Proprietary Trading Firms - A Different Business Model

I could get by initially without any paid services or storage capabilities, maintaining a no-cost monthly upkeep as long as needed using a program that would work off my algorithm to execute trades and analyze data faster than I ever could, letting it run using virtual or real money to test it over a chosen time period; and then move on to a higher quality product if it seemed to work.

Or alternatively, if I accumulate the capital to jump to the send option and am totally confident in my system, I could do that instead, adding some functionality and an overall increase in user experience. If I have the capital, I will be able to fund some pricier charting libraries (can cost up to $1500 a month) and choose what I like and don't like. That way, by the time I'm ready to go live, I'll have a product I like that works exactly how I want. From there, the decision would need to be made on whether I want a piece of software or a website.

I'll include the following, but I don't think it really applies to me...

(Algo trading servers that run closer to NYSE servers execute orders faster. I will be in competition with people doing the same thing with their own algo and this will inevitably lead to overlap in purchase points. If their submission is 5 milliseconds faster than mine, then they win and I lose. How this applies is extremely evident in level 2 market data—specifically graphs showcasing current orders. Relocating servers to Wall Street, not just New York, is highly advisable at this point and very expensive. For commodities I'd need the same thing, but in Chicago.)

Keep in mind however that products like these will take trial and error to find exactly what I like. Dedicated UI/UX developers generally make this part of the process a lot smoother and are probably worth the added expense. It's likely to save a lot of headaches for both me and the backend developers I hire to build the product.
 
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poopy said:
How do you make the the time for the prop firm while trading these $3 nadex bets?
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What $3.00 Nadex bets? I am not going to make it a habit of posting the amounts from my live accounts, but just as ONE example, here is a record of the LAST trade I made on Friday...

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As you can see, this was for $70 MORE than the $3 you cited. And having just sent my "finalized" trading guidelines to the printer (which I will be picking up later this afternoon), I anticipate that it won't be long before I am generating funds in my live account more in line with what I'm currently achieving in my demo account...

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But, this is not good. Three dollars or seventy-three dollars, why should I care as long as I'm making progress? Congratulations! You have managed to provoke me to waste my time with something I should regard as being of absolutely no consequence in my life, and I fear you might even be able to repeat this feat!

Accordingly, to prevent this from happening again, you are now on my ignore list. (Let me get back to looking for a programmer in the Los Angles area who can help me automate my system so that NONE of the $73 trade opportunities it's able to identify slips by me, and I can scale up to $5000 payouts like I did in my demo account as quickly as possible, if you don't mind.)
 
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Question from Quora

What are the investment strategies of James Simons/Renaissance Technologies? I understand he employs complex mathematical models, along with statistical analyses, to predict non-equilibrium changes.

Answered by James Baker...

I have known Jim Simons, Bob Mercer and Peter Brown since 1965, 1974, and 1979, respectively. Renaissance has also hired senior researchers who had formerly worked for me for years. None of these people has ever told me anything about Renaissance's investment strategies. My observations below have been obtained entirely from publicly available records.

In particular, the core strategy is publicly known. It's the details that are proprietary. There are millions of details, and they are essential to the performance. However, the question was about strategy, so that is what I will try to answer.

The core strategy is portfolio-level statistical arbitrage carried to the limit and executed extremely well. Basically, portfolios of long and short positions are created that hedge out market risk, sector risk and any other kind of risk that Renaissance can statistically predict. The extreme degree of hedging reduces that net rate of return but the volatility of the portfolio is reduced by an even greater factor. The standard deviation of the value of the portfolio at a future date is much lower than its expected value. Therefore, with a large number of trades the law of large numbers assures that the probability of a loss is very small. In such a situation, leverage multiplies both the expected return and the volatility by the same multiple, so even with a high leverage the probability of a loss remains very small.

The general properties of the strategy can be deduced from the statement of Renaissance for the Hearing of the Senate Permanent Subcommittee on Investigations, dated July 22, 2014.

Renaissance collects "all publicly available data [they] can that [they] believe might bear on the movement of prices of tradable instruments--news stories, analysts' reports, energy reports, crop reports, weather reports, regulatory findings, accounting data, and, of course, quotes and trades from markets around the world."

Their models "use this data to make predictions about future price changes."

The hearing was specifically about the Medallion fund, about which the statement says "The model developed by Renaissance for Medallion makes predictions that are profitable only slightly more often than not."

With these properties, there were two reasons that Renaissance would like to have a call option on the portfolio that it has designed: leverage and protection against Black Swan events.

Leverage is needed because, unleveraged, the rate of return of the portfolio is low. However, because the volatility is much less than the expected return there is no limit to how high the leverage could be without increasing the probability of a loss, at least according to the models. Through years of use and refinement, Renaissance knows that its models are very reliable. However, they also know that there is always the risk of something happening that is not covered by the models, in particular something that is outside prior experience, which is called a "Black Swan" event.

Thus, a call option is ideal: it can provide high leverage and can provide protection both against the very low probability of a loss greater than the option premium and also against the unknown probability of a possibly catastrophic loss due to a Black Swan event.

We know all this because these are the business reasons for Renaissance accepting Deutsche Bank's proposal of barrier options. Basically, Deutsche Bank, and later Barclays, sold the equivalent of a call option to Renaissance on the reference portfolio that Renaissance designed.

Of course, writing an uncovered call on the Renaissance portfolio would be equivalent to betting against Renaissance at high leverage, which would seem to be a foolish thing to do. The banks covered these options by buying all of the securities in the portfolio. Thus the bank's position was equivalent to a covered call. In other words, the banks' profits and risks were essentially equivalent to writing a put option, which is a bullish position. Because the volatility was very low the probability of a loss for the bank was low and the probability of a loss greater than the option premium was even lower.

Except for the Black Swan risk. The probability of a Black Swan risk is unknown. Part of the premium paid by Renaissance and earned by the banks was equivalent to insurance against Black Swan risk. I don't know if the amounts of the premiums were publicly disclosed.

There were many more details in the statements and the testimony at the hearings. However, discussion of further details would detract from the important points that I have made above. In particular, the hearings themselves were about tax issues not about investment strategies. Renaissance explicitly asserted, under oath, that its "models do not factor in tax rates when making trading decisions." Therefore, tax issues, although they might be very important, are not part of the "investment strategy" at least as reflected in the models, so they are outside the scope of this particular discussion.

The reference portfolio was highly dynamic. There were thousands of trades per day. To accomplish this, the banks gave RenTech's computers direct access to execute trades through the banks' trading desks.

This arrangement was part of what created controversy about what should be the proper tax treatment for this particular case. However, I am not a tax lawyer and will not try to analyze those issues. However, if you want to hear more details on the automatic execution of the trades, and questions about how much human interaction was present, that is all discussed in the live testimony before the subcommittee.
 
expiated said:
What $3.00 Nadex bets? I am not going to make it a habit of posting the amounts from my live accounts, but just as ONE example, here is a record of the LAST trade I made on Friday...

View attachment 339137

As you can see, this was for $70 MORE than the $3 you cited. And having just sent my "finalized" trading guidelines to the printer (which I will be picking up later this afternoon), I anticipate that it won't be long before I am generating funds in my live account more in line with what I'm currently achieving in my demo account...

View attachment 339138

View attachment 339139

But, this is not good. Three dollars or seventy-three dollars, why should I care as long as I'm making progress? Congratulations! You have managed to provoke me to waste my time with something I should regard as being of absolutely no consequence in my life, and I fear you might even be able to repeat this feat!

Accordingly, to prevent this from happening again, you are now on my ignore list. (Let me get back to looking for a programmer in the Los Angles area who can help me automate my system so that NONE of the $73 trade opportunities it's able to identify slips by me, and I can scale up to $5000 payouts like I did in my demo account as quickly as possible, if you don't mind.)
More...


lol you're risking 9600 to earn 400. Clown shoes.
 
QuantConnect is an open-source, cloud-based algorithmic trading platform for equities, FX, futures, options, derivatives and cryptocurrencies.

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expiated said:
What $3.00 Nadex bets? I am not going to make it a habit of posting the amounts from my live accounts, but just as ONE example, here is a record of the LAST trade I made on Friday...

View attachment 339137

As you can see, this was for $70 MORE than the $3 you cited
More...

You're blowing yourself over shorting $44, buying 119, and losing $73 all in?
 
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