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I don’t have a background in this but I was under the impression that much of algorithmic trading is that there are trillions of pennies lying around and if you

I don’t have a background in this but I was under the impression that much of algorithmic trading is that there are trillions of pennies lying around and if you have an algorithm that picks up those pennies faster than anyone else, you make a lot of money. So it’s capitalizing on tiny market inefficiencies rather than directional predictions.

WJW 3y ago
There's a wide variety of strategies available. The type you mention of picking up small inefficiencies certainly exists but there are plenty of other strategies that involve having some sort of informational edge. Some hedge fund managers just read a lot of earnings releases, but there are also more sophisticated approaches: a famous example would be the fund that paid for satellite imagery of the parking lots of certain shops, so that they could count how many cars there were and extrapolate that into whether the chain was growing or not. Another straightforward example would involve using proprietary weather forecasting software to try and predict the global grain/cocoa/coffee/whatever harvest, so that you can then trade accordingly if you can see a bumper crop coming up.
- altdataseller 3y ago
  Both of those examples have been exploited to death and no longer are profitable
  - cnewey 3y ago
    If the parent had discovered a viable and profitable trading strategy, do you think they would share it here?
    - cesaref 3y ago
      I've been out of the loop for a number of years, but I believe there's a serious amount of ML being thrown at predicting time series, so this probably gives you an idea of how money is being made. I've no idea what the current models look like. I imagine it was all RNNs but maybe transformers have taken over?
  - WJW 3y ago
    True, but they were just meant as easy examples of non-HFT hedge fund strategies.
  - Zolde 3y ago
    If a feature is used by many and has a predictable impact on their behavior it becomes profitable again. If you act faster on the same feature as everyone else, or you predict the feature accurately, you can anticipate what the market will do in response. The market often overreacts to new data. So if satellite imagery shows steep decline in parked cars, the stock will be predictably oversold. You can then take a contrarian position (buy the stock before it reverses to the mean). Some commonly used features by popular public trading bots create predictable market movements, no matter if the feature itself is long-term informative/profitable.
  - paulpauper 3y ago
    yeah but but his point is that hedge funds do things that are non-obvious to extract alpha
- paulpauper 3y ago
  There's a wide variety of strategies available. The type you mention of picking up small inefficiencies certainly exists but there are plenty of other strategies that involve having some sort of informational edge There are many such strategies. It's not all HFT either. For example, a strategy that short BTC and goes long ndx/qqq at the open and closes both positions at the close (four trades total), allocating half of capital to each pair, posted a double-digit gain for 2023 despite btc rising. https://greyenlightenment.com/2023/12/31/2023-bitcoin-method-recap-and-efficient-markets/ https://greyenlightenment.com/2023/12/31/2023-bitcoin-method... there are many other things like this. gotta keep your eyes peeled but they exist.

WJW 3y ago

There's a wide variety of strategies available. The type you mention of picking up small inefficiencies certainly exists but there are plenty of other strategies that involve having some sort of informational edge. Some hedge fund managers just read a lot of earnings releases, but there are also more sophisticated approaches: a famous example would be the fund that paid for satellite imagery of the parking lots of certain shops, so that they could count how many cars there were and extrapolate that into whether the chain was growing or not. Another straightforward example would involve using proprietary weather forecasting software to try and predict the global grain/cocoa/coffee/whatever harvest, so that you can then trade accordingly if you can see a bumper crop coming up.

altdataseller 3y ago
Both of those examples have been exploited to death and no longer are profitable
- cnewey 3y ago
  If the parent had discovered a viable and profitable trading strategy, do you think they would share it here?
  - cesaref 3y ago
    I've been out of the loop for a number of years, but I believe there's a serious amount of ML being thrown at predicting time series, so this probably gives you an idea of how money is being made. I've no idea what the current models look like. I imagine it was all RNNs but maybe transformers have taken over?
- WJW 3y ago
  True, but they were just meant as easy examples of non-HFT hedge fund strategies.
- Zolde 3y ago
  If a feature is used by many and has a predictable impact on their behavior it becomes profitable again. If you act faster on the same feature as everyone else, or you predict the feature accurately, you can anticipate what the market will do in response. The market often overreacts to new data. So if satellite imagery shows steep decline in parked cars, the stock will be predictably oversold. You can then take a contrarian position (buy the stock before it reverses to the mean). Some commonly used features by popular public trading bots create predictable market movements, no matter if the feature itself is long-term informative/profitable.
- paulpauper 3y ago
  yeah but but his point is that hedge funds do things that are non-obvious to extract alpha
paulpauper 3y ago
There's a wide variety of strategies available. The type you mention of picking up small inefficiencies certainly exists but there are plenty of other strategies that involve having some sort of informational edge There are many such strategies. It's not all HFT either. For example, a strategy that short BTC and goes long ndx/qqq at the open and closes both positions at the close (four trades total), allocating half of capital to each pair, posted a double-digit gain for 2023 despite btc rising. https://greyenlightenment.com/2023/12/31/2023-bitcoin-method-recap-and-efficient-markets/ https://greyenlightenment.com/2023/12/31/2023-bitcoin-method... there are many other things like this. gotta keep your eyes peeled but they exist.