The Tone of BS (Part 3)

Last time, I interrupted the analysis with a challenge impossible. I want to elaborate on that today with regard to why we could never prove that institutional traders are more profitable than retail traders (or vice versa).

As a quick review, [2], [3], and [4] all suggest that institutions are profitable whereas retail traders are not. How would we design a study to evaluate that claim?

First, we would need large sample sizes of systems traded by institutions and by retail traders. Given the systems, perhaps we can evaluate them for profitability.

I need not think too hard to realize attaining these samples would be, in and of itself, an impossible feat! I would be hard-pressed to find even one [never mind a “large sample size” of] institution[s] that is willing to share its “secrets.” Many retail traders also feel the same way about their own “proprietary strategies,” which would make it extremely difficult to get the second large sample size, too.

Another problem with this proposition would be the time and money required to do this study. I could be making phone calls to institutions for a long time before ever getting cooperation! With regard to retail traders, how would I even find them? I would also have to operationally define “trading system.” If someone attempted a trade once or a handful of times, would that constitute a “trading system?” Retail traders range drastically from “full-time trading for a living” to “Vegas-style trades for a hobby.” People are not all that open to detailed questions about their financial dealings especially when strangers are doing the asking.

A third problem regards the questionable justification for the immense cost of doing this study. So what if I find institutional or retail traders to be superior as a whole? The answer won’t help anybody. This study would not be actionable to me or any other trader as we continue doing what we do.

Therefore, I’m quite sure no valid study of the sort has ever been done and any claims about the institutional or retail world being more profitable than the other are baseless.