Not at all. Returns at the institutional level are not measured strictly as percent of money that account grew by, but it is always divided by risk taken after the fact. Before the fact, it is even more complicated how risk is assessed. I agree that this is the way retail traders look at "trading" though.
Trading Catechism
- Thread starter nitro
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why cant't the bread and butter not be earning the spread. Whether it be borrowing at near FF rates and lending at prime or worse. Whether it be market making. Whether it be underwriting debt [essentially being compensated for the risk of warehousing and committing]. Whether it be sec lending [essentially earning the spread borrowing shares from inhouse AM or other AMs and lending to PB client bases, for instance. Most of the those operations are middle men operations, not explicit risk taking ventures. Though of course there have been times, and I am sure there will again be times where risk taking, including directional risk was and will be en vogue.
Aha! Thanks for making the most pertinent point of all for a retail trader: That we don't have the means to trade like an institution. Or do we?
The tension between your post and mine is the holy grail. Not to markets, but to all newbies coming to ET for magical answers.
I don't see any "tension".
If you want to survive a long time and "make fees" (institutional), you behave one way. If you dare to be GREAT(?) making a high rate of return, you behave another.
But if you do it correctly and have the disciple to use stops, you can both be GREAT and survive the long haul. (I understand few can/do... doesn't mean it shouldn't be an objective.)
IOW... I get the message... "Nobody can do what you've done." WHAT?? Of course you can... just gotta get your brain squared away.
I guess that is a pretty precise depiction. After all transferring risk nowadays has become very cheap and would not satisfy required rates of return. Of course in all those activities there is risk taking involved in one way or the other. The benefit those whales have is deep pockets and brains to intelligently diversify in meaningful size. But every now and then even they go bananas and infest investors/shareholders with the idea that return on equity north of 30% is sustainably achievable. That is when mathematicians with zero understanding of economics and market dynamics start designing funny products that explode in everyone's face.
Here is one very important consideration. What do people mean when they say, "Risk On" or "Risk Off". What is really going on underneath at the market from micro structure to macro trading, and who is taking risk and who is taking it off? Are they the same players? How can you take advantage of that? Should you try to predict, or service customers?
I am now and always have been a "retailer" for my own/family accounts. But I've also been an institutional manager on a small scale (~$60 MM mutual fund timing service...before the revenooers figured out how profitable it was and effectively outlawed trading). The ONLY things clients care about are (1) rate of return, and (2) drawdowns. "Comparative this and that to others" means bupkis.... unless you're trying to preserve your fee flow continuance, that is.
Clearly that would not be banks (at least not nowadays) on either side. I believe it is anyone in the game who actively takes and actively avoids/hedges risk. Also consider that everyone has different investment horizons. A central bank with a keen interest to target a certain level of currency allocations may buy euros into the face of a strong selloff not because they believe the euro is at its weakest but because they look at strategic target levels and because they look at a much longer-term picture than, for example, a hedge fund trading currencies with holding periods of days or few weeks.
Well, here is sort of an aside to what you are saying. One of the biggest problems retail traders have is they can't even get started quantifying their risk. They are looking at charts, and setting stops. That is their risk "structure". If you go to JPM and see their books and how they trader, it is a slew of statistics, hedged books across multiple instruments, all backed by theory and statistics and years and millions if not billions of trades.
Retail traders seek leverage so they can quit their jobs. They are half right. Seek leverage, and bring risk to the minutest level possible. Between those two extremes lies a vast chasm.
