Observation: the market pays you for a service

Wide Tailz · Nov 20, 2011

Consider the following winning trading methods and the services they provide to The Market:

Fundamental - Provide "good businesses" with funding
Trend following - Price Discovery
Band Trading - Price Stability
Range Trading - Price Stability
Spread - "Market Efficiency" - low premiums between similar instruments
Arb - "Market Efficiency" - low premiums between same instruments over small time frames
HFT - Purely predatory, provides no service, high speed skimming

Your thoughts?

Wide Tailz · Nov 28, 2011

I see no Elite Traderz decided to confirm, deny, challenge or question my hypothesis, so I will expound on it further.

Consider what would happen if these professional trading methods were removed from The Market.

Trend following: if no one was speculating on the future demand, prices would settle at some level and volume would die off. Think of what happens when communists try to fix prices.

Range / Band trading: if these masters of mean reversion were missing, the trend followers would rip the market to shredz by creating unnecessary volatility. Remember Jessie Livermore, the "bear raids", etc. Not possible when a huge pyramid of limit orders sit below your raid point.

Arb: Pretty obvious that you could get ripped off at various exchanges around the world if you didn't have the arb crew keeping them honest.

Funny Mentals: In a bull market, they can decide who will succeed or fail. I think George Soros was onto something with his theory of reflexivity (the alchemic nature of the feedback loop of expectations, funding and the ensuing results on a company's fundamentals).

Capital Flow Analysis: (not mentioned previously): if no one was out there looking to exploit cash flow and liquidity problems in various places, it would be similar to the absence of trend followers because volume would dry up to nearly nil.

HFT: no one would believe how low the volume in the latest markets is if HFT'ers weren't jacking up the numbers.

Suckers: (emotional discretionary traders) otherwise known as price chasers - create the overshoots and mispricings that give professionals something to make right with the various aforementioned trading tactics............

ddouglas · Nov 28, 2011

Quote from Wide Tailz:

HFT - Purely predatory, provides no service, high speed skimming

HFT, depending on the strategy employed, definitely falls into one of the categories you listed in the above two posts - especially arb'ing and range/band-trading. It's just done faster & on automatic. So if the above services can be considered valuable to the market, HFT just provides more value more often, right?

Also, all trading is purely predatory - if it benefits the market somehow, then that's an accidental side-effect. People come to the market to try to profit. That is virtually the only reason. No one gets up and says "What can I do to help the market today?"

(for the record, I'm not an HFT, I'm 100% discretionary - I just feel differently about the robots than you do, apparently).

Wide Tailz · Dec 1, 2011

Quote from ddouglas:

HFT, depending on the strategy employed, definitely falls into one of the categories you listed in the above two posts - especially arb'ing and range/band-trading. It's just done faster & on automatic. So if the above services can be considered valuable to the market, HFT just provides more value more often, right?

Also, all trading is purely predatory - if it benefits the market somehow, then that's an accidental side-effect. People come to the market to try to profit. That is virtually the only reason. No one gets up and says "What can I do to help the market today?"

(for the record, I'm not an HFT, I'm 100% discretionary - I just feel differently about the robots than you do, apparently).

Intentions do not equal their unintended consequences.........

However, with a name like GETCO, even the HFT market makers show their true intentions.......

Wide Tailz · Dec 3, 2011

Going further.........

The market moves in self-preservation.

The market always goes where the liquidity is.

The market would die if there was no volume.

Likewise if there was not a ready bid for every offer and offer for every bid.

The market makes a partner with those that preserve it.

And who is the closest, most wealthiest participants in the market? Perhaps the exchange itself, and the specialists in the pit that provide the greatest service........

..... therefore, you - looking to be employed by the market - can act in interest of its self-preservation by providing liquidity, understanding where it needs to go to find a healthy volume of trades, and providing a ready bid and / or offer.

The specific price points necessary to get the biggest paycheck for your service to the market are yours to discover. I believe this takes a bit of experience and trial & error.