Hacker News Reader

Comment by bryananderson | Hacker News Reader

There is not an equal probability of a day trader making 700k and losing 700k trading options.

Market makers won’t demonize day trading—the “new blood” are their best marks.

The efficient market hypothesis says otherwise. If it was easier to lose money (ignoring trading costs and spreads) than it was to make money, I could easily beat the market by doing the opposite of the average joe loser.

That could also be problematic: you mighth need to know what the average joe loser does instantly, or maybe even before the fact, to turn an actual profit.

Though doing the contrarian move is sort of common wisdom: "sell when everyone is buying, buy when everyone is selling", of course if you understand what to sell/buy in either case.

I think you're right. By the time you know what everyone is buying/selling with any certainty, the boat has already sailed.

I mean, if you just want to be contrarian, watch your holdings for what's going up over whatever period, and sell that --- that's what everyone is buying.

Look over the whole market for whst is going down, and buy that, that's what everyone is selling. Every finance information outlet ever tells you the day/month/year's biggest winners and losers, and most people aren't watching that and taking the contrarian position, or the winners and losers would be pretty boring.

> you mighth need to know what the average joe loser does instantly, or maybe even before the fact, to turn an actual profit.

As in, run a day trading service and analyze anonymized trading data?

There was an SEC enforcement action a few years ago where they went against a platform trading company that catered to especially unsophisticated and risk taking clientele. They never actually put on any of the trades their clients were "making." They just pocketed the money and when the clients inevitably lost it all, the outcome was the same for the client.

> They never actually put on any of the trades their clients were "making." They just pocketed the money and when the clients inevitably lost it all, the outcome was the same for the client.

Whoa. That is so elegant in it's simplicity. Evil, certainly, but elegant.

And now I'm imagining more elaborate versions that incorporate the Baltimore Stockbroker scam to convince the clients to invest (and lose) even more money...

You can't even take the short side of a spx put with less than a US Lifetime income of capital.

No one makes money on symmetrical markets, and they therefore are unpopular.

This was interesting to think about. I think the efficient market hypothesis implies only that a random selection of stocks is equally likely to be market beating rather than market performing. $5 of imaginary internet money says this poor dude was on a Telegram group telling him what to buy and sell

There are firms that do exactly this. Robinhood's business model is to sell the order-flow data of its users to HFT hedge funds, who then take the opposite side of the trade. It's proven very profitable both for Robinhood and for funds that do this.

Why is that okay for them to do that? Genuinely curious.

It's a dark pattern, but there's nothing illegal about it. Their privacy policy states "We may also share information with others in an aggregated or otherwise anonymized form that does not reasonably identify you directly as an individual." Knowing that there exists someone who is about to buy TSLA does not identify that person, and yet is still incredibly useful to a market-maker. Selling data you've collected (without identities attached) is legal and largely unregulated. And the actual transaction is an ordinary B2B customer relationship.

Amazingly, a significant number of Robinhood customers are aware that they do this and don't care.

If I am a Robinhood customer who is investing for the long term instead of day trading - should I care?

not investment advice: no, you shouldn't. the spreads you get can be tighter (good when you want to buy and sell), and any hypothetical front running of your order would lead to miniscule slippage over the long-run. buying SPY and TLT is more or less the same experience in robinhood as it is in schwab, TDA, etc.

even as a day trader i wonder if it matters. i would be more annoyed that RH doesn't allow options on indices or futures, which leads to RH traders loading up on similar-but-not-identical products (eg USO as a substitute for oil futures or whatever VIX etf's remain standing)

No for a few reasons.

All the other major retail brokerages do this, unless they allow you to provide specific routing instructions (which usually comes at a cost, but I haven't checked lately). Everybody's doing it doesn't make it right, but it makes it unavoidable.

It's actually usually good for you --- your brokerage has a duty of 'best execution', so they can only route your trades to the HFT when the quotes are the same or better and they expect the HFT trade to complete as well as if they routed it to the other market. Often that means you'll get a better price, or more likelyhood of a complete trade, but some tradea might have executed better at another venue.

There's much bigger things to care about, like your brokerage's track record of availability or lack thereof during the trading day, how confusing their UI is for the things you want to do, if their means of access work with you (some people want local offices, which excludes some brokerages), fees and charges for services, including hidden fees like below market interest on deposits or above market interests on margin loans (but please don't have margin loans, cause it's usually a bad idea), etc.

Why is it a dark pattern? Brokers get the best price for their clients this way.

It gives the retailers a better price. The HFTs can quote more tightly (offer smaller spreads) in their dark pools, because they know some large, well-informed hedge fund isn't going to come along and roll them over.

Adding on, this can be of benefit to all three parties of the trade.

The brokerage gets paid for order flow.

The retail investor will often get a price better than the quoted market price, and the brokerage has a duty of best execution per SEC regulations, so the prices can't be worse very often; the duty is examined in aggregate, so some trades may execute poorly. Order flow payments are a part of how brokerage expenses are funded, one of the factors in the reducing and eventually eliminating of comission charges.

The HFT benefits, as you said, because they're trading against retail investors, and can use techniques appropriate for trading against random trading, rather than trading against sophisticated traders (or other HFT).

The downsides, I guess, are for the traders whose orders are on the other exchanges --- they didn't get your trade, so they will wait longer, and may not get as good a price as if you traded with them. Also, these dark pools may have less timely public reporting on trades, leading to an information gap? But, my understanding is there's already a lot of retail trading with less timely reporting as odd lots (not a multiple of 100 shares) may not have real time reporting.

Its quite competitive citadel makes money. But Citi bought a company and then sold it. KCG went bust ...

The big money is trading options, etfs, equities,cme futures against each other and against swaps. But for swaps you need an otc desk.

patio11's "How Discount Brokerages Make Money" is worth a read: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone... for those who are interested.

The efficient market hypothesis says nothing of the sort. Upside and downside with options aren't symmetrical.

Unlike when purchasing long positions in stocks, when trading options it's possible to lose many times more money than you initially put in. You also really can't ignore the spreads. Market makers win pretty consistently and everyone else is playing a worse than zero-sum game.

They are symmetric in the sense that you can both buy and sell options, so whatever payoff curve you get e.g., by buying an option (say unlimited downside and fixed upside) you can sell the same option to get the mirrored outcome (unlimited upside, fixed downside).

Adjusted for probability, upside and downside are theoretically the same with options.

> Unlike when purchasing long positions in stocks, when trading options it's possible to lose many times more money than you initially put in.

The converse is also true. It’s entirely possible to almost guarantee yourself a tiny profit and almost no downside risk as it is to create infinite risk.

So EMH definitely maps to the options market.

The market is (mostly) efficient but that doesn't mean that the same number of people end up ahead a certain number of dollars as behind.

In a zero-sum game, it's entirely possible and common to have a small number of comparatively large winners and a large number of losers.

It's the other way around. With stocks, you can take loans and trade on margin. If something happens, like very large gap down in the morning, and they can't unwind your position quickly, you could end up in debt. It's a very rare situation in practice. With options, you can only lose what you have invested. Unless you write naked options, which I am almost sure is not allowed on Robinhood.

With options your gains are infinite but your loss is limited to the premium. I don't think you can loose more than you put in, only exactly however much you've put in.

Someone needs to pay out the "infinite gains", that's the option trader on the other side of the contract.

Most brokers aren't allowing regular people to sell tons naked of puts or calls. For almost all retail option traders, their losses are fixed.

Something something Robinhood box spread something

aka the legend of 1r0nyMan

It's trivial to lose money by trading outside of the efficient frontier.

The warren buffets and medallion funds of the world have much better information and resources that Joe Loser. EMH just says that all the publicly known information is priced in almost instantaneously... It doesn't say much about how that profit from those price changes are distributed. It also says nothing about non public information. Unfortunately you're competing with a bunch of motivated people who have access and analysis techniques that you simply do not have, and this data gets priced in by them exploiting their information and analysis to make trades which alter the price of the market to represent the true value.

In a very roundabout way, EMH says, people with access to information will perform arbitrage trades based on that information as soon as it is available. If you are not those people, you will just have to ride the rising market.

You occasionally hear of people making money by trading the inverse of what's popular on reddit's /r/wallstreetbets community. So I'd believe it.

You can easily beat the market using the wheel at a minimum but the time investment/return aren't ideal.

There are posts below that will decry listen to Buffet and others however their accounts are so large listening to them is a disservice to yourself. Also the larger players have larger trades so their strategies are much different from a regular trader and there are lots of places for small accounts (under $5m) to make money.

But the possibility exists. That you can make money by simply trading stocks, without actually putting much in too much work and time (outside of research and education).

I have a hunch, just a feeling, that the powers that be prefer that we normal people not know about how they make money by simply trading around stocks with excess money they have laying around.

Nonsense, they advertise lotteries everywhere.

Lotteries aren't really the same thing as holding shares in a company.

Reply on news.ycombinator.com