Let's say I have a trade that has a slight edge on the order of tens of dollars per day, and it trades about 500 shares a day. Over the course of a year, it creates a few thousand dollars. But, in the short run, as I watch it, it's not an amazing trade. No better than working at McDonalds, other than that it's automated and can be run in conjunction with working at McDonalds. If I have (and this is just a fake value) 100 million dollars and not all of my capital is allocated, should I take this edge? And what about if I only have $10,000 (since this is ET, reality may as well be I have 2k dollars and my mom let me put a computer in the basement and open a brokerage account yester-- hang on, brb, mom yelling at me to get a job! .....) I guess, my question is, what kind of "edge" do you throw away in the absense of having better edges elsewhere? If it's purely a capital allocation problem, it's obvious that the money should be allocated towards the better edge. However, if there is infinite capital or lack of a better edge, is this just a personal call? I am more than willing to bet you guys have lame, junky edge strategies. One high frequency firm in Chicago I interviewed said in some cases they'd trade millions of shares and end up with $100 a day, if that, but that it made a few thousand dollars at the end of every year. So I know people do it. Is this kind of like settling for the ugly girl when the bar closes, or is it practical at all?
first, that firm in chicago trading millions of shares a day for $100 avg either is i hope an exaggeration or they're unfortunately complete idiots. it's easily the tiniest edge i've ever heard of and without knowing any details i can guarantee the risk they're taking to move millions of shares a day does not justify that reward. to your questions, you asked a few, they're not really related, so i'll help refine them for you. 1) with infinite capital (or let's just say a large amount) quality of an edge is mostly judged primarily with it's scalability, ie. how much can i move before reaching the boundaries of liquidity in the target market. you may have an edge that bats 99% and pays 3:1, but if it's only scalable to $1M/yr, it's not that useful when you're managing $1T. 2) what you personally should concentrate on is where you make the most consistent money. if it's a thousand a year, so be it... especially if it can scale. i started with $2.5k and made $2.5k the first year, $6k the next, $25k the next... took me 5 years to start making real money. i could have taken loans etc. to push my growth along, but i was unable to come up with a risk model that would allow me to bet bigger if i didn't want to put the loaned funds at risk or increase the variance in my returns. if i could give you any advice, it would be that survival in this business, if you're not dicking around with opm, depends on paying more attention to the projected variance of your returns (risk) than to overall profitability. with tiny accounts, the amount to which you can keep the variance of growth under control, the more likely you'll be able to find continued success when you scale that up. it really is paramount, and ultimately, is the single defining factor of what distinguishes a good trader from a great one. good luck.
I've been working on 2-3 strategies that will trade for ~$0 but provide liquidity and volume - both of which will aid my other strategies. Your Chicago firm may have been telling you the truth but you don't know the whole picture. Reality is you have to weigh the cost of your fees & programming and overhead - how much does it cost to get the thing set up? If it's pretty cheap why not set it up and let it run? At some point too how much is your time worth and how much intra-day or daily/weekly time/maintenance does the thing need? Something that trades millions of shares for ~$0 may save the firm $10k/day in other strategies but does that apply to you?
If it makes money and I have the capital (which I always do since I do prop) then of course I run it. Even if it makes 50 dollars a day that's 1000 a month. Enough to make payments on a car, or take a couple nice trips a year. Tiny edges are fine if they're scalable. My longest running strategy only nets 2 cents per share on average. After trading 1 million shares a month that's 20K.
Perhaps the high frequency trader means that hes running 6-12 uncorrelated strategies that make only $100 a day on average, but what he likely didn't tell you is that they are run at the same time... so its actually $600-1200 a day profit... But for your info, you probably don't want to run a trading firm thats only make $1200 a day if it has 5 employees....
My gut feeling was that they were running a strategy that was correct in a purely theoretical sense, but one that couldn't cut it in terms of technology. I figured they kept running it as a kind of feedback mechanism to tell them whether their technology was improving with regards to execution in some kind of a race to be first somewhere. However, rather than take that trade off the books or turn it on whenever they wanted information, they just let it run because they were comfortable with the risk, even in a churn situation. Of course, I am not them. I'm a Joe Blow average retail-trader from Alabama that sits in a plain joe-blow office, with a scribbled up whiteboard, some nascar posters, and a small paper pad advertising cholesterol drugs. This is why the question of capital allocation to minor edges matters more to me. It's the difference between hot dogs for dinner and mac'n'cheese, not caviar or kobe beef. Thanks for responses on thread, and keep them coming.
i have to agree with dolan, at all costs, avoid the drawdown that take you to the bridge where shit flows under.
I would judge it by Sharpe ratio or something similar. You could take a tiny edge and lever it up until it makes x dollars per day, but you'd be taking way too much risk. I am assuming anything with an annual Sharpe under 1 is not up for consideration.