The Day I Lost a Sh*t-ton of Money, Part II (trading/stock Market)
ptotrading.blogspot.com
ptotrading.blogspot.com
It makes me sick that these guys are put in a professional environment which makes them feel like big swinging dicks instead of degenerate gamblers.
Ask yourself, if you flipped heads on what you thought was a fair coin 500 straight times, did you REALLY just observe an ultra rare event? Or is it more likely another phenomenon at work (like a rigged coin)? Whether you can fully explain it or not doesn't matter.
Why do you care so much what I do with my money? Or how a firm chooses to allocate its money? This wasn't client money or institutional money, it's the money of a few guys (partnership type of structure) who used to be or still are daytraders themselves.
(one last edit: if you're too thick to see it, I deliberately tried to showcase my overconfidence to show how things can go wrong easily. guy makes money and wants to make more, guy wins money and thinks he's a champ -- it's called the human condition. I deviated from normal execution rules and position size rules and paid the price)
It just feels like you aren't investing to build industries, just to gamble.
When you go to much less traded stuff like Bonds, or in the more extreme case... Real Estate... its harder to put an accurate price on these items.
A house might have an asking price of $300,000 but the only buyer might be offering only $250,000. If both sides refuse to budge, then the market stops moving.
A trader can move the market very simply in this case. He can buy the house at $265,000, and then sell it at $285,000. Everyone benefits from their perspective.
The Seller got to sell the house at higher than $250,000. The Buyer got to buy the house lower than $300,000. The trader gets away with $20,000 made.
This is in essence, the trader's low-risk function and his job is to move markets.
Now lets say a 2nd trader enters the market, and instead is willing to get away with only $10,000. He buys the house at $270,000, and sells it to the buyer at $280,000. Because this 2nd trader has better offers, he will get the cash.
So this leads to point #2: the more traders compete with each other, the tighter Bid/Ask spreads get, and the "fairer" the market price becomes.
When we get to the tens of thousands of traders who deal with high-volume stocks, these stocks end up having bid/ask spreads smaller than pennies. In fact, bid/ask spreads are so low during the trading day, that most people forget about them during trading!
But at the end of the day, stocks are like any other good. There is a bidding price, and there is an asking price. And the bid is always lower than the asking price. They only become closer because traders are willing to become market movers and take up the risk themselves.
When people express their dislike for day trader or HFT, it's exactly for this: people with additional market knowledge extract money from market without creating value.
I've yet to read a coherent description of how the manufacturing and service world is better thanks to new trading techniques. It always seems to come down to having different people pocketing money instead of banks or more traditional wall street firms.
Yeah, but "actual actors of the market" don't talk with each other. You inherently rely on traders to set the price whenever you buy / sell stocks.
If you don't trust traders, then don't go into the Stock Market. However, I trust the market and take advantage of the liquidity that it offers me. Its so much easier to buy / sell stocks because of the mass of traders granting liquidity at every corner.
Traders capitalize upon emotion and correct the market. When people are panic-selling, traders look for market bottom and try to buy (sending the price back up). When people are stampeding towards the "buy" button, traders look for a market high and sell (or short sell), correcting the price back down.
Traders inherently watch the crowds, find problems with crowds, and then move the market into the more theoretically sane position.
Note that the "issue" in this blog post occurs when the trader ignores news, and misinterprets a massive drop in price as a false-panic. It wasn't a "false" panic, people were liquidating their position because news came in that devalued the stock. The trader somehow ignored the news and was caught buying stock on a downward spiral. Furthermore, when the crowds were telling him that it was a true market movement, he lost his discipline (with the company's money... but kept discipline with his personal bank account) and failed to liquidate his position.
>>>I've yet to read a coherent description of how the manufacturing and service world is better thanks to new trading techniques. It always seems to come down to having different people pocketing money instead of banks or more traditional wall street firms.
The entire commodity / futures market. The manufacturing benefits off of traders setting the price of oil / wheat / orange juice 6-months or 12-months into the future.
If you want to buy a contract that allows you to buy 1000 barrels of oil in March 2015 (say, you know your factory is going to be open by then), you can go to the futures market.
Or if you're an oil producer and you want to sell 1000 barrels of oil in March 2015 (maybe... you don't have the oil yet. But you expect to have oil by then).
But consumers don't know what the price should be, they'll throw down a call action on the oil. The Oil producer doesn't know the price either, so maybe he'd put down a put action on the oil.
But call actions and put actions don't line up. Someone has to step up to the risk that the producer doesn't sell oil (aka: his refinery blows up and can't make the oil by then), or that the consumer doesn't buy the oil (aka: the factory opening is delayed so you cancel the order). Traders calculate the risk, move the market and satisfies both parties.
Heck, the futures market is the only place where you can buy contracts like that. But without traders taking on the risk for everyone, futures market would be a lot less busy and much less useful.
If he actually used domain specific expertise to make judgements on value of what he is trading, I would agree.
In the end, I don't care that much to argue about social utility. I trade my own cash or I trade the money of guys who completely understand my objectives and choose to back me. I respect your views and I won't bother to persuade you otherwise.
I get the feeling if this thread was about losing $200k to Phil Ivey heads up in Hold Em or Nate Silver losing $200k by betting against Obama on a political betting site, nobody would care to bring up social utility.
1. Is it luck or skill. I'd say there must be some skill, but luck too, kind of like poker maybe? 2. Is it useful to society? No idea if its a benefit, a drain, or neutral. 3. Should it be allowed? It is your money after all.
2) At the very least, I don't think what I do is harmful to anyone.
I'd also like to add that I make many trades that are a better example of adding value. In the trade example of buying the dip in AAMRQ (prior blog post on my site), I am making the market more efficient (I'm saying this with the benefit of hindsight, of course). AAMRQ was moving adversely against its clear fundamental value (based on a stock merger deal with US Airways) and by buying it on weakness, I'm adding liquidity on the side that it should "eventually go to". This only works if I'm consistently right more than wrong. I also short garbage stocks that have no fundamental value, another example of trying to restore efficient prices. Price discovery is important so capital isn't allocated inefficiently.
3) Impossible to ban trading without destroying market liquidity. It's also way too difficult to define what trading is helpful vs. parasitic and have everyone agree on it. One could easily place a seemingly "outlawed" type of trade and claim to have sound intentions, which is what makes market manipulation difficult to prosecute.
My sharpe ratio at my firm (calculated automatically in our database) was well over 3 until that loss. I don't remember it exactly but it was such a crazy number to believe (relative to other sharpe ratios) that I stopped thinking it was a risk metric that mattered for my style of trading.
In effect, he transferred $48.5k from his employer's account to his personal account.
Like most geeks I suck at negotiation. And trading seems to me a very fast-paced very high-stakes game of negotiation where you don't even get to talk to the other guy. How do you get better at that ?
I have to admit that I'm skeptical that it's possible at all to do this. In the longer term I mean. Nobody gives the other side of the argument though : there would be no banks, nor a wall street, if it really didn't work at all.