Can a Retail Trader Succeed at Algorithmic Trading? (Part 4)

Today I continue presentation and commentary on an internet thread (subtitled “KD vs. EC”) regarding algorithmic trading that took place about 18 months ago.

     > I think they are both “right” in their own way. If you look at what KD does,
     > it’s a little different from EC’s strategies.

KD gets his customers to work for him (see second paragraph here)! I wonder how many are aware of this fact.

     > The “trading robots” you see on sites like collective2 aren’t serious edges.
     > Only an idiot would sell a serious proven edge to random Internet anons for
     > pennies on the dollar, and idiots don’t develop profitable trading algos.
     > If you have a proven edge, you raise capital to trade it yourself or sell
     > it to a quant fund for serious lump-sum cash and a job.

As I discussed near the end of Part 3, it’s not so easy to just “raise capital to trade it yourself or sell it to a quant fund.” Proving the edge probably means creating an incubator fund (or friends and family fund, if one can be lucky enough to gather a reasonable minimum amount of capital this way) for purposes of trading and auditing. That can cost many thousands of dollars, which singularly establishes a high barrier to entry.

     > Both of them are nice guys, and I’ve complimented them for their contributions,
     > but neither one of them is really “killing it” in this game. I tend to learn a lot
     > more from those with serious (1M+) skin in the game, and I don’t mean OPM.

We don’t know whether either is “killing it,” much less how much “skin in the game” (actual capital deployed) either has (see fourth paragraph here).

     > And there lies the bait. Yes, in theory a large account can withstand large
     > drawdown if low leverage is used, but most people do not have large accounts,
     > and those that do, will pull the plug if drawdown gets to 20 percent or more.
     > I have seen clients closing accounts after 10 percent loss.

This max drawdown is consistent with the kind of performance I have come to believe is necessary to have something of institutional quality.

     > The algorithms the largest banks and funds use depend on infrastructure or size.
     > There’s almost no way an at-home type trader can participate in this. Many
     > markets have large capital requirements — 100s on millions just to enter.
     > For others you need best co-location or contacts in the industry.

I would imagine these algos are of the HFT variety. I don’t know whether this person knows from experience or is just hypothesizing, but s/he makes some really good logical points. The post continues:

     > I’ve been following people who sell signals for a long time. There are very rarely
     > profitable systems but they always go private fast because selling something that
     > can make millions for thousands is not a business. On top of that you have people

Speaking of someone who has been following signal sellers for a long time, I’d like to hear Mark Hulbert’s take on this.

I will continue next time.