Can a Retail Trader Succeed at Algorithmic Trading? (Part 3)

Today I continue presentation and commentary on an algo trading thread that took place about 18 months ago.

     > Ok, wait a minute: every time traders are talking about big players and market
     > manipulation, everyone seems to agree that algos are running the game. So,
     > assuming that this is right – someone stating that 85% of market is driven by
     > them – that means the big banks, players, etc. actually have financial
     > algorithms that work and are profitable.
     >
     > If this is true, why is there, after decades of banks using them, no market for
     > retail traders to buy them, even if it is not the best/newest version of all?!

This is a very interesting point. Question the premise, though: who is to say that many big firms don’t have profitable algos?

Aside from banks, the “etc.” is probably asset managers and hedge funds. With regard to the former, passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (July 2010) made it illegal for deposit-taking institutions to engage in prop[rietary] trading. That would include banks and many asset managers. With regard to hedge funds, I studied 2008 – 2016 and found them to underperform (see table here). This may leave some smaller firms that attempt prop trading for a period only to realize they can’t make [enough] money at it and quit. I therefore think it likely that the overall universe for prop trading, where algos are being used to generate the huge Wall Street profits of legend, is significantly diminished.

I’m not convinced that “everyone” (who “seems to agree that algos are running the game”) is all that informed—especially in the face of the kind of reasonable doubt just discussed. People repeat what the financial media writes or broadcasts. Does anyone actually check and scrutinize sources or underlying motives? Not nearly enough, I suspect.

One person responded:

     > The reason is only bank and large firms’ algos can work for them such as
     > market making and HFT. Hardware barrier of entry is in 10s of millions.

I can’t verify the claim of eight figures, but I do believe in a large and formidable barrier to entry.

     > What you are looking for is a strategy can can be deployed on retail
     > level. While those exist, no one in their right mind would disclose it.

This would imply the strategies given by KD (see second-to-last paragraph here) are bogus.

     > It is not that difficult to raise funds and trade it, as long as it
     > indeed has positive expectancy.
     >
     > You will not find it anywhere in public domain.

I don’t believe it is ever easy to raise funds for investment. This article claims the financial services industry has a 12% success rate. Another article claims 90% of financial advisors will fail within the first three years. Claims like these along with the personal roadblocks I have discovered around the wealth management industry make me believe raising money is anything but “easy”—a word that I as a marathon runner will never take for granted (injuries!).

And once again: forget the public domain. You will have to uncover it yourself.

I will continue next time.