Journey from investment bank to independent automated trader

lolatency · Jul 2, 2009

Quote from ezbentley:

My understanding is that high-frequency strategies are either market-making or stat arb. Do you agree or are you aware of any other type of HF strategy? I am apparently a newbie trying to satisfy my curiosity.

Since high-frequency trading requires very low commission and very good execution, do you think an independent retail trader can build an infrastructure to trade high frequency profitably?

On the street, it generally means spread extraction, rebate trading, stat or index arb.

I think the independent retail trader generally can't play spread extraction in liquid names, and rebate trading is out of the question. Stat arb is my retail approach, but how high-frequency I can get really depends on the data and the commission structure I get.

ezbentley · Jul 2, 2009

Quote from lolatency:

but how high-frequency I can get really depends on the data and the commission structure I get.

Are you implying your stat arb model is actually scalable in terms on holding period? Wouldn't the expected profit decrease with longer holding period since the model ideally works with higher frequency?

lolatency · Jul 2, 2009

Quote from ezbentley:

Are you implying your stat arb model is actually scalable in terms on holding period? Wouldn't the expected profit decrease with longer holding period since the model ideally works with higher frequency?

The holding time loosely scales with the time-frame I'm trading, yes. The profit potential doesn't decrease over a long period of time unless there's a structural break, and by structural break I'm referring to a formal definition.

As a matter of practicality, there's no benefit to holding because structural breaks can and do happen, just on account of short-term news. I hope that makes sense.

asiaprop · Jul 2, 2009

just wondering how can a strategy that trades with a half-life of seconds be based on statistical arbitrage? Maybe we play with definitions here but I consider most short term market moves random and white noise unless you approach the whole story as a market maker, earning the spread. I am not familiar with market making in cash markets but more on the equity derivatives side.

I know of some guys who trade high frequency strats prop based on flow and pick up in short term momentum but I would not define this as stat arb in the traditional sense. To me stat arb is the exploitation of divergences from the mean (however derived) beween two or more assets that generally highly correlate.

Calling this even arbitrage is in my opinion an insult to highly paid financial mathematicians who often very successfully find most optimal hedges against exposure resulting from exotic derivatives that others are either unable to correctly price due to lack of understanding and technology.

To comment on your last question I think its impossible to trade high frequency retail unless you are making markets and try to extract the spread, any other high frequency trading will eat you alive due to transaction costs. That last part is just my opinion I dont trade such strategies so you are much better off asking TSGannGalt or LoLatency among others.

Quote from ezbentley:

My understanding is that high-frequency strategies are either market-making or stat arb. Do you agree or are you aware of any other type of HF strategy? I am apparently a newbie trying to satisfy my curiosity.

Since high-frequency trading requires very low commission and very good execution, do you think an independent retail trader can build an infrastructure to trade high frequency profitably?

GCSICLRBC · Jul 2, 2009

Quote from lolatency:

I work in what used to be known as an investment bank. I'm somewhat miffed about lots of effort and no reward from 2008, and feel as if I should work towards independence. Unless they give me a serious raise at work (and I did ask for one), I'm out and I'm either going to find a job that gives me what I want or I will do it independently.

I work in a fully automated group, and they have access to much better technology than what I will have access to. I've outlined some goals I want to achieve.

Goals:

- Build trading framework that is manageable by one individual
- Quantify risk very cleanly, make SURE I have an edge
- Be up and running before July/August
- Trade intraday only, no overnights.

Tools I will use:

- Python, C, C++, maybe C#, R, Mathematica

Tools I still need:

Clean backtesting framework. I may need to author my own, if I can't find something that will do it for me.

The journal will progress from paper-trading automated strategies to real strategies. The first part will post the back-test results that I do have, and how I plan to go about doing things.

How come most of you quant guys can't look @ charts @ trade with discretion to make money? It's not that hard.

You all spend countless days & hours programming & focusing on the technology when you could be swinging 50-lots @ a time in ES & CL, etc.; do you not know how to trade?

Or are you trying to create a program that will trade your style so you can sit on a beach somewhere?!

::Never understood this::

asiaprop · Jul 2, 2009

so what is YOUR edge?

Quote from GCSICLRBC:

How come most of you quant guys can't look @ charts @ trade with discretion to make money? It's not that hard.

You all spend countless days & hours programming & focusing on the technology when you could be swinging 50-lots @ a time in ES & CL, etc.; do you not know how to trade?

Or are you trying to create a program that will trade your style so you can sit on a beach somewhere?!

::Never understood this::

Transatlantic99 · Jul 2, 2009

Quote from asiaprop:

just wondering how can a strategy that trades with a half-life of seconds be based on statistical arbitrage? Maybe we play with definitions here but I consider most short term market moves random and white noise

wow, are you serious?

what do you think is easier to predict, what is going to happen in the 50 milliseconds or what is going to happen in the next 1 year??

asiaprop · Jul 2, 2009

absolutely in the next year, no second doubt about it!!! Unless you have access to order flow maybe you can point out where you take your prediction from what the next tick is gonna be and especially how you plan on capitalizing on such knowledge.

By the way, I am not in the business of predicting, I trade AFTER catalysts hit the market, I am no crystal ball reader.

Quote from Transatlantic99:

wow, are you serious?

what do you think is easier to predict, what is going to happen in the 50 milliseconds or what is going to happen in the next 1 year??

CloroxCowboy · Jul 2, 2009

Quote from Transatlantic99:

wow, are you serious?

what do you think is easier to predict, what is going to happen in the 50 milliseconds or what is going to happen in the next 1 year??

Neither can really be "predicted" due to chaotic factors, but both can be traded profitably.

Transatlantic99 · Jul 2, 2009

Quote from CloroxCowboy:

Neither can really be "predicted" due to chaotic factors, but both can be traded profitably.

the difference is, at the 50ms end of the spectrum you will be able to more quickly generate a statistically signficant number of trades while being able to recalibrate and refine your model and adapt to changing market conditions...

on the other end of the spectrum, not so much so...

theoretical profits will also always be greater at the high frequency end of the spectrum due to the length of the coastline of the price path, but that is a different argument...

good luck