Going public with a system ruins it?
- Thread starter Martini
- Start date
This topic has been debated before and will be debated again. But I don't think the topic's original question is the right one.
I think the better question would be, if 10 others started competing with me by trading my same size at my prices would this impact my results? In other words how much liquidity can my market support at my prices? Would my method stand up if someone traded it at 100x my size at my same prices? What about 1000x my size?
Liquidity for a given market is limited. At some point the extra competition for fills at given prices will leave you with the short end of the stick. I think that is the main reason why more professional traders don't share their specific setups - they don't want the extra competition for fills.
Now the question could be asked, can a method be shared that will enhance rather than detract from my ability to get filled at my prices? Are there methods "out there" that have been released to the general public that are designed to do just that?
I think the better question would be, if 10 others started competing with me by trading my same size at my prices would this impact my results? In other words how much liquidity can my market support at my prices? Would my method stand up if someone traded it at 100x my size at my same prices? What about 1000x my size?
Liquidity for a given market is limited. At some point the extra competition for fills at given prices will leave you with the short end of the stick. I think that is the main reason why more professional traders don't share their specific setups - they don't want the extra competition for fills.
Now the question could be asked, can a method be shared that will enhance rather than detract from my ability to get filled at my prices? Are there methods "out there" that have been released to the general public that are designed to do just that?
The reason goes _much_ deeper than that and it was hinted at previously by resinate in his post:
If you have a system that has an edge, and you are in this for the long term, then don't you want someone on the other side of your trade to lose to you?
People automatically assume that there will _always_ be someone on the other side of their trade, but that is false for a given timespan and a given instrument at a given price. In other words, as markets become more efficient at correcting for incorrect prices, they adjust and the faster they adjust, the less your edge.
If "your system" accurately more often than not is able to tell that a price for a given instrument is not corrected for, and the information that your system output was used by every trader in existence, the other traders would adjust for that price and assuming they were not slow you would not be able to take advantage. Take that away on the entry and exit and you have just given away the "entry/exit edge."
It is always so funny to me when I see these kinds of threads started. There are a myriad of examples of how something that has become public knowledge or implemented by more and more maket participants has taken an edge away. For example, think about the early 90s when access to datafeeds and computing power made implementing Black Scholes in realtime a reality. The people that did it first made a HUGE amount of money. The word spread fast and many others started doing it. That particular edge died when retail traders got access to fair value calculations for options prices in software that costs $50 a month to lease. That particular edge died when there were too few misinformed market participants to take the losing side on the entry and on the exit.
nitro
If you have a system that has an edge, and you are in this for the long term, then don't you want someone on the other side of your trade to lose to you?
People automatically assume that there will _always_ be someone on the other side of their trade, but that is false for a given timespan and a given instrument at a given price. In other words, as markets become more efficient at correcting for incorrect prices, they adjust and the faster they adjust, the less your edge.
If "your system" accurately more often than not is able to tell that a price for a given instrument is not corrected for, and the information that your system output was used by every trader in existence, the other traders would adjust for that price and assuming they were not slow you would not be able to take advantage. Take that away on the entry and exit and you have just given away the "entry/exit edge."
It is always so funny to me when I see these kinds of threads started. There are a myriad of examples of how something that has become public knowledge or implemented by more and more maket participants has taken an edge away. For example, think about the early 90s when access to datafeeds and computing power made implementing Black Scholes in realtime a reality. The people that did it first made a HUGE amount of money. The word spread fast and many others started doing it. That particular edge died when retail traders got access to fair value calculations for options prices in software that costs $50 a month to lease. That particular edge died when there were too few misinformed market participants to take the losing side on the entry and on the exit.
nitro
Of course you want to be able to get your order filled, but you don't want the majority of traders on the other end of the trade. If they are, you'll be on the side of the smaller crowd and your trade will be a losing one.
Assuming there is someone on the other side of the trade to get your order filled, wouldn't you want more people using your system to improve your odds of being on the side of the bigger crowd?
Well, I sort of do but I will tell you this, it depends on how you take money from the markets.It depends on the system.
If you think you can find a flaw in the market and being the only world in the whole financial world (where there are many big brains btw) to know the secret, then sure keep it for yourself.
If you trade moving averages or support and resistance, tell it to everybody and gain credibility with your trades. The more people think google as reach it's top, the more likely it will.
The money management part of the system, there's no harm sharing it.
If someone tells you he's got a winning system based on some sort of occilator, don't belive that.....
If you think you can find a flaw in the market and being the only world in the whole financial world (where there are many big brains btw) to know the secret, then sure keep it for yourself.
If you trade moving averages or support and resistance, tell it to everybody and gain credibility with your trades. The more people think google as reach it's top, the more likely it will.
The money management part of the system, there's no harm sharing it.
If someone tells you he's got a winning system based on some sort of occilator, don't belive that.....
The answer is quite simple.
You want the majority of traders to be on the opposite side of the market when you are taking your position. Once you are in your position, you want the majority of traders to move over to your side of the market.
All the principles of something like covertible arbitrage have been documented and in the public domain for decades - yet there are even more profitable firms doing it now than there were ten years ago.
It's not as black and white as some have suggested. The problem is that the "if you make a system public it won't work any longer" idea is that it presumes too much about what a "system" is and what it's being publically available means to the overall market dynamics.
Whether any given "system" would become dysfunctional if made public depends on the nature of the system, the overall liquidity of the market(s) it can be used on, realistically how widespread its use will be, etc.
750K ES contracts traded today. If you and 10,000 of your closest friends traded 10 contracts each today you'd account for only 13% of the volume.
In the SPY, you and your 10,000 friends would have to trade 1,000 shares each to account for the same fractional volume.
On the QQQQ, you'd have to trade about 1,500 shares each.
If a "system" is fundamentally based on a small "edge" that could end up being arbed away, then sure it could disappear if enough people use it. Yet firms routinely use buy/sell systems to capture temporary mispricing between index futures and cash. The activity then soon renarrows the gap but the fact that everyone in the biz knows all about it and a lot of firms engage in it -- the "system" hasn't been eliminated.
In the case of the "systems" applicable to something like convertible arbitrage in which the trades are fundamentally based on identifying asset mispricings and risk mitigations and everyone knows all the mechanics and methods -- and yet the market is so large that even though the subject has been covered ad naseum in books and publications, more convertible hedge volume is done today (and more profits reaped) than a decade ago.
As you noted, there's inexpensive software available to assist options traders. Yet, it hasn't eliminated the ability of many traders to successfully engage in something like gamma scalping.
So does making a "system" available to the public render it useless? Yes - if it's a weak, fragile, or narrow system or designed for relatively illiquid markets. Otherwise, it'll probably have little or no impact - especially given the scale of use that most "systems" ever see.