Hacker News Reader

Comment by bearmf | Hacker News Reader

There is no such thing as "consistent profitability" in trading. Trading is not a business where you make a product and sell it to someone, and the more and better you sell, the more you make. It is much more alike to gambling, but with probabilities of winning and losing a bet always changing. You need to know when to bet, but you have no way of knowing the probabilities beforehand. Thus you cannot be sure that your strategies will keep working tomorrow or a year from now. Nor can you be sure of always being able to develop a new strategy that is better than old one.

View on HN

That is quite incorrect. There are many firms with consistent low volatility profits. Market makers are a good example.

Hmm, like Knight Capital? Oh, wait..

A somewhat different situation.

Market makers are actually an example of "picking up pennies in front of a steamroller"

That is quite incorrect. Market makers are typically close to flat and are trading liquid instruments (assuming on exchange MMs like NYSE DMMs). The tail risk on a short duration trade of an exchange traded instrument is quite small, especially if the MM is not writing put options which this specific quote refers to. When writing a put option the premium collected by the writer is typically not enough to compensate for tail risk. Thus there is limited upside with extreme downside in the face of a tail event. Also the options tend of have longer durations (months or years). Firms pursuing this type of strategy are typically carrying a lot of mispriced risk on their books for a long time.

It might be true if you are talking about market makers that have an advantage over other participants due to regulations. However nowadays market making on liquid instruments is almost equivalent to high frequency trading. The tail risk might be low if you have very low latency and perfect connection to the exchange. Anyway your pnl distribution will be negatively skewed. You are unlikely to lose tons of money like Knight (their testing algorithm kind of actively tried to do it) but making a steady profit is not easy in liquid markets.

Reply on news.ycombinator.com