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There's always a plethora of misinformation about trading, so here goes.. Retail and institutional is the difference between playing in a casino and being the c

by dpweb 3y ago

There's always a plethora of misinformation about trading, so here goes.. Retail and institutional is the difference between playing in a casino and being the casino. It's important to understand - on the whole - he average probability of guessing the direction of a trade is 50/50. Any obvious (and virtually all non-obvious) edges, arbitrage for instance, are removed by the market participants. That's what a market IS. In that respect, 'random walk' is correct. However, that does not mean all participants cannot expect profitability over the short or long term. Which are also themselves, very different things. For retail traders, transaction cost (commissions + bid/ask spread) make it a negative expectancy. In fact, bid/ask spreads and commissions ARE PRICED right at a level to remove any positive expectancy, but leave the APPEARANCE of a possible positive one. Getting that up just a couple percentage points to a positive expectancy is difficult in the short term, and VERY difficult over the long term. Not impossible. That's why about 70-80% of active retail traders are losing overall at any given time. For firms, order flow and much lower transaction costs make for a positive expectancy. The value of order flow alone is responsible for the zero-commission trading industry. Skill isn't the issue. The trader with skill level at lose a little or break even trading - from his bedroom - would very possibly be winning on the big banks trading desk. Even if executing the SAME trades they were at retail. More so, the more frequent the trading activity. So if big institutions have a built in edge why do they sometimes fail? Easy, they still sometimes make stupid bets (ie.. Silicon Valley Bank's bond bet which killed it).

tnecniv 3y ago
I have a family member who was a speculator for about a decade and worked in a secondary role for investment banks for the rest of their career. Their advice, as a retail investor, was to just build a diverse portfolio so you are profiting from the market averaging above inflation in the long term. Obviously, later in life you want to transition toward more stable investments like bonds so your retirement money isn’t gone if there’s a crash, but that was the core idea. Is that not sound advice? Based on your comment, any investment at retail is a loss on average.
- DavidSJ 3y ago
  I think that's consistent with their comment. They said it's still possible to expect profit over the long-term, you just won't have an edge over the market as a whole.
- mellosouls 3y ago
  The comment was about short term trading (eg "day trading") I think. The reference to long term was in the context of regular short term trading over a long period. Investing in a market spread (eg an index tracker) over the long term with infrequent trading during that time is a different strategy that trusts the market rather than the individual's "skill". This latter is presumably what your relative was (correctly) advising.
dan-robertson 3y ago
In US equity markets, retail get tighter spreads than institutions and lower transaction costs. Retail can trade at tighter spreads than the nbbo with ‘zero’ commission (yes, there is still payment to the broker, but this commission is missing out on an even tighter spread). Institutions trade at actual exchanges, pay fees for trades, fees for connectivity, fees for market data, etc. Institutions can have advantages with eg cheaper financing. I think most of what you have written is basically false, at least for US equity markets. The reason institutions like trading with retail (for equities in the US) is not that they get to charge big commissions. It’s that they don’t have to pay for the high risk of adverse selection. I.e. trades with retail tend to not be regretted because the market is not particularly likely to quickly move in the direction that favours the retail trader. If you are retail and you have some actual edge, you could find the brokerage which gives the tightest spreads (mostly this means the one with the worst traders except some take much more pfof). But there are likely better ways to get leverage than trading on your own account, eg selling a newsletter or working for a trading firm where you have more capital.
ldjkfkdsjnv 3y ago
Look at Nvidia stock, the market knocked it all the way down and then all the way back up. There is no efficient market. Its really about making a contrarian bet. The reason traders lose money is that most of the time there are no good trades to make. If as a retail trader you made a trade once every two years, things would be different. Another thing, it takes a while for news to price in. If inflation craters and it means the QQQs should be 10% higher, that move CANNOT happen in one day.

by dpweb 3y ago

tnecniv 3y ago

I have a family member who was a speculator for about a decade and worked in a secondary role for investment banks for the rest of their career. Their advice, as a retail investor, was to just build a diverse portfolio so you are profiting from the market averaging above inflation in the long term. Obviously, later in life you want to transition toward more stable investments like bonds so your retirement money isn’t gone if there’s a crash, but that was the core idea. Is that not sound advice? Based on your comment, any investment at retail is a loss on average.

DavidSJ 3y ago
I think that's consistent with their comment. They said it's still possible to expect profit over the long-term, you just won't have an edge over the market as a whole.
mellosouls 3y ago
The comment was about short term trading (eg "day trading") I think. The reference to long term was in the context of regular short term trading over a long period. Investing in a market spread (eg an index tracker) over the long term with infrequent trading during that time is a different strategy that trusts the market rather than the individual's "skill". This latter is presumably what your relative was (correctly) advising.

dan-robertson 3y ago

In US equity markets, retail get tighter spreads than institutions and lower transaction costs. Retail can trade at tighter spreads than the nbbo with ‘zero’ commission (yes, there is still payment to the broker, but this commission is missing out on an even tighter spread). Institutions trade at actual exchanges, pay fees for trades, fees for connectivity, fees for market data, etc. Institutions can have advantages with eg cheaper financing. I think most of what you have written is basically false, at least for US equity markets. The reason institutions like trading with retail (for equities in the US) is not that they get to charge big commissions. It’s that they don’t have to pay for the high risk of adverse selection. I.e. trades with retail tend to not be regretted because the market is not particularly likely to quickly move in the direction that favours the retail trader. If you are retail and you have some actual edge, you could find the brokerage which gives the tightest spreads (mostly this means the one with the worst traders except some take much more pfof). But there are likely better ways to get leverage than trading on your own account, eg selling a newsletter or working for a trading firm where you have more capital.

ldjkfkdsjnv 3y ago

Look at Nvidia stock, the market knocked it all the way down and then all the way back up. There is no efficient market. Its really about making a contrarian bet. The reason traders lose money is that most of the time there are no good trades to make. If as a retail trader you made a trade once every two years, things would be different. Another thing, it takes a while for news to price in. If inflation craters and it means the QQQs should be 10% higher, that move CANNOT happen in one day.