put in more effort and "optimized" their trades with algos and somehow skipped the middle-man, but they would've sacrificed convenience and time, which may be worth more to them than the little bit of extra $ they paid. Aren't we all winners? When you go buy bananas in your grocery store you also don't complain about them taking a cut for providing liquidity. You don't say the farmer has "lost" money because the consumer paid more than what the farmer originally sold for to the grocery store. The farmer is happy because otherwise he may not have traded at all or his bananas may have gone bad (= needs to trade quickly). This is no different.
nine_k 7y ago
To spread one's wealth, one can donate to charities. Opening up one's secrets of trading seems to only make sense if one has found deeper, more effective secrets, so that the old crop is not going to be seriously competitive, but a bit of good PR would come in handy.
awesome_dude 7y ago
A famous example of a strategy that was published, and shared, whilst still profitable is that of Benjamin Graham, several of his students went on to be incredibly successful traders (we all know about Buffett, right?) But that's an exception rather than a rule
machinehermit 7y ago
It is an absurdity to believe there has never been a good trading strategy published in a paper. The real value though of publishing a trading strategy is in signaling to future employers. Ultimately, money is made by the ability to come up with new strategies. Any single strategy is only going to live for so long before it dies and it is no longer profitable.

by jawns 7y ago

traK6Dcm 7y ago

I don't think it necessarily has to be true. I also built a profitable system and wrote about it, but I didn't share all the details. Not even close. There are just too many small details that must be "just right" that they would fill a whole book. It's kind of like building an operating system from scratch. It's not something you can put into a single post or paper. There isn't one "trick" that suddenly makes it all profitable - it's a combination of so many small details. Then there is the cultural aspect. People who are working in trading are just not used to sharing openly. They don't write online, or anywhere. They are not even allowed to write due to their employers. And people who work in academia are naturally not working on "production" systems - their only job is to write, not to build. So you almost never see people in the intersection of: writes-online & understands-trading & is-not-in-academia

amiga_500 7y ago

> Or does it always reduce down to "I win only because you lose"? It is a zero sum game. Nobody is producing anything, therefore for one to win another must lose.

solotronics 7y ago
this would only be true if it was a closed system. the central banks essentially magic money into existence and put it into the market through convoluted methods.
- whymauri 7y ago
  My understanding is that while all markets are not zero-sum, that high-frequency trade amongst trading firms approaches zero-sum.
traderthrow454 7y ago
I think thats an overly simplistic view of things. The market is big and many participants trade at different frequencies. Large pension funds need liquidity to move big blocks of stock for their quarterly and monthly rebalances, and the big medium term statistical arbitrage traders provide liquidity for them to do so. HFT players provide liquidity for the stat arb players. The classes of participants with different frequencies actually help one another, while there is competition for alpha within strategies with similar holding periods. Overall the system creates an extremely efficient and liquid system for valuing and exchanging equity - the very system that empowers YCombinator and other Venture investors to make VC investments knowing that their winners will eventually IPO or be bought by public companies.
- amiga_500 7y ago
  I knew someone would come in with "liquidity". Many HFT jump out when things get volatile, when liquidity is actually required. Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero. Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world. The costs required to compete at the lowest latencies are large, and forcing small/medium players out the game, as the investment cost is large, which is also bad. The system is hugely inefficient. The costs as latencies get lower are ever higher, for an extremely similar end result. The law of diminishing returns.
  - traderthrow454 7y ago
    My initial comment was discussing speculative trading in general, but since you mostly brought up some common anti-HFT tropes I might as well address them. > Many HFT jump out when things get volatile, when liquidity is actually required. Do you have a citation on that? If you look the preliminary Q1 results of Virtu Financial [0] (only publicly traded HFT) they seem to be doing more trading than ever in these volatile markets. > Ultimately HFT is doing nothing of societal value, the race down to zero is never-ending and we are wasting huge amounts of resources on a totally pointless march towards zero. HFT is a mature industry. Latencies have mostly stabilized, and profitability is way down in the last few years. Many firms are merging/consolidating. So in the past few years society is actually spending fewer resources - both financially and from a human capital standpoint on HFT than it did in the past. > Exchanges should introduce random delays to allow market participants who really want to hedge / buy / sell, then we can shift some of the resources to the real world. IEX is doing something relatively similar to that for a few years now. They have ~3% of US equities market share. People have the option of trading there but they mostly choose not to. > The system is hugely inefficient. The costs as latencies get lower are ever higher, for an extremely similar end result. The law of diminishing returns. Due to consolidation, costs are actually decreasing. Could it be that the market is... working? [0] - https://ir.virtu.com/press-releases/press-release-details/2020/Virtu-Announces-450-Million-of-Additional-Broker-Dealer-Borrowing-Capacity-and-Preliminary-Quarter-to-Date-Results/default.aspx https://ir.virtu.com/press-releases/press-release-details/20...
traK6Dcm 7y ago
That's overly simplistic. While the overall system may be zero-system over an infinitely long time horizon, this doesn't typically matter in practice. It can be positive sum for participants over some time horizon they care about. For example, an HFT trader make pennies from each trade by exploiting tiny price inefficiencies. He essentially takes money from a "stupid" retail investor who does not know how to optimize his trades. However, the retail investor may not actually care about optimizing trades and just wants to liquidate assets or make a long-term (10+ years) bet. He is totally fine with throwing away a few dollars because optimizing his trades through complex algorithms would be too much work. Here, both parties win, the HFT trades gets paid because he provides convenience, or liquidity, to the retail trader. The same would apply to any human market maker, it doesn't have to be HFT. And yes, HFT liquidity may disappear during HUGE market movements due to risk, but it doesn't disappear as long as both parties get what they want and the risk is manageable, which is "most of the time". Of course, HFT has other issues such as the race to zero and unfair advantages for a few central players, and I don't want to defend HFT. But saying that "it's all zero sum" is not correct. An analogy is your nearest grocery store. They're a market maker because they buy from the manufacturer and sell to the consumer and profit from the spread. Do you also argue that these are all zero-sum and we should cut them all out and connect all consumers and farmers directly? And their liquidity also disappears when black swans (corona) happens :)
mattkrause 7y ago
Is that always true? Melon Usk (say) wants to make cars, but he can’t pay for the factory himself, so he forms a company, sells shares in it, and uses the proceeds to build a factory. Now he and his shareholders can make cars, so the shares are worth more. Who lost money?

Qworg 7y ago

Trading is inherently zero sum.

nightski 7y ago
That's only true in the sense of opportunity cost. I may buy something at $10 and sell it at $15 making a $5 profit. Then it may go to $20. Did I lose $5/share? Sure. But in reality I wasn't a "loser". I find that in reality opportunity cost rarely matters.
- yorwba 7y ago
  If you buy something at $10 and sell it at $15, where are the $5 profit coming from? From the other market participants, e.g. someone selling to you for $10 and later buying it back for $15, losing $5 in the process. Your profit and their loss sum to zero, which is what "zero-sum" means. It has absolutely nothing to do with opportunity cost, or whether you, personally, are a "loser". But if you're a "winner", someone else must be the "loser".
  - traK6Dcm 7y ago
    In this simple example, yes, but you are assuming that monetary value = utility. That's not always the case. People have all kinds of different incentives for participating in the markets. Let's say I am a market maker offering to buy Apple shares at $99 and sell them at $100. Let's take an ex-Apple employee who owns some shares. He just had a family emergency and wants to liquidate his shares to get cash, and he needs it quickly. He doesn't care about paying a few dollars extra in exchange for a quick trade because he needs to pay a bill tomorrow. I buy his shares for $99. He is happy because he immediately got his cash. On the other side, there is a a retail investor doing long-term investment and wants to add Apple to their portfolio. They also don't care about a few cents because they're holding the stock for a decade and love the new CEO. They buy my Apple shares from me for 100.0. They are happy because I can guarantee them a stable price for a decent number of shares. All participants are happy. I just made $1 from the spread for providing liquidity, the investor got the long-term investment they wanted, and the ex-Apple employee got his cash. Sure, both sides of the market could have made more optimal trades if they had put in more effort and "optimized" their trades with algos and somehow skipped the middle-man, but they would've sacrificed convenience and time, which may be worth more to them than the little bit of extra $ they paid. Aren't we all winners? When you go buy bananas in your grocery store you also don't complain about them taking a cut for providing liquidity. You don't say the farmer has "lost" money because the consumer paid more than what the farmer originally sold for to the grocery store. The farmer is happy because otherwise he may not have traded at all or his bananas may have gone bad (= needs to trade quickly). This is no different.

nine_k 7y ago

To spread one's wealth, one can donate to charities. Opening up one's secrets of trading seems to only make sense if one has found deeper, more effective secrets, so that the old crop is not going to be seriously competitive, but a bit of good PR would come in handy.

awesome_dude 7y ago

A famous example of a strategy that was published, and shared, whilst still profitable is that of Benjamin Graham, several of his students went on to be incredibly successful traders (we all know about Buffett, right?) But that's an exception rather than a rule

machinehermit 7y ago

It is an absurdity to believe there has never been a good trading strategy published in a paper. The real value though of publishing a trading strategy is in signaling to future employers. Ultimately, money is made by the ability to come up with new strategies. Any single strategy is only going to live for so long before it dies and it is no longer profitable.