Pairs Trading

[bestfriend]

GGSAE,

Dude, the flaw IS in the methodology.

You have plenty of info on this thread showing why pair trading is not a winning strategy. So what if some people make money at it?
The others getting upset that they are being dissed deserve what they are getting. They respond with anectdotes and ad homynym statements.

As it's sold here, you have people relying on technicals (I'd hardly call that 'quant') to generate lots of commission dollars.
Why not go learn GAAP, hire yourself some industry experts, analyze all the financials,perform proprietary research etc. I'm not so sure that strategy has alpha either, but at least there are fewer people capable of doing it and it therefore has more of a chance of succeeding. Of course, then you can call yourself a long/short equity trader.

 

[cas7598]

I have been a prop trader since 1994 and have made a career buying stong stocks and selling weak ones day trading and overnights. Especially when the stocks are in play with news (earnings, sympathy plays etc.) My trading is automated with strict money management rules. Guess what it doesn't work anymore. Another guy in my room hadn't made money in years he started trading equity pairs 6 months ago and is making a great great living doing it. There is much more money being allocated to mean reversion strategies by hedge funds and prop shops, then there is to short term trend trading. For every $ I spend buying a breakout there are more $$ pushing those stocks against me. You would think by now that too many people are doing it for it to work anymore but as long as there are suckers like me providing the other side for the pairs guys I guess it will keep working. Maybe if I get away from the news trades intraday trends still work (steel stocks solar stocks etc.). Just an observation and not scientific but a mean reversion strategy seems to be better then a trend startegy for trading the stocks that are in play each day.

 

[nitro]

Quote from cas7598:

... Just an observation and not scientific but a mean reversion strategy seems to be better then a trend startegy for trading the stocks that are in play each day.

Maybe.

Guys like Taleb believe that mean reversion guys make decent money a lot of times (like Neiderhofer), and then give much or all of it back on one or two trades. Even though you may make a living on the edge of this chaos [mean reversion tug of war] for a long time, one day your number comes up.

Imo, the key is to find a way to not get killed when your number comes up. Sometimes it is unavoidable though...Every pair trader has a debacle once in a while that really hurts.

In a market like today though, other than Feb 27 2007, whose afraid of the monster? Even then, the markets went down together. Volatility doesn't swing wildly from day to day, so your expectancy is finite...

Otherwise, I agree 100% with what you said.

nitro

 

[Charly]

Quote from TraDaToR:

Itmediaco, on the level of correlation needed to create a pair strategy, I think the problem in stocks is that the correlation is quite unstable.

Futures correlation are more stable. There are pairs that have 90 % correl for a long time. That is just an impression, no real study. [/B]

~~~~~~~~~~~~~~~~~~~~~~~
Which futures you are talking about??

Thanks
Charly

 

[atticus]

Quote from stereo70:

Shall I produce the PM's from a former Bright Trader who talks about Bob Bright taking over people's pair portfolios when they blow up? Nice gesture, but really just another revenue stream.

You're serious? I assume he's trading these accounts as POA. Man, that's friggin ridiculous.

 

[atticus]

It's a pseudo-short gamma strategy. Notional VaR under stress converges to a short premium analog. The PairCo BS about averaging into losers [tranche] is simply more tripe. Wow! The spread just blew-out, time to add!

I don't see why Bright is so reticent about K1's trading options with haircut. After-all, Bob Bright sold a ton of GM puts in the JBO. Why not allow the "experienced" rank and file access to those markets?

I am referring to risk-treatment, not the current zero-leverage policy at Bright.

 

[GGSAE]

Quote from bestfriend:

GGSAE,

Dude, the flaw IS in the methodology.

You have plenty of info on this thread showing why pair trading is not a winning strategy. So what if some people make money at it?
The others getting upset that they are being dissed deserve what they are getting. They respond with anectdotes and ad homynym statements.

As it's sold here, you have people relying on technicals (I'd hardly call that 'quant') to generate lots of commission dollars.
Why not go learn GAAP, hire yourself some industry experts, analyze all the financials,perform proprietary research etc. I'm not so sure that strategy has alpha either, but at least there are fewer people capable of doing it and it therefore has more of a chance of succeeding. Of course, then you can call yourself a long/short equity trader.

What? I don't use techicals at all...i use a number of probability sets for determining entries/exits...standard deviations, stuff like that....anyways i don't know what you mean exactly when you say it's not a winning strategy. I would say that if one person can make money consistenty, then it's profitable.

I'm net positive everyweek scalping pairs, whether you choose to believe that or not i don't care, and all the posts expressed here in this thread will not cause me to change my methodology.

 

[Don Bright]

Quote from atticus:

It's a pseudo-short gamma strategy. Notional VaR under stress converges to a short premium analog. The PairCo BS about averaging into losers [tranche] is simply more tripe. Wow! The spread just blew-out, time to add!

I don't see why Bright is so reticent about K1's trading options with haircut. After-all, Bob Bright sold a ton of GM puts in the JBO. Why not allow the "experienced" rank and file access to those markets?

I am referring to risk-treatment, not the current zero-leverage policy at Bright.

Now what are we talking about "zero leverage" ? The only thing we do is keep options at 1 to 1, or 25% of your account value of long calls or puts.

The interest on the leveraged short stock is crucial to pairs and mergers.

And to the other poster: The only accounts Bob "took over" were our accounts anyway from our portfolio group who were trading our money. He may have helped someone who was having trouble on occasion, but that's just the way he is. No "revenue stream" when it's our money.

I really don't understand what all the debate is about. Some trader mergers, some trade spreads, some like options, some like futures, some trade portfolios, some day trade, some swing trade, some like automation, some like to try "systems" and some make money, it doesn't have to be an "either or" or "mutually exclusive" set of trading methods.

Some like SUV's and some like hybrids.

Isn't the country divided enough these days without having to fight over trading styles? If you're making money, keep doing what you're doing (possibly add other techniques) - and if you're not making money, then perhaps consider other methods.

Not a big deal guys.....no need for such hostility.

All the best,

Don

 

[atticus]

Quote from Don Bright:

Now what are we talking about "zero leverage" ? The only thing we do is keep options at 1 to 1, or 25% of your account value of long calls or puts.


Isn't the country divided enough these days without having to fight over trading styles?

1:1 limited to 25% of their deposit is offering leverage? I pray you're not running the numbers for Bright Trading

Hostility? In the immortal words of Rodney King...

 

[Don Bright]

Quote from atticus:

1:1 limited to 25% of their deposit is offering leverage? I pray you're not running the numbers for Bright Trading

Hostility? In the immortal words of Rodney King...

I knew we'd find common ground. Now, we can "all just get along."

And, perhaps after we modify our arrangements with Goldman to allow for a more cost effective way to trade options, we may very well open up the whole option leverage thing (I have them "working on it" now, we'll see).

Don