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You should know this is a really bad idea, unless loosing money is your goal "Automated" trading, even if there is an edge (and unless you are a crook, there i

by worik 3y ago

You should know this is a really bad idea, unless loosing money is your goal "Automated" trading, even if there is an edge (and unless you are a crook, there is not) will sink you with transaction costs You should know this.

chronic74930 3y ago
> You should know this. Anyone who worked in quantitative trading knows you can consistently outperform the S&P500/VTI/SPY over 20+ year horizons. Buy and hold passive US equity index funds gives a Sharpe ratio of ~0.7 with annual return of 8-10%. Meanwhile, high frequency trading does upward of Sharpe 10+ with 40-60% annual return, with 10+ year track records, of course. Hell, even Citadel hedge fund, after their ridiculous 50% performance fee, returned 19% _after fees_ annually to outside passive investors over 20 years. And this is billions of AUM, so the ”quant don’t scale” argument goes out the window. Why is nobody talking about this? Because the elite politicians and businessmen invest in these very quant funds, and thus suppress any news or regulation. Sucks for middle class professionals with <$5M net worth.
- panarky 3y ago
  Nobody's saying that alpha doesn't exist. But before you unleash your automated proprietary model, you should be able to explain why you think you have any edge whatsoever over your far better funded, far more experienced counterparties. And, no, getting great results from backtesting your model is not evidence of edge in the future against adversaries with access to better data than you have.
  - eps 3y ago
    > you should be able to explain RenTech famously tried to understand exact mechanics of their successful models after they (models) proved to be successful. Sometimes they succeeded.
- deleted 3y ago
  [deleted]
- metabro 3y ago
  How many hedge funds are there? A few thousand? How many beat the s&p? Of those how much can be attributed statistically to skill rather than luck?
  - chronic38202 3y ago
    > How many hedge funds are there? A few thousand? How many beat the s&p? The average index fund fails to outperform the S&P. How many passive index funds are there worldwide? Thousands? How many beat VTI or S&P500? Answer: QQQ and small cap. > Of those how much can be attributed statistically to skill rather than luck? If you are picking S&P as your champion, then I am allowed to pick a hedge fund as my champion. And Citadel outperforms S&P over 20+ year horizon. Citadel 19% vs S&P 10%.
    - metabro 3y ago
      >The average index fund fails to outperform the S&P This is a straw man as most people understand investing in indexes as buying a an index that tracks the s&p. >If you are picking S&P as your champion, then I am allowed to pick a hedge fund as my champion. You are making a false equivalence. The s&p is a proxy for the us market and therefore is a benchmark. It captures the captures the bets placed by all market participants including citadel. Citadel does something beyond buying and selling equities to generate that alpha. And it’s likely not just restricted to equities. Nonetheless they are an outlier. Which is the point I was making. Most people won’t do better than the us market in aggregate over a similar stretch of time.
- 1letterunixname 3y ago
  Individuals tends to lack the data sources, low latency access, strats, controls, deep bench, and deep pockets to make serious money. It's less risky to pool money with other smart rich bastards at shops that perform. Division of labor, specialization of trade.
- MuffinFlavored 3y ago
  Slightly related: what are "big players" more likely to do to get exposure to the S&P directionally: 1. SPY shares long/short on margin/leverage 1. SPY options 1. SPX options 1. /ES e-mini futures 1. a blend of all Does one trump another in popularity?
  - jleahy 3y ago
    ES trumps the others.
    - MuffinFlavored 3y ago
      Nice, thanks. I wonder by how much. Here is why I ask: a lot of technical analysis is done on psychological levels related to (in my opinion) SPY strike prices/SPX strike prices/SPX levels. Yet, /ES is typically 20 points ahead of SPX. For example, there can be a battle zone of support/resistance at 4900 on SPX, but /ES blew past it a day ago. I wasn't sure if one had more power/prominence than the other.
      - jleahy 3y ago
        The spread between SPX and ES is purely mechanical. It’s a function of expected future interest rates and dividends over the remaining life of the future. There is no such thing as support/resistance in reality.
        MuffinFlavored 3y ago
        > There is no such thing as support/resistance in reality. Where would you say 80% of the daily trade volume comes from on average? The powers to be that I can think of: institutional investors / fund managers slowly reallocating (selling stuff off, buying stuff) daily high frequency trading algorithms trading shares back and forth to each other in an artificial way to generate synthetic volume/movement market makers reacting to option chain volume to remain neutral "hedge funds" / "quant funds" running their algorithm what do those algorithms look for at the "minute by minute" scale if not things like support/resistance/patterns/volume?
- jairuhme 3y ago
  Citadel isn't making the bulk of their alpha from simply finding an edge, its making trades in dark pools based on trade information they receive for executing trades. The individual trader won't be able to make trades at the speed required when finding small price discrepancies, nor would they have the capital to really earn anything.
  - affyboi 3y ago
    Citadel securities is the market maker, Citadel is the hedge fund and doesn’t have access to data from the other side
    - SturgeonsLaw 3y ago
      Did they pinky promise not to access the data or are there some actual barriers in place?
      - User3456335 3y ago
        It being illegal seems like a pretty big barrier to me.
        worik 3y ago
        > It being illegal seems like a pretty big barrier to me. That speaks volumes about your integrity. Good on you! But it is not true.
        User3456335 3y ago
        I wouldn't be so sure about that. Also, even if people cross the barrier it doesn't mean it is not there or isn't big. But thanks for the compliment!
- chaosmonger7 3y ago
  [flagged]
- affyboi 3y ago
  > Hell, even Citadel hedge fund, after their ridiculous 50% performance fee Do you have a source?
cltby 3y ago
> (and unless you are a crook, there is not) What sort of shenanigans do you think profitable automated traders are engaged in?
- worik 3y ago
  Insider trading Market rigging Survivor bias (not shenanigans that one)
  - User3456335 3y ago
    Insider trading: there's a lot of information freely available that can be used to make predictions Market rigging: the market can be affected by your behaviour without you rigging anything Survivorship bias: this can be argued for any competitive industry. Don't engage in it unless you're good at it.
    - worik 3y ago
      Sigh! People really want to believe there is some magic trick to trading. There is not. > Insider trading: there's a lot of information freely available that can be used to make predictions The efficient market hypothesis deals with that. The freely available information is priced in (nothing is free, and it takes time) > Market rigging: the market can be affected by your behaviour without you rigging anything I am talking of things like: https://en.wikipedia.org/wiki/Libor_scandal https://en.wikipedia.org/wiki/Libor_scandal and https://en.wikipedia.org/wiki/Forex_scandal https://en.wikipedia.org/wiki/Forex_scandal. These are incidences where the traders got caught. Given the millions at stake, do you think many are caught? To win at active trading you need an edge nobody else has. There have been cases of traders having insights not known to others. Pairs trading is the only example I know of. In that case the people who kept it secret made out like bandits for a few years, then the secret leaked and it is no longer profitable The most common legal edge players have is scale: They are huge and nimble and can take advantage of opportunities at scale. It goes really well, until it does not, and another trading house collapses. The most common edge I believe, after studying it for a decade, is crime. Big trading house, big crime
paulpauper 3y ago
then how does renaissance technologies make so much? it can be done...no one say it is easy, but it's doable
- bluepizza 3y ago
  RenTech remains a touchy subject, as their only high performing fund is closed to external investors. Their available to the public stuff performs much less than their closed fund.
  - bmitc 3y ago
    Medallion was open to external investors. They closed it because Medallion has an approximate $10 billion cap before it moves the market too much and starts losing money and thus they just keep it to themselves. So they no longer need capital from outside investors. And why make others money when you can make yourself money? Their other funds can't just do what Medallion does, otherwise you are just increasing the cap of Medallion and thus hurting it, which is why they aren't as successful.
    - paulpauper 3y ago
      which is why they aren't successful. fixed it
    - bluepizza 3y ago
      It was closed to external investors in 1993, and had gains of 98% in 2008, in the middle of an economic meltdown. How come they figured it out for one single fund, but aren't able to make any alternative strong strategies except the secret and closed one?
      - TheAlchemist 3y ago
        Strategies have limits on how much money they can manage. By limits, I mean - either it's impossible to put in more (could be because there are no more counterparties to trade with above a certain amount) or it would significantly decrease performance.
1letterunixname 3y ago
LTCM enters the chat
tim333 3y ago
Transaction costs can be surprisingly low these days. Like in crypto you can get 0.02% maker fees or less and in stocks it's sometimes free. See Alpaca for example https://brokerchooser.com/broker-reviews/alpaca-trading-review https://brokerchooser.com/broker-reviews/alpaca-trading-revi... - "Commission-free stock and ETF trading"

by worik 3y ago

chronic74930 3y ago

> You should know this. Anyone who worked in quantitative trading knows you can consistently outperform the S&P500/VTI/SPY over 20+ year horizons. Buy and hold passive US equity index funds gives a Sharpe ratio of ~0.7 with annual return of 8-10%. Meanwhile, high frequency trading does upward of Sharpe 10+ with 40-60% annual return, with 10+ year track records, of course. Hell, even Citadel hedge fund, after their ridiculous 50% performance fee, returned 19% _after fees_ annually to outside passive investors over 20 years. And this is billions of AUM, so the ”quant don’t scale” argument goes out the window. Why is nobody talking about this? Because the elite politicians and businessmen invest in these very quant funds, and thus suppress any news or regulation. Sucks for middle class professionals with <$5M net worth.

panarky 3y ago
Nobody's saying that alpha doesn't exist. But before you unleash your automated proprietary model, you should be able to explain why you think you have any edge whatsoever over your far better funded, far more experienced counterparties. And, no, getting great results from backtesting your model is not evidence of edge in the future against adversaries with access to better data than you have.
- eps 3y ago
  > you should be able to explain RenTech famously tried to understand exact mechanics of their successful models after they (models) proved to be successful. Sometimes they succeeded.
deleted 3y ago
[deleted]
metabro 3y ago
How many hedge funds are there? A few thousand? How many beat the s&p? Of those how much can be attributed statistically to skill rather than luck?
- chronic38202 3y ago
  > How many hedge funds are there? A few thousand? How many beat the s&p? The average index fund fails to outperform the S&P. How many passive index funds are there worldwide? Thousands? How many beat VTI or S&P500? Answer: QQQ and small cap. > Of those how much can be attributed statistically to skill rather than luck? If you are picking S&P as your champion, then I am allowed to pick a hedge fund as my champion. And Citadel outperforms S&P over 20+ year horizon. Citadel 19% vs S&P 10%.
  - metabro 3y ago
    >The average index fund fails to outperform the S&P This is a straw man as most people understand investing in indexes as buying a an index that tracks the s&p. >If you are picking S&P as your champion, then I am allowed to pick a hedge fund as my champion. You are making a false equivalence. The s&p is a proxy for the us market and therefore is a benchmark. It captures the captures the bets placed by all market participants including citadel. Citadel does something beyond buying and selling equities to generate that alpha. And it’s likely not just restricted to equities. Nonetheless they are an outlier. Which is the point I was making. Most people won’t do better than the us market in aggregate over a similar stretch of time.
1letterunixname 3y ago
Individuals tends to lack the data sources, low latency access, strats, controls, deep bench, and deep pockets to make serious money. It's less risky to pool money with other smart rich bastards at shops that perform. Division of labor, specialization of trade.
MuffinFlavored 3y ago
Slightly related: what are "big players" more likely to do to get exposure to the S&P directionally: 1. SPY shares long/short on margin/leverage 1. SPY options 1. SPX options 1. /ES e-mini futures 1. a blend of all Does one trump another in popularity?
- jleahy 3y ago
  ES trumps the others.
  - MuffinFlavored 3y ago
    Nice, thanks. I wonder by how much. Here is why I ask: a lot of technical analysis is done on psychological levels related to (in my opinion) SPY strike prices/SPX strike prices/SPX levels. Yet, /ES is typically 20 points ahead of SPX. For example, there can be a battle zone of support/resistance at 4900 on SPX, but /ES blew past it a day ago. I wasn't sure if one had more power/prominence than the other.
    - jleahy 3y ago
      The spread between SPX and ES is purely mechanical. It’s a function of expected future interest rates and dividends over the remaining life of the future. There is no such thing as support/resistance in reality.
      - MuffinFlavored 3y ago
        > There is no such thing as support/resistance in reality. Where would you say 80% of the daily trade volume comes from on average? The powers to be that I can think of: institutional investors / fund managers slowly reallocating (selling stuff off, buying stuff) daily high frequency trading algorithms trading shares back and forth to each other in an artificial way to generate synthetic volume/movement market makers reacting to option chain volume to remain neutral "hedge funds" / "quant funds" running their algorithm what do those algorithms look for at the "minute by minute" scale if not things like support/resistance/patterns/volume?
jairuhme 3y ago
Citadel isn't making the bulk of their alpha from simply finding an edge, its making trades in dark pools based on trade information they receive for executing trades. The individual trader won't be able to make trades at the speed required when finding small price discrepancies, nor would they have the capital to really earn anything.
- affyboi 3y ago
  Citadel securities is the market maker, Citadel is the hedge fund and doesn’t have access to data from the other side
  - SturgeonsLaw 3y ago
    Did they pinky promise not to access the data or are there some actual barriers in place?
    - User3456335 3y ago
      It being illegal seems like a pretty big barrier to me.
      - worik 3y ago
        > It being illegal seems like a pretty big barrier to me. That speaks volumes about your integrity. Good on you! But it is not true.
        User3456335 3y ago
        I wouldn't be so sure about that. Also, even if people cross the barrier it doesn't mean it is not there or isn't big. But thanks for the compliment!
chaosmonger7 3y ago
[flagged]
affyboi 3y ago
> Hell, even Citadel hedge fund, after their ridiculous 50% performance fee Do you have a source?

cltby 3y ago

> (and unless you are a crook, there is not) What sort of shenanigans do you think profitable automated traders are engaged in?

worik 3y ago
Insider trading Market rigging Survivor bias (not shenanigans that one)
- User3456335 3y ago
  Insider trading: there's a lot of information freely available that can be used to make predictions Market rigging: the market can be affected by your behaviour without you rigging anything Survivorship bias: this can be argued for any competitive industry. Don't engage in it unless you're good at it.
  - worik 3y ago
    Sigh! People really want to believe there is some magic trick to trading. There is not. > Insider trading: there's a lot of information freely available that can be used to make predictions The efficient market hypothesis deals with that. The freely available information is priced in (nothing is free, and it takes time) > Market rigging: the market can be affected by your behaviour without you rigging anything I am talking of things like: https://en.wikipedia.org/wiki/Libor_scandal https://en.wikipedia.org/wiki/Libor_scandal and https://en.wikipedia.org/wiki/Forex_scandal https://en.wikipedia.org/wiki/Forex_scandal. These are incidences where the traders got caught. Given the millions at stake, do you think many are caught? To win at active trading you need an edge nobody else has. There have been cases of traders having insights not known to others. Pairs trading is the only example I know of. In that case the people who kept it secret made out like bandits for a few years, then the secret leaked and it is no longer profitable The most common legal edge players have is scale: They are huge and nimble and can take advantage of opportunities at scale. It goes really well, until it does not, and another trading house collapses. The most common edge I believe, after studying it for a decade, is crime. Big trading house, big crime

paulpauper 3y ago

then how does renaissance technologies make so much? it can be done...no one say it is easy, but it's doable

bluepizza 3y ago
RenTech remains a touchy subject, as their only high performing fund is closed to external investors. Their available to the public stuff performs much less than their closed fund.
- bmitc 3y ago
  Medallion was open to external investors. They closed it because Medallion has an approximate $10 billion cap before it moves the market too much and starts losing money and thus they just keep it to themselves. So they no longer need capital from outside investors. And why make others money when you can make yourself money? Their other funds can't just do what Medallion does, otherwise you are just increasing the cap of Medallion and thus hurting it, which is why they aren't as successful.
  - paulpauper 3y ago
    which is why they aren't successful. fixed it
  - bluepizza 3y ago
    It was closed to external investors in 1993, and had gains of 98% in 2008, in the middle of an economic meltdown. How come they figured it out for one single fund, but aren't able to make any alternative strong strategies except the secret and closed one?
    - TheAlchemist 3y ago
      Strategies have limits on how much money they can manage. By limits, I mean - either it's impossible to put in more (could be because there are no more counterparties to trade with above a certain amount) or it would significantly decrease performance.

1letterunixname 3y ago

LTCM enters the chat

tim333 3y ago

Transaction costs can be surprisingly low these days. Like in crypto you can get 0.02% maker fees or less and in stocks it's sometimes free. See Alpaca for example https://brokerchooser.com/broker-reviews/alpaca-trading-review https://brokerchooser.com/broker-reviews/alpaca-trading-revi... - "Commission-free stock and ETF trading"