It certainly is worth the effort for most, but, as you said yourself, finding trust and cohesion is very hard. The reasons why it's a great model are obvious, to list a few: - diversification for each partner. You get a smoothed-up PL profile based on a number of strategies on a number of asset classes. Also, you are not forced to do trades when you don't see any opportunities (I have seen a lot of people come up with really dumb ideas just to "throw shit at the wall and see if it sticks"). - verification of alpha. A person with a different background might be able to spot an error in a trade logic that would elude the trader himself. For example, I had my former boss always ask me "yes, I see the effect and it back-tests well - but why is it there?" - cross-pollination of ideas. If someone comes up with an idea that works (or does not) for a specific security or an asset class, it's worth testing or modifying it for something else. For example, a high frequency trader I know gave me an interesting idea on how to optimize delta hedging that I would have never thought of. - skill pooling. I might be a very good vol trader and someone else has a good call on market direction and yet another guy has good macro/fundamental insight. Combining these skills together improves probability of extracting alpha.
Great stuff sle - but why doesn't someone embrace these ideas in a prop firm ? With almost all prop firms today, you're "on your own".
Yup. And in investment banks case it falls under sales and trading revenue. Not that it all is profitable as costs like salaries aren't included.
I agree that these are the benefits, I'm just not sure that for an individual who is already successful, the cost of searching for partners is low enough to justify the benefits. For some, yes, but I would think those who would benefit at a higher level than the costs incurred would be those who had more marginally-profitable strategies to begin with, which would mean that their most appropriate partner would be another marginally-profitable independent trader ("appropriate" in the sense that both bring approximately the same skill level to the partnership), but, among profitable independent traders, the marginally-profitable probably make up the largest segment, assuming an 80/20 distribution of profits among profitable independent traders, where 20% of them make 80% of the profits, which may even be overly generous, since I have seen some data indicating that something like 5% of profitable independent traders make 80% of the profits. So, my pool of potential partners is a fairly large proportion of the overall pool and the marginality of their profitability means that the risk of their strategies becoming unprofitable with even a slight change in market dynamics is high. So, I go through all of the trouble to find someone with whom to partner and, soon enough, their strategy starts to fail. Now, some of what I am putting down here is speculation, but since we're trying to address why a specific business model doesn't appear to frequently in the marketplace despite clear potential benefits, I'm kind of "backing in" to an explanation. The bottom line is that really profitable independent traders don't need partners, or, if they partner, it will most likely be with an established firm they network their way into by means of their superior track record, not with the guy with a barely profitable strategy which could go kaput at any moment, because the primary need for highly-profitable independent traders is typically capital, not ideas or diversification. And, when two (or more) guys with barely profitable strategies get together, the likelihood that all of them will remain profitable is low and, inevitably, the ones who do remain profitable will kick the ones who become unprofitable out of the group, which ultimately will leave everyone back where they started, only now they've taken time out from enhancing their strategies to pursue these failed partnership plans, leaving them, in some sense, worse off because of the opportunity cost of time spent not enhancing their strategies. If you want, you can say this is a "market failure" primarily due to search costs. As much as I think that markets are the best mechanism for enabling coordinated action, they do sometimes fail. An analogous situation occurs at top universities every year during recruiting season when there will, after all is said and done, be a handful of really top-caliber students without jobs. If only those students could get themselves organized or be organized by an outside investor, they could probably create a company which, on average, was more talented than many companies already existing in whatever market they would enter. But, alas, this does not happen and, I think, for some of the same reasons that there are very few firms matching the description of what you laid out. Hey, I could be completely wrong here, too, but this is how I see it and you yourself said that this seems to be a space where there should be more firms matching your description, but aren't, so something obviously is stopping it from happening.
You do know that the commissions that investment banks charge HF and others is for the research. It falls under Research Sales. That excludes tags analyst get. There is an internal conflict between Sales Trading and Research Sales. If somebody called you with an idea that made you money you would give them the trade. That is the theory.
http://www.zerohedge.com/article/case-quant-trading-industrial-sabotage-about-destroy-goldman-sachs Heres an idea... This has all been swept under the rug. BAC, JPM have similar trading records. It is not a group of great traders. Its a group of financial mathematicians and programmers.
The banks are doing algorithmic trading. I witnessed this at JPM when I was contracting there last year. They were doing it in the Forex spot market. However, this was not a big portion of their overall trading volume.