Comment by mrchicity | Hacker News Reader

Comment by mrchicity | Hacker News Reader

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It's the law of large numbers. Virtu's infamous net trading profit histogram showed the firm had one losing day in over 3 years: https://www.zerohedge.com/news/2014-03-10/holy-grail-trading... (1)

Again I've seen the same just running a single HFT desk within a larger firm. The only time we ever lost money was from rare technology errors. Trading equities, even if one position spikes 5-10% bad on news, you will still make money, because it's just one little position out of the thousands of tickers you trade. Even guys making far fewer bets in asset classes like FX only ever lost on extreme dislocations like the Euro/Swiss unpeg.

If you make a large number of bets, even with just a tiny statistical edge, you will be consistently profitable. RenTech probably isn't profitable every day, but I bet over a year they make at least as many bets as someone like Virtu makes in a day, so it's not surprising that they never have a down year, provided they have the edge.

1: Now does this mean Virtu the business made a profit above cost every day? Probably not. But it does show that consistent trading profits are achievable.

I'm not sure RenTech and Virtu are comparable though (although I'll admit I don't work in the industry, so correct me if I'm wrong), but based on the article from Matt Levine on his Bloomberg column "Why Do High Frequency Traders Never Lose Money?" [1]:

> Imagine how suspicious it would be if, for instance, your local supermarket made money on every carton of milk that it sold. That just seems too good to be true, doesn't it? How can they know the price of milk before you do? Shouldn't they be losing money on half of their milk, and making it on the other half, so that things balance out? Doesn't the fact that they always make money suggest that they're ripping you off? [...] That is, Virtu (like Goldman) is selling a product, and that product is liquidity, and it charges for that product. High-frequency trading firms are in the business of acting as middlemen, providing a valuable service by letting buyers and sellers trade as soon as they want to, rather than waiting for fundamental sellers/buyers to come in on the other side of the market.

As I understand it, RenTech is taking an investment position which is why the returns are remarkable whereas virtu is (as Levine puts it), selling liquidity.

[1] https://www.bloomberg.com/opinion/articles/2014-03-20/why-do...

RenTech doesn't publish much so I'm merely conjecturing based on their volumes and other information that's in legal filings. There are a lot of ways to provide liquidity and fair pricing over diverse time horizons. It doesn't really matter how they do it. If your bets are independent and you have a statistically significant edge, you are basically guaranteed to make money with proper bankroll management.

From what Virtu's published, they make two-way markets, and once filled they scalp a tick, arbitrage in another product, or cross if the market becomes weak. Maybe RenTech does something like buy underpriced oil producers whose prices haven't moved up after bellwether stocks in the industry like XOM and CVX have, then sell once the spread between them converges. I'm sure both firms have loads of different tactics. The key thing is that they're mildly better than chance.

Virtu makes money because they take advantage of a structural setup in the market: they trade retail flow from the likes of Schwab and Robinhood.

This is vastly different than making money in the markets just by connecting to an execution venue and receiving market data.

In the former you have a clear edge over the market because you receive dumb uninformed flow. In the latter example you are left to fend for yourself and challenge the EMH purely through your math skills and insights.

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