Questions about portfolio trading

B

BhillYachtsman

It has been fun, but the club is closed. I am a former exchange market participant, and personally disgusted with the fact the exchanges went public for profit. It’s not worth it to provide temporary liquidity in this environment of constant program trading. We are on our way to major fragmentation here lads. My average post order size dwindled down to 300 shares at a time, with most being autoexec. The few floor brokers with any order flow left, scrapping for pennies, as they all get orders in small bursts. If a market does need liquidity, why the hell would I want to work to stabilize a price when a program is just waiting for us to buy and lean on my post position with reserve orders panicking the original institutional order? What ever happened to letting the stock lift Evergreen Funds? Enjoy the new hybrids and walk the book till your blue in the face, I’m done with this phase.

That brings me to the original point of the post. I’m looking at alternatives in this market. Conventional prop trading doesn’t interest me, though some of my colleagues ended up there spinning their wheels. There is this one option with a private equity fund I am looking at that has a more modern approach to the markets. My costs would be .01 a share, and if I use a regional floor broker to execute .02 a share. This is cheap for prime brokerage. Portfolio compensation would be 90% of net. Instead of locking 70% of my net worth to the fund, my stake would be 50K, not bad at all. Floor guys are probably familiar with them.

My question is to those who have experience trading behavioral finance models with a quantitative program algorithm. What’s the max number of positions you could manually handle at once. As in say you have multiple valid signals, at what point do you stop adding positions to the portfolio, would you use the concept of portfolio heat even trading intraday? I know the emphasis in this style trading is not on charts, would you just trade the overall portfolio P&L? When a good market wide distribution event occurs in your favor, do you close out the portfolio all at once, or pick and choose positions,trying to maximize each ones individual gain? Finally can anyone give me the lay mans explanation of kurtosis, and leptokurtic? The way these guys describe what I’ll be doing gives me a headache, just give me the signals and I’ll trade them.

Thanks in advance..
 
I guess I would say I trade in a similar manner to the one proposed to you. If your “actually” portfolio trading expect to carry around 20-30 positions at a time in various equity sectors, adding and taking off as each position capitulates or stops out. The point would be to stay afloat to slightly positive and try to catch the big move. This requires a different outlook then say a scalper. Your dealing more with statistical portfolio expectancies where the scalper deals more with pure hit rate probability. Very different game, though I find the former less stressful and far more profitable.

Portfolio heat is just the max risk for the entire portfolio if all your positions are exited at a given time at once. Never have had it happen to me, but that’s what it means. You would use this concept the whole time your trading, and I think it was Ed Sekoyta that said it shouldn’t exceed 20% of the total portfolio.

Trade with the P&L…Look at the chart if the P&L in one position jumps rapidly. Don’t spend to much time worshiping the charts. Try to choose positions, but if the market is caught off guard and rips during lunch.. Book it all.. you can always reestablish later.

Kurtosis has to do with a normal distribution and a fat tail.. Really I don’t know maybe a quant guy here can elaborate. Though I don’t think a quant would give you the simple answer your looking for. Where the heck are you getting access to prime brokerage with only 50k? Congrats on your opportunity.


Quote from BhillYachtsman:

It has been fun, but the club is closed. I am a former exchange market participant, and personally disgusted with the fact the exchanges went public for profit. It’s not worth it to provide temporary liquidity in this environment of constant program trading. We are on our way to major fragmentation here lads. My average post order size dwindled down to 300 shares at a time, with most being autoexec. The few floor brokers with any order flow left, scrapping for pennies, as they all get orders in small bursts. If a market does need liquidity, why the hell would I want to work to stabilize a price when a program is just waiting for us to buy and lean on my post position with reserve orders panicking the original institutional order? What ever happened to letting the stock lift Evergreen Funds? Enjoy the new hybrids and walk the book till your blue in the face, I’m done with this phase.

That brings me to the original point of the post. I’m looking at alternatives in this market. Conventional prop trading doesn’t interest me, though some of my colleagues ended up there spinning their wheels. There is this one option with a private equity fund I am looking at that has a more modern approach to the markets. My costs would be .01 a share, and if I use a regional floor broker to execute .02 a share. This is cheap for prime brokerage. Portfolio compensation would be 90% of net. Instead of locking 70% of my net worth to the fund, my stake would be 50K, not bad at all. Floor guys are probably familiar with them.

My question is to those who have experience trading behavioral finance models with a quantitative program algorithm. What’s the max number of positions you could manually handle at once. As in say you have multiple valid signals, at what point do you stop adding positions to the portfolio, would you use the concept of portfolio heat even trading intraday? I know the emphasis in this style trading is not on charts, would you just trade the overall portfolio P&L? When a good market wide distribution event occurs in your favor, do you close out the portfolio all at once, or pick and choose positions,trying to maximize each ones individual gain? Finally can anyone give me the lay mans explanation of kurtosis, and leptokurtic? The way these guys describe what I’ll be doing gives me a headache, just give me the signals and I’ll trade them.

Thanks in advance..
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You mean Ed Seykota…He stated that anyone who risks more than 3% of a portfolio on any one position is a gun slinger. I’m guessing he means a single position itself and not the whole portfolio, with the whole portfolios exposure never going over 20% of portfolio equity.

Yes, they mentioned to me most days would come out either positive or negative, but within a trading range. What their program does is position the portfolio for larger intraday moves. I’m guessing this is where fat tail probability comes in. An approach to maximizing winners. If I am working off expectancy wouldn’t I want to carry as many positions as possible? Maybe more than 20 -30 provided I can handle that many mentally.

Using the P&L as an overall indicator I think is a good idea for portfolio traders, I’m not sure if just waiting for the P&L positions to pop is the best way to maximize the gains though, maybe a logical target and a stop and let the expectancy work itself out. Sometimes simpler is better.

As to my offer from a PE Fund, I don’t want to get into it here. Thanks for your help, and if you want to know PM me and I can elaborate.
 
No no no no… Even though technically when you have a positive expectancy system it would make sense to add frequency into the equation and boost profits. This is all in theory though. In practice when you are intraday portfolio trading, you are standing ready to take positions on and off. So in practice you won’t have max positions on 100% of the time. This leads us back to the other idea of portfolio heat. Though you could theoretically if you could mentally handle tons of positions put them on and manage them, because of portfolio heat, each one would have to be less than 1% risk and sized accordingly. Therefore in practice, you have about 20 positions of 1% exposure, giving you a total portfolio heat back around 20% at any given time. Do a search there are a few of us intraday portfolio style traders out there. There was one thread I remember where the guy was trying to teach everyone how to only look at P&L and level 1 quotes to manage positions. Check your PM. This is a good constructive discussion path we are on, and I will watch it closely to make sure it’s contributions stay that way. :)

Quote from BhillYachtsman:

You mean Ed Seykota…He stated that anyone who risks more than 3% of a portfolio on any one position is a gun slinger. I’m guessing he means a single position itself and not the whole portfolio, with the whole portfolios exposure never going over 20% of portfolio equity.

Yes, they mentioned to me most days would come out either positive or negative, but within a trading range. What their program does is position the portfolio for larger intraday moves. I’m guessing this is where fat tail probability comes in. An approach to maximizing winners. If I am working off expectancy wouldn’t I want to carry as many positions as possible? Maybe more than 20 -30 provided I can handle that many mentally.

Using the P&L as an overall indicator I think is a good idea for portfolio traders, I’m not sure if just waiting for the P&L positions to pop is the best way to maximize the gains though, maybe a logical target and a stop and let the expectancy work itself out. Sometimes simpler is better.

As to my offer from a PE Fund, I don’t want to get into it here. Thanks for your help, and if you want to know PM me and I can elaborate.
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Now I'm frustrated I can't find that thread I wanted to show you, the poster really had some decent insight into managing multiple positions intraday only using level 1 data. If your going to be trading an algorithm of some kind all you will be focusing on is the position management and exits. I wish I could find that thread.
 
I still can't find the thread. If anyone out there knows the thread i am talking about and can find it I would be most grateful.
 
Beware of anyone who mentions the "word" expectancy. It indicates they haven't been exposed to classical Probability theory including density functions, distribution functions, moment integrals, and the like. Usually "expectancy" people are long on opinion and short on facts, in my experience. Occasionally (with probability 50% :-) their opinions happen to be correct, but not often enough to merit risking your capital upon their remarks. This is MY opinion.
 
What the hell are you talking about.. Not every probability distribution has a density function. I think its kind of pompus to make such a generalization. I also like how you pulled your probability of 50% in your statment from out of your ass :-)

My feeling if its good enough to withstand monte carlo simulation, and produces decent fat tail trades with a regularity consistent enough to overcome small losses and still have a positive expectancy, then I for one feel its got merit. I feel most quants would agree. Why are you adding in varibles you don't have? What are you going to do, perform sensitivity analysis on past data? Only thing that matters is how it performs Today. Also if it fits psychologically with your mental make up to execute.

I do get what you were saying though.
Quote from MGJ:

Beware of anyone who mentions the "word" expectancy. It indicates they haven't been exposed to classical Probability theory including density functions, distribution functions, moment integrals, and the like. Usually "expectancy" people are long on opinion and short on facts, in my experience. Occasionally (with probability 50% :-) their opinions happen to be correct, but not often enough to merit risking your capital upon their remarks. This is MY opinion.
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