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Don't Steal Money from Day Traders Before They Lose It (bloomberg.com)
298 points by thaumasiotes 6 months ago | hide | past | web | favorite | 249 comments

I was a trader at a big bank for many years. The tools and access I had there put me in a different class of trader that very few other firms or individuals can attain. There is such information and technology asymmetry in this business - its not worth trying to day trade as an individual. Buy and hold forever... only way to invest.

I worked briefly[0] at a startup that helps get professional traders faster/easier access to reports, data, etc[1]. It was eye opening. Brokerage firms do huge amounts of research to help figure out where the market is going, then only give that information to the big fish who do millions/billions in trades. You and I are not competing in a fair game when we buy and sell stocks.

I just keep my retirement savings in a robo-investment account now, balancing ETFs. Hands off the wheel, don't think about it, don't mess with it.

[0]Fintech wasn't for me. Just didn't enjoy it. [1]StreetContxt. Cool folks, great company.

I've worked in a similar role. I broadly agree: individual investors don't really have the technical skills or the capital needed to acquire and analyze the dizzying amount of data you typically need find an edge.

That being said, an individual who specialized in that kind of data acquisition and analysis at a firm can do well on their own by targeting specific equities with only one or two streams of revenue. But it's still difficult and that individual would probably be trading in a manual capacity.

The alternative is to simply look at longer time horizons.

In the 1990 you could have beaten the market by simply realizing that the PC was going to explode into an everyday item and simply focused on buying and holding the sector vs any one stock. That's not going to see huge daily gains, but on the backs of huge successes like Dell it could easily have turned ~100k into retirement money in a decade.

That worked better when companies IPO'ed earlier. Now most of those gains get taken by private capital. If the equivalent of the PC now is AR/VR/XR or say synthetic biology I can't invest in that without connections and already having that retirement money.

So, by that logic, where is the market going now? Isn't this just hindsight bias? What's your decade strategy now?

Some thoughts for a decade strategy:

(1) the US will move to single payer health care. Besides the growing popular support for this, there is a coming crisis of corporate, municipal, and state pension funds which are unfunded to pay for their growing health care commitments. Single payer will be used to bail out those pension liabilities.

(2) Climate change. Consider effects on real estate of the placement of storm barriers, the increases of flood tides, etc.

(3) Self-driving cars. Lots of unexplored knock-on implications of the cultural changes. Dropoff without parking may reinvigorate walkable downtowns. Driving without attention required will enable longer commutes and combined work+commute with mobile offices. Cheaper last-mile delivery may push more retail shopping online. Introduction of drive-thru services targetting unoccupied vehicles -- dispatch a car to fetch something. The now high-end service of going shopping and asking for items to be sent back to your home could become commonplace.

(4) demographics. You can predict China's growth will soon slow looking at how the age distribution is projected to change.

I don't see anything right now growing the way the PC revolution did. But, thinking in terms of what stocks you would want to own 10 years from now is IMO still valuable.

Oil companies are still going to be making tons of money in 10 years, but people will start to doubt their future without heavy diversification. Whichever company wins to battle for solar cell manufacturing is going to become the next Exxon, but it's going to be a long brutal slog. Still if your in your 20's buying and holding any company that looks to have an advantage in this space is a long term winning strategy even if most of them will fail.

> Hands off the wheel, don't think about it, don't mess with it

I'm the same way. I put money in, buy more shares of whatever ETF I deem worthy, and outside of the occasional sell to fund another ETF purchase, I don't touch it. It fluctuates, but ultimately goes up.

But, man oh man, do I fantasize about trading. When I look at the underlying stocks in an ETF that's doing good for me, and some of them have these massive YTD returns, I get the itch.

I suspect I could do that successfully. What I do instead is give up 0.5% per year and let WealthSimple[0] do it for me. Automatic weekly payments from my bank account get invested in whatever way gets me closer to a balanced portfolio.

It's a big cut for doing something I could do manually but I'm super lazy and it's a percentage of not much money anyways.

[0] https://wealthsimple.com or https://wealthsimple.com/invite/FCU4AG if you want a referral link which gives you (and me) some extra discounts.

That's a pretty hefty fee when you compare relative to average annual returns. Plus the compounding nature of those costs is not insignificant. Jack Bogle (Vanguard) has a nice chapter demonstrating this in "The Little Book of Common Sense Investing".

It is. But like I said, I'm really lazy, haha. It works out to a few hundred dollars per year for me, which I'm willing to pay.

There's also discounts for referrals which helps lower it.

The problem is when everyone is simply tracking an index, there are no more humans in the loop to avert disaster.

We've had quite a few disasters with humans in the loop. And humans are still in the loop, no one is banning them from the exchanges. As long as there is an arbitrage opportunity, why wouldn't someone take advantage of it?

The only thing happening is the low value brokers/traders are being taken out of the system and automated, just like people were made redundant in other industries. But for investors who like digging in and doing their homework, opportunity is abound. Everyone else can enjoy their standard index returns to keep up with inflation.

I'm just relaying the observations from someone like Mark Blyth on this topic:


I find it hard to believe there’s any day trader using any kind of information making a consistent profit. Isn’t everybody just dabbling around hoping to be in the 50% that outperform by chance?

i’ve read about ed thorp pioneering statistical arbitrage in the 80s (?) which would fit the bill of “consistent returns”, but I doubt that there is any of that left close to 50 years later.

I’m wondering what all these quantitive funds are doing.

The only way you can consistently make money is by knowing things others do not (e.g., insider trading) or by taking advantage of structural problems or inefficiencies in the trading platform (e.g., high frequency trading).

I do believe that insider trading is rampant. I've seen many occasions where a large corporate announcement sends a stock up or down, but hours before, you can see the price of the stock slowly slide in the direction. Obviously a certain amount of that may be random/explainable, but I've seen it a lot and my intuition says more is going on. This also seems relatively easy to quantitatively measure, I'd love to see a real analysis of it.

I find the market for knowledge which others do not have but which aren't actually illegal to be quite fascinating.

There is a company who will break down a brand new car into its component parts and by knowledge of materials and production processes can tell to a very narrow margin what the cost of producing that car is - and therefore the profit potential of each sale. The information about the number of cars sold is either public or more easily obtained than the actual company accounts (public in many jurisdictions due to car registrations).

There are other companies who will buy a bunch of iPhones for example and by carefully analysing the serial numbers can deduce to within a reasonable margin exactly how many have been sold.

Using information like this I'm sure most large trading firms have very good models of the likely performance of each publicly listed company.

I wonder how far down this rabbit hole things go. Do they have people standing outside factories counting how many cars leave on the back of the truck? Do they have access to systems like Galileo in the travel industry where they could figure out how many seats had been booked on a plane, or how many rooms were booked in a hotel? They can then take a good guess at staffing / fixed costs and arrive very much in the correct ball park.

> There are other companies who will buy a bunch of iPhones for example and by carefully analysing the serial numbers can deduce to within a reasonable margin exactly how many have been sold.

AKA the German Tank Problem (https://en.wikipedia.org/wiki/German_tank_problem). Fascinating application of statistics.

Except it only works when serial numbers are sequential, I believe the common practice today is to have serial numbers to be random alphanumeric strings.

Not usually, and especially not for physical products. An 8 digit alphanumeric serial contains 2.82E13 possible values (which is more than any one company will sell of anything, ever), and it'd be crazy not to use that to store some kind of information like models, series, bins, etc. Two characters allow almost 1300 possibilities, and just three give over 46,000. Our POs have 6 digits, and after over two decades of multiple weekly deliveries, we're still in the 500000s.

To make that random would be a huge waste and also destroy the potential for creating visible patterns helpful within a lot of industries.

Edit: I just thought about redemption codes, which yes, do aim to be randomized have a huge space relative to the issued codes. In those cases, I see what you mean. Serials of digital media are often and intentionally randomized.

Bought 3 identical Sony cameras recently 1 a month ago and a pair this week, serial numbers are numerical and the most recent pair are two digits apart.

So not everyone randomises.

How about tracking corporate jets to buy stock in companies before a merger / acquisition. That blew me away when I first read about it.

[0] https://www.bloomberg.com/news/articles/2017-01-27/hedge-fun...

In the movie "Wall Street" (1987) Gordon Gecko has his lackey Bud Fox follow a rival around to try and figure out what he's going to invest in, so they can undercut him.

He follows him to a private jet and finds out it's flying to mid-sized city that happens to be the corporate headquarters of a particular company. In the movie it's sort of implied that this activity is illegal.

I wonder if it actually was, and if so, why that would be different than what those hedge fund guys you reference were doing?

A company I interviewed at was finding people who lived near power plants and paying them to set up cameras. The cameras would look at the smoke/steam coming out of the plant and based on that and the type and age of the plant they were estimating the power being generated. They'd then sell that data to energy traders.

Satellite imagery counting the cars, not people. [1] http://www.otusintel.com/insights/hedge-funds-gaining-tradin...

>> Do they have people standing outside factories counting how many cars leave on the back of the truck?

Yes. They do. I took a car ride with someone a few years ago who claimed to work for a consulting firm that the big banks+others hire to gather on the ground intel from companies through things like factory tours and shooting the sh*t with employees at bars near the warehouses etc.

The problem with that is that it could be insider information (or, at least, it isn't obviously not insider information, the way info about the serial numbers from iPhones that anyone could buy is public information).

The gist I've read in the past is that basically as long as it's not obtained illegally (e.g. breaking in and stealing) and there's no benefit to the person providing the information, it's not insider trading.

Matt Levine writes on the topic pretty regularly. Here's an example with a number of interesting situations.


"pork bellies..."

This is famously the Eddie Murphy rule - it was a crime to steal the briefcase, but not to trade on the knowledge gained from the contents of said briefcase.

iirc 'Trading Places' is on netflix, and Planet Money[0] did an entertaining episode about this.

[0] https://www.npr.org/sections/money/2013/07/09/200401407/epis...

That would be a good way to donate to charity. Just feed info about your corporate overlord to a philanthropic trader.

I've never thought about that before, but it would certainly make for an interesting news story!

"Meals on Wheels is accused of receiving insider information about big market movements from dozens of investment bankers. The Meals on Wheels endowment has seen 10x growth in the past 18 months. It looks like the group they provide for will be fed forever, even if we went through another Great Depression-level financial catastrophe. Should they be allowed to keep these funds? It certainly looks bad for the government to fine them hundreds of millions of dollars with the recent cuts in government-provided social programs."

I wonder if the contract with the firm is setup so that the information they gather is public, if anyone can find the application in the back of the drawer in the basement if you show up in person and request the form from the admin who is only there 2 hours a week.

For something to be insider trading, one of the people involved has to have breached their fiduciary responsibilities. Low-level employees typically don't have any fiduciary responsibilities to their company, so the firm that collects information from them is under no obligation to make it public.

I'm not a lawyer, but this definition can't possibly be correct, can it? If you're a janitor and you come across a piece of paper or a conversation between bigwigs discussing a merger and sell it to a trader, the trader and the janitor can surely both be sent up the river for insider trading, right?

>I wonder how far down this rabbit hole things go. Do they have people standing outside factories counting how many cars leave on the back of the truck? Do they have people standing outside factories counting how many cars leave on the back of the truck?

Mostly as an exercise for myself, I've been curious to make a system that would do this. Cameras on all the entrances, license plate tracking, and maintaining an "inventory" of vehicles in the facility.

You could track shift change, number of consumer vehicles (estimating number of people working), number of semis, etc.

Throw things into mechanical turk and you could categorize semis. Maybe that factory that makes big things needs one big component for every unit, and it's super obvious when it comes in on a semi. Boom, that's going to be a strongly correlated factor to production.

Consumer vehicles versus true production over time could help find increases in efficiency.

There are tons of ways to leverage little bits of data, and I think a vehicle in/out tracker would get you a LOT of information.

Funny enough, in the last couple of days I've been wondering whether you could use computer vision in combination with sports betting to generate more accurate odds given the current state of the game.

Of course the problem with that is getting up to the second video feeds (as apposed to delayed video feeds from SKY etc) from a fixed view point. I'm sure you could pay some money to get essentially a security camera feed at the game but that would be expensive.

Which made me wonder whether someone could turn up the night before a big game, park a drone on the roof broadcasting the video to a van with the computers processing the results while evading detection...

>I've been wondering whether you could use computer vision in combination with sports betting to generate more accurate odds given the current state of the game.

Totally unfamiliar with the gambling side of things. Do they set odds at the start of the game and maintain them throughout? There are already companies who will do live "coding" of game events to create a stream of data about the game. Players on the field, time on the field, location of the ball, location of the players, who has possession, possession by player.

There are some other trackers out there targeted for coaches. E.g. track player running speed. If they are going 10% slower than typical after the start of a play in American football, it's a good sign that they need to come out.

The common problem with your idea and mine are getting high enough quality for relatively modest prices. A standard dash cam isn't enough to grab a license plate, it'd have to be at least somewhat better tuned. Drone video from a distance is going to be tough to use to discern who is who and to get valuable info.

BSkyB has a betting arm, why wouldn't they just do this with all the cameras they have?

I'm fairly certain they don't do it because there technical solutions are provided by the company I used to work for.

I haven't seen this far, but one summer I joined a friend working for a commodity trading firm. We went into corn fields, ripped off a couple ears and made some counts to help them estimate yield. it was definitely trespassing, one time he got caught and got an "earful" from the farmer.

> I do believe that insider trading is rampant. I've seen many occasions where a large corporate announcement sends a stock up or down, but hours before, you can see the price of the stock slowly slide in the direction.

I can tell you from professional experience that is most often not insider trading. You might be surprised at the amount of meaningful information that can be legally obtained through research.

I used to (very legally) find and analyze data that would lead to better conclusions than street analysts. The results of equity earnings are basically an open secret among institutional investors before they're announced.

Yeah, along the same lines, the actual definition of insider trading is a lot narrower than people think, there's interactions that would be insider trading if it came from the CEO, but is not insider trading if it comes from a guy who overheard the CEO on the phone in a coffee shop or something. Multiply that by thousands of employees with "sensitive" information having unguarded conversations that they're perfectly allowed to have, and there's a lot of information out there.

Could also be confirmation bias. If you see the stock going up before a good news you notice it and think this is insider dealing. If you see the stock going down you don’t notice it because it is just a random movement.

Would be simple to test with past data, surely.

Yep, assuming every announcement is a complete surprise to the market, which is also unlikely.

This would also require you to log all past predictions for a large enough sample of events to be worthwhile.

One trick insiders use is when they know a stock will go down, they invest in competitors within the sector. They don’t have the same reporting requirements for those shares and are much less likely to get caught.

Your two ways fall a bit short. The goal of markets is to integrate any kind of information into an assets price which is relevant for its value (so called price discovery). So the ideal way to make money would be to discover some new source of information, like for example the data from social media (which was pretty new some years ago). Another example: Some decades ago quant funds started using weather data for trading commodity futures, etc.

Information asymmetry doesn't have to be on insider information.

> Information asymmetry doesn't have to be on insider information.

In theory, yes, in practice no.

I used to visit fuckedcompany.com to short sell companies based on information I found there. It worked for awhile until that site became too popular. That was a long time back, 1999 or so.

Which get's into the short vs long term problem. In the short term strategy X works, in the long term it failed. How much of that success is random chance and how much is the value of the underlying data? And how do you avoid losing all benefit when the strategy eventually fails?

The reality is this kind of short term incite based investing does not really scale. Over time the money you spend on paying people to do this is less than your risk adjusted long term benefit.

"Knowing things others do not" can be perfectly legal, because a lot of times the crucial knowledge is recognizing something as important among all the chaff.

There was somebody who recently demonstrated that you can derive useful information from simply reading SEC filings, which orthodox theorists would presume should already be reflected in stock prices.

There's an article recently where a hacker hacked a bunch of journalists and was selling that information to investors on wall street.

I think this is what you are referring to https://www.theverge.com/2018/8/22/17716622/sec-business-wir...

Most people follow the community when they should be trying to be ahead of the community.

Front running.

FWIW, I'm day trading and I'm making consistent returns, well above the rates of most mutual funds and hedge funds.

The caveat is what most fund managers would call capacity. My trading strategy can't scale without severe cuts in those returns. It's extremely easy to buy 10 contracts and hold for 5 ticks. I've never experienced slippage at all. Operating at mutual fund sizes, I would be trading at volumes that would slip 25 ticks before filling completely. My strategy can't and won't ever scale to that level...it would degrade to negative profitability likely with two or three million dollars of daily volume. Effectively this means I have major limits to compounding...like most day traders, I merely skim returns off of a fixed amount of capital.

So yeah, I do well enough for myself, and there are thousands of traders just like me. The quant firms may be on another level, but it's not because they have better returns than you can get as a day trader, it's because they have better capacity.

Nice. You know the market has been in a historic long bull run these past 9 or so years, right?

I trade futures and currencies. Short positions happen about as frequently as long positions. My average trade lasts less than 5 minutes. Macro trends don't really affect my strategy outside of the fact that I tend to watch Fed and ECB news announcements as a way of predicting short term volatility.

If your average trade lasts less than 5 minutes, then you can conceivably make money only if you can read 5 minutes into the future (not currently possible), or have tools that allow you get news/information faster than everyone else, analyze that information, and act on it, 5 minutes before everyone else.

Today, it's extremely difficult to get information 5 minutes sooner than everyone else without insider trading. Also, doing such quick analysis can be pretty error-prone, it's not uncommon that bad stories send a stock up and good stories send it down because the price is based on the perception rather than the fundamentals. So even if you have the right information, you may make the wrong bet. I'm sure some are better than others at this, but to make money, you'll need to be better than 50% of everyone else.

Today, it's extremely difficult to get information 5 minutes sooner than everyone else without insider trading.

You're assuming parent is trading on news, information, or fundamentals. A technical trader wouldn't care about anything you've mentioned.

> You're assuming parent is trading on news, information, or fundamentals. A technical trader wouldn't care about anything you've mentioned.

I don't believe it's possible to consistently make money ignoring "news, information, or fundamentals". Otherwise you're just fitting curves to noisy data. If it could work consistently, then you would be able to read the future.

If you haven't heard of arbitrage, you might want to look that up before assuming that all forms of profitable trading require knowledge of the future or inside information.

I don't believe it's possible to consistently make money ignoring "news, information, or fundamentals".

I’m not here to argue if it works, I’m arguing that there are people who trade stocks with no concern for anything that you mentioned. Argue the effectiveness all you like, people still do it.

It's educated guesses. At small scale you're just a speck traveling with the wind. Your job is to guess if direction suits you long enough. If you see someone with a leaf blower, it's just easier.

The data may be noisy but as long as it’s not just noise it may be possible to find a signal that can be exploited.

By the way, people read the future all the time: it will rain today and it will snow in four months.

I've never tried it myself, but I don't think it sounds impossible. Realistically, the greatest single stimulus for traders is the curve itself. So it would stand to reason that there would be patterns to its movement, since people and machines expect there to be patterns.

> If your average trade lasts less than 5 minutes, then you can conceivably make money only if you can read 5 minutes into the future (not currently possible), or have tools that allow you get news/information faster than everyone else, analyze that information, and act on it, 5 minutes before everyone else.

I can't perfectly read 5 minutes into the future, nor is it necessary. All that is necessary is to have a slight edge. Just like running a casino, a small statistical edge is enough assurance that any individual game outcome doesn't matter because you will have more wins than losses. And a tiny edge is not hard to do.

I'm doing fine without news feeds at all. An economic calendar and some basic technical analysis is sufficient enough of an edge to win more than I lose.

Seems like you can automate those technical analysis algorithms that you have and just sit back and rake in the cash

That’s when it stops working, as far as I understood. You turn into next deterministic robot that you just exploited with your’s. The same holds for bet arbitrages; once you automate it, they find you and cut your leverage.

who is they? Is it your broker? why would they do that it? It's in their interest to have you trade as frequently as possible...

Idk why exactly, but smaller bookmakers seem to not like surebets much. (edit: ‘bet arbitrages’ part was not about a regular market.)

They = other traders in the market

Okay, so you need to read 5 minutes into the future with some X% accuracy, where X is large enough to provide a return. You're still trying to read the future, if you could do that well, you could make money betting on coin flips.

Estimating likely changes in the future based on current information is different from divining the outcome of a completely independent chance-based event.

If I can buy X for $1.00 from location A and sell it for $1.01 at location B, then the only thing I need to worry about is what happens if the price moves against me at either A or B between the time I send my orders and the time they're accepted.

I guess you could technically call that "trying to read the future", but the (big) difference is that the horizon is on the order of probably a few milliseconds at most, not 5 minutes.

If it's a temporarily biased coin, you can make some money off of it.

If it's a fair coin you can make money off it, and convince yourself you can predict the "market" "because the coin is biased" ... but it's just 'luck' (ie statistical anomaly).

It evens out in the long run so this doesn't apply to this person's trading.

I think that's a statistical misunderstanding. It's likely to even out; across a population it will even out. An individual however can get "more heads than tails" by chance.

People can read five minutes in to the future.

Five minutes from now I'm going to be sitting on my bed.

Five minutes from now I'm going to be male.

Five minutes from now I'm going to have a nose.

That I can read these aspects of the future has no bearing on me being able to tell the future of coin flips.

"Today, it's extremely difficult to get information 5 minutes sooner than everyone else without insider trading."

You'd think so. It turns out that there is plenty of news out there at the right time. Thing is, no-one has the time to continuously check the top 50 or so online news sources to see if their individual interests are being mentioned.

This is why text analysis software is used. Humans are far too slow at reading and reacting.

I am not a trader but in this scenario won't he have to read (news, signal, trigger, etc.) just 5 minutes before everyone reads it?

The larger corporations might be on top of things but there will be plenty of individual investors reacting to the news. You just need to react before they do.

Reacting before “individual investors” and trying to read the news 5 minutes faster than them is not a sufficient edge to consistently beat the market. You have to react faster than the market moves, which means you have to move faster than hedge funds, banks, prop shops, mutual funds, etc. The market moves very fast, and it is dominated by very large sophisticated participants.

First of all, 5 minutes is a very long period of time in the world of high frequency trading, where machines are executing millions of trades every millisecond. Secondly, the same machines are equipped with AI algorithms for reading real-time news feeds, earnings releases, etc, and reacting very quickly on the news. Thirdly, the amount of money that the machines (and their owners) are trading with dwarfs any impact that individual investors would have on market prices.

> Reacting before “individual investors” and trying to read the news 5 minutes faster than them is not a sufficient edge to consistently beat the market. You have to react faster than the market moves, which means you have to move faster than hedge funds, banks, prop shops, mutual funds, etc. The market moves very fast, and it is dominated by very large sophisticated participants.

5 minutes is plenty of time, well shorter than most successful day traders who are trying to predict on 15 minute or hourly horizons, or swing traders trying to predict on daily horizons. There are plenty of trends that occur on the horizons of minutes, hours, days, even weeks.

> First of all, 5 minutes is a very long period of time in the world of high frequency trading, where machines are executing millions of trades every millisecond. Secondly, the same machines are equipped with AI algorithms for reading real-time news feeds, earnings releases, etc, and reacting very quickly on the news. Thirdly, the amount of money that the machines (and their owners) are trading with dwarfs any impact that individual investors would have on market prices.

This comment reads like a science fiction fan's made up ideas about how NASA works. You've taken snippets of vague ideas about the truth and mishmashed them into a frankenmonster that would never exist in reality.

* Millions of trades every millisecond is an exaggeration several orders of magnitude off from the real world volumes of HFT firms.

* HFT algorithms don't use AI. They wouldn't be able to react fast enough if they did. HFT algorithms in practice are rarely more complicated than linear regression.

* Those who use AI in their algorithms are doing so with incredibly varied levels of success. They are typically trading on horizons much longer than HFT firms. They are trading volumes orders of magnitude lower than HFT firms, even if those volumes are orders of magnitude higher than individual investors. From what I can tell, outside of text analysis of the potential sentiment generated by news, the finance industry is pretty pessimistic about AI.

* There are plenty of traders operating successfully across several time horizons. It is not necessary to be faster than HFT firms to be successful. Most day traders like me actually depend on the liquidity provided by HFT firms in order to be profitable; we couldn't do it without the deep books that they provide.

* Likewise, a lot of the predictability of how the market moves comes from the market effects of large actors: when you trade $100M in a day in a single direction, you move the market with you, and that creates a trend pattern that smaller traders can pick up on and take for a ride.

He never said he's making money on long positions though. Options allow you to buy and sell volatility, and short underlying securities.

You're an individual retail day trader? Come back to us in 10 years and lets see if you are still making money. Or rather lets see if you can beat the S&P 500 for 10 years straight.

Formula 1 cars probably couldn't even beat a Vespa in a 3000 mile endurance race. Does that mean f1 cars are slow? Does that mean Vespas are fast?

Comparing returns between income-oriented day traders and compounding-orieted mutual funds is like comparing top speed between f1 cars and endurance cars. You can certainly do it, but you're not doing anything worthwhile with your time by doing so. My strategy has high returns but low capacity and no compounding potential...simply put, I'm not competing against the S&P 500, I'm making an income. In fact, most of my excess returns end up in SPY.

If you reduce the Formula 1 car's performance by as little as 25%, you would be able to get a much much higher mileage. Those things are so optimized that they break down much faster and easier.

That's exactly the point. If I were trying to beat the infinitely compoundable returns of the whole market over a long period of time, I would have to make monumental changes to how I operate, and those changes would drastically alter the level of returns that can be realistically achieved.

There are some important rules when doing day trading.

1). never stop studying about what is going on

2). practise, practise, practise (otherwise known as paper trading) before you ever lay down any coinage

3). don't let emotions ever take you away from whatever strategy your paper trading comes up with

4). whatever the environment you had when you did your paper trades, don't allow that to change when you finally put some coinage down.

5). take a holiday from trading if the markets get too volatile (your definition of volatile applies here)

6). remember that many of your trades will lose coinage, it is up to you to determine what you put in place to mitigate this, others will make enough to cover these losses, if you keep to the rules you have.

7). if your success at paper trading does not see the same success in coinage trading, stop and do a complete review of what has happened and go back to paper trading.

8). keep meticulous records of all your trades, paper or real and continually look for further insights into yourself as you do this.

9). continually look at what your goals are and why you are doing this.

10).don't spend any coinage that you cannot afford to spend on this, in other words, keep calm and steady.

I feel like it's a lot easier to just get a job or start a business that makes at least double the average successful day trader

The way traders personally make money isn't by making good bets, it's by taking fees. If they make good bets, they get huge rewards, if they make bad bets, they get fired, but otherwise lose very little. So once you start betting with other people's money, you can do pretty well, it's just a matter of how long.

Sure, it might be easier, but it's not always about "easy". Some of it is adrenaline junkies, or ego, or a love of gambling.

What he describes isn't gambling though, it's a very detailed and tedious list of tasks that are apparently necessary to succeed.

>What he describes isn't gambling though...

That's like saying that having a very complex system for playing blackjack to have an advantage over the house isn't gambling.

My definition of gambling is "any event in which money is bet on the outcome of an event in which the user does not have 100% perfect knowledge". If you're an insider trader, you're not gambling. If you're Joe-average day trader, you're a gambler.

Being a good gambler is a skill that can be developed. If your game of choice is the stock market, then those things he's talking about are part of how he pushes the odds in his favor.

By your definition then every business, every primary producer, even every government are gambling, including insider traders. None of us, no matter how much we may think otherwise, has perfect knowledge. Every activity has a certain level of risk that means failure.

What I think you need to add to your definition is an addendum that says that what you bet is significant enough that you will suffer significant harm from losing. So if you cannot afford to lose that $5 you put down on some race, then that is significant. if putting down $1,000,000 on some event and losing means nothing to you, then are you still gambling or having entertainment.

My father's advice to me from a very young age, was to treat all "bets" as a loss anda form of entertainment. So only use what you could afford to lose. if you cannot afford to lose anything, then you don't lay down resources on the expectation of "winning", that is the mug's game. So as far as day trading is concerned, follow the rules that I set out above, which are the same rules that I received from others who have actually been successful in day trading. Interestingly enough, I have had the same advice from those who were unsuccessful and they admit they broke the rules as laid out.

Well you framed it in the context of an adrenaline junky. If someone has a specific system they're tediously following, expecting a certain regular profit at regular time intervals, I don't think that's an adrenaline pumping endeavor, that's more like a job.

I framed it as 3 different, possibly unrelated causes that could be contributing. We'll just chalk this up to "communicating on the internet can be hard" and say it was a misunderstanding.

I would happily make money for n-years and lose for one, provided the amount lost was a fraction of what I earned.

> I would happily make money for n-years and lose for one, provided the amount lost was a fraction of what I earned.

Your caveat there often swallows the rule. Many bet on the market and make big bucks only to lose multiples of it later.

Yeah irresponsible people do. But it's not necessary to bet the farm to make a living. Although it's certainly easier to eke a living off a $600k bankroll than a $50k

Many hedge funds and active traders do this every day. Maybe they're irresponsible, but they're the norm.

It’s different when it’s someone else’s farm.

If you set up a stop loss you could make it impossible to lose a huge enough amount on a single trade to wipe put the profit on your prior ones.

all stop losses do is create an order when a certain condition is met (e.g. last trade price is below X)

there's no guarantee it will be created immediately, execute at all, and if it creates a market order you might very well not like the price it does end up executing at

“Stop-loss” orders don’t work perfectly. If the entire market has gone South, you can lose a lot more than your stop-loss says.

Sometimes a strategy becomes reliably successful, the people start to notice, then it stops working. Do not be lazzy. The only way to earn money in trading is to work hard to gather information and to analyse it. This gives you an advantage on all the gamblers.

How much would you say is the smallest amount of capital you would need to use in order to run a profitable strategy such as yours?

It's unclear to me why you are not hitting the same problems as a mutual fund would - are you and your thousands of parallel traders not creating the same problem of scale?

Out of curiosity, how much manual work that can't be automated does this require?

How much did you outperform the market e.g. S&P 500 over the past 3 years or so?

What stops big firms from automating a great many small trading strategies?

Because one strategy returning $50-100k a year is a pittance to an investment bank. And (I bet) those strategies require a lot of manual intervention. Plus the risk value if they go haywire.

Honestly I have very little insight into how the bigger firms work. I've only ever done this by myself. But I can imagine that it's a lot harder to come up with 1000 strategies that don't compete with each other for the same opportunities than it would be to hire a team of geniuses that can build a single high capacity strategy.

How long have you been doing this?

Sounds like you are eyes wide open anyway.

Nothing, I work for one, but we often won't bother with the smallest of the strategies. It just depends on the markets and the players more than anything. They call us Quantitative Trading Firms or Algo Firms or HFTs.

Hey, your name refers to the ill-fated Portuguese king, right? I'd love to pick your brain on a few things related to daytrading, could we talk at your best convenience? I'm @Ftuuky on Twitter and Telegram, Monteiro on Keybase. Thanks.

and how long have you been doing this?

I doubt longer than 5 years profitably.

Allegedly 90% lose money on trades, but 50% of the capital makes/loses money in a given market window (however most of the winning capital is owned by a smaller number of players than the losing capital, mostly banks, quant funds, and creative/smart/disciplined/lucky indie traders).

It is not 50%, even if you are allowed to post passive orders (quotes) and pocket the spread (instead of loaing it) commissions will eat a lot.

Effectively, brokers and exchanges have almost infinite ROI: with small and fixed investments in infrastructure and marketing they take _percentage_ of your traded volume.

And shady trading rooms will screw you on commissions, spread, high margins on volatile instruments, and in very unlikely event if you manage to cash out more money than deposited, they will hold your account for "review of illicit trades".

But even on real and legal exchanges far less than 50% of capital wins, I assure you.

Not if the exchange has spreads and leverage. Even small spreads can screw your odds completely if you trade at margin, and gamblers bust means if you turn over your money a few times at high leverage you'll probably lose it all.

Who do you expect to take effort to change your mind? It is much better to keep most people with skills and grit away by giving off impression that the task is impossible: it means there is more alpha for the ones who actually work with it and make a living. Because whatever alpha there is available, it is negatively correlated with the number of minds and amount of dollars trying to extract it. The markets can only get so efficient.

This industry is filled with secrecy on one side, and paradoxically, with a wealth of free information on the other side. It's just that information is so abundant and complex, a normal person has no chance of using it anyway. Especially if they think it's impossible.

The hoards of "get-rich-quick" dudes with no emotional control rushing into this thinking they can learn to day-trade in a month, loosing their life savings and then ranting on forums about how it is all just a big casino - they do not help the situation either. Well I guess in a way they do help real managers to keep their jobs.

So you keep wondering. Just stay away from the markets :)

> the 50% that outperform

Not even. After you take your brokerage's fee structure into account, you've got to nominally outperform the market by a fairly decent margin in order to stay ahead of the market. The amount by which you need to depends on the rate at which you incur those fees, so day traders are giving themselves the toughest row to hoe in this department.

Brokerage fees are getting lower and lower. I understand Interactive Brokers will pass through exchange rebates for setting orders that add liquidity. Negative fees add up too.

Not sure about individuals but https://en.wikipedia.org/wiki/Renaissance_Technologies did ok. (Assets now$84bn, "from 1994 through mid-2014 it averaged a 71.8% annual return").

> I doubt that there is any of that left close to 50 years later.

Based on what? The conditions for stat arb to be possible haven't really changed.

This is a joke right? You were a flow trader for a dealer. How is that even remotely the same as buyside regardless of size? The tech at bulge doesn't even compare to what some of the sophisticated buysides have in place.

He could have been on the buy side within the bank? Some investment banks still do this kind of business, even if within certain limits.

Correct. I always traded prop, even at a bank. The Volcker Rule was a joke. It caused some papers to be shuffled around and a lot of noises were made. The current Administration pretty much certified its death.

Also - having access to flow creates substantial information asymmetry and opportunities.

Banks and hedge funds aren't always competing for the same types of profits that other market participants are. I've met some very small individual investors who generate legitimate alpha. There are myriad niches to extract outsized returns from. Even the fact that your bank was able to succeed shows this. Banks have shit technology and fundamental information, but can utilize their customers' ideas and order flow to generate alpha. That's a niche that Hedge Funds and prop shops don't fulfill.

Likewise, I was prop and the tools, access to borrow and reduced exchange fees and balance sheet made it all possible.

As an individual it’s way more difficult and time consuming.

Aren't there lesser known trading pairs that are too small in volume to be worth the time for institutions to develop and operate trading strategies for, with an acceptable risk level? I know plenty of successful individual traders, and not a single one shares your mindset.

Similarly, I spent 8 years building research and production trading infrastructure for a trading firm. The quality of data, tools, and trading execution infrastructure produced for these purposes was so far ahead of anything I could access without building my own HFT firm that I resolved to find myself on the other end of their trades as infrequently as humanly possible.

I'm definitely the dumb money in the market, trading on stone age tools by comparison.

Retail day trading is guerrilla warfare. It's not about beating the big guys.

What sorts of proprietary data?

The professional trader must be keeping the profits, I've day traded on a fairly slow volume and consistently get 200-1000 percent return year over year. Meanwhile the professional traders give me a meager 5-10 percent at most. For several years they didn't even beat inflation. Regardless of their access and tech they seem to suck at their jobs.

You must not be considering the total return of all your wealth just a limited subset. If you started with 10k and earned 300% (138.6% continuously compounded) then after 5 years you will have over $10mm. Wait another 3.3 years and you're a billionaire...

I was simply stating I have a substantially higher return than the pros. I've used that money for other purposes. for instance buying American airlines the day they went bankrupt allowed me to pay off a medical bill for a surprise medical emergency. But in that case it was literally 1000 percent return. I bought a bit of their stock the morning they went bankrupt. AMD is also an incredibly easy one to profit one. Wall Street might like to short sell on them to my benefit. From 3 dollars a share to 28 with incredibly predictable highs and lows for two decades. If I had the cash in college I could have been a millionaire by making ten trades a week on that one stock. The pros suck. I beat them year over year vs my managed retirement fund. It's pathetic.

>for instance buying American airlines the day they went bankrupt allowed me to pay off a medical bill for a surprise medical emergency.

Good job, you got into the same short-squeeze opportunity everybody else did that morning.

Be sarcastic, but quite a few pros claimed it was a terrible investment. Same thing has been happening with amd. It's incredibly low hanging fruit. I just wasn't able to or decided not to reinvent the profits. My original point stands, the pros are terrible at their job. If you can't beat the rate of inflation in a multi billion dollar fund get a new job, despite all the fancy pointless tech.

>My original point stands, the pros are terrible at their job.

They are. Because no one can be good at that job. I think that's the part you're missing. You're deluding yourself that you've figured out a strategy for making money in a way that you beat the relevant market index consistently.

It was a terrible investment until they filed for bankruptcy and the stock went to 10 cents. Just because it went back up to a dollar because of everybody needed to close out their short positions doesn't mean the professionals were somehow wrong. They were making a killing, too.

Huh, got through the whole article without the author referencing the origin of the term “bucket shop.” Nothing new under the sun when it comes to market manipulation. I like the idea of a whole new generation of crypto market manipulators rediscovering techniques that haven’t worked in eh real markets in 100 years.


The transaction goes "in the bucket" and is never executed. Because no trading of actual securities occurs, the customer is essentially betting against the bucket shop operator in a game based on abstract security prices.

My understanding is that this is normal securities, not crypto. But it could also happen in crypto, just not this time

I think a big difference here is that bucketeers knew they weren't actually buying the securities, and just waging against one another. The scheme in the article is like a combination of a bucket shop and a concealed ponzi scheme

Is running a bucket shop still illegal even if you are open with everyone that it is a bucket shop and people are just gambling?

The modern equivalent is spreadbetting. We have loads in the UK.

That usually falls foul of gambling laws.

I always felt that some shops that only work with ETFs or derivatives look like bucket shops. In some cases it makes me even more suspicious when it seems that you're only trading within that shop... like a betting house.

This is so interesting - one wonders if this is strictly immoral. I propose this thought experiment: What if there was a version of this fraudulent brokerage that conducted this behavior in the open?

Let's say their policy is something like, "You trade for real under favorable commissions and margins. If we decide via internal algorithms that you are liable to lose money, we will instead pocket your trade and credit you 10% of the money you would have lost back. If you win, you win in full as normal."

Would this be immoral? Illegal?

That's basically taking a short position on whatever the customer thinks they're buying, right?

Whenever the customer wants to sell their position, you'd have to pay them whatever the value was at that time, whether the position had gone up or down. Big risk, unless you're confident that the customers are going to reliably make terrible trades, on balance.

It might still be fraud maybe if you claimed to be performing a service that you're not performing, but if you actually told your customers that you were doing it (as in the situation you ask about), then I can't see how it could be breaking any laws. And I'm not certain why your customers would even care, and might even prefer it, due to the "get 10% back if you lose everything" clause which you don't get with normal day trading.

There are laws against naked shorting, even when you've personally determined that the stock will tank as evidenced by the fact that an idiot is buying it.

There are arguments that naked shorting should be allowed, but it isn't allowed right now.

the parent poster means simply betting against their customers. Not explicitly shorting a security without a locate. Just a lingo thing. In any case, this sounds a lotvlike a Contract-for-Difference type of arrangement. The broker functions as the liquidity provider, taking the contra side to all customer bets. Broker collects the bid-ask spread and hopes that it overcomes losses. One big downside is counterparty risk: if the broker goes bankrupt, the winning customers may not get paid!

I've read sensible arguments about why shorting is ok. I've yet to read any sensible argument about why naked short selling is ok. Mind elaborating or giving a few references?

Lots to unpack there, but the “favorable” margins and low required funding they offered are illegal to offer precisely because they preferentially attract poor, unsophisticated people and mechanically increase the likelihood of their trades blowing up.

This is why being the counterparts to all your client’s trades and using the public markets only as a source of random numbers to operate a gambling operation with a fig leaf of respectability is derisively referred to as a “bucket shop” and is broadly illegal.

Its just wrong. For starters, you're advertising a service that you're not providing. Secondly, you're basically running a twist on a Ponzi scheme. Eventually it will get out of hand.... if your customers have an incredible streak of good luck but no real trades to back them - how do you pay them?

The Ponzi scheme part applies in reverse to customers trading with leverage.

EDIT: Oh, that part also applies to banks with fractional reserve (i.e. all banks) but no discussion about the merits of that here please :)

This is market making and is done in currency markets. Your broker/dealer might be the other party taking the other side of the trade. The argument over there is that as long as you trade major currencies, the market depth and liquidity will ensure narrower bid-ask spreads and that you will not get too raw of a deal.

This is different because it seems the account holders were tricked into believing they were buying/selling securities, which are highly regulated activities.

The argument that the market depth and liquidity will ensure narrower bid-ask spreads make no sense. Bucket shops not executing trades don't narrow bid-ask spreads.

Unless you mean, the broker/dealer generally offers fairly competitive spreads and so 10 pips isn't too big of a deal.

The "win in full as normal" guarantee is the weakness. What happens when the producer cannot meet the guarantee for lack of funds due to faulty or too-aggressive algorithmic chump choices?

However, given that hobbyist full-disclosure crypto ponzi schemes are a thing, probably the market has an appetite for anything.

Isn't this basically describing a counterparty? If they decide via internal algorithms that you are liable to lose money, they will pocket your trade and...well, not credit you 10% of the money you lost.

I guess it's sorta like the brokerage having a right of first refusal on all your trades - they have the option to take the other side of the trade first in exchange for a 10% premium. If it's clearly disclosed, I don't think it would be illegal, but it's also not a particularly new concept.

That’s not what the word counterparty means. You’re thinking “internalization.” An internalizer is not a counterparty to the position (“I think you will lose money”) they are a counterparty to the order (“I have extreme confidence that you are not secretly running Goldman Sachs from that eTrade account and so your sale of 2 shares of Google is unlikely to be based on a material edge, and therefore I am happy to make you a market in Google at a tight spread and indeed at a price better than any market covered by Reg NMS, whereas I would not make this offer to someone I knew to be Goldman Sachs because they would gouge my eyeballs out. I express no opinion as to whether you make or lose money on this position; I’m ambivalent as to whether you’re selling these shares because you’re unwisely timing the markets, because your daughter needs braces, or because you spent three hours reading their 10-K; none of these constitute edge and none of them mean I am unlikely to successfully make markets on many hundreds of thousands of similarly situated trades with an average hold time denominated in milliseconds.”)

Dangerous. What happens when your incredibly clever internal algorithm decides a customer is liable to lose money and you pocket their cash, and the trade goes a huge amount the other way? The customer demands their 1000% profits, and sues you when you can't pay up.

Also, if you really had this super always correct algorithm, just use it to place short trades or options trades based on what it predicts across the market and sit back and rake in the cash.

No, because it doesn't involve deception.

I don't day trade, I mostly keep my money in ETFs and other dumb securities. But every now and again, I see the market move in such a completely unreasonable way, most often hammering a stock on some bad, but not awful news. In these cases, I've made small gambles and bought the stock when it's low to see it recover every time. My sample size is small and I'm too conservative to bet the bank, but I haven't been wrong yet.

> I'm too conservative to bet the bank, but I haven't been wrong yet.

You are being cocky because you are dabbling with small money, when you play with big money, your emotions will immediate change and that is when you will make mistakes.

> when you play with big money, your emotions will immediate change and that is when you will make mistakes

That's precisely why I don't play with big money, not that I have so much anyway. I wonder though, if I was playing with someone else's "big money", if you could keep those emotions in check.

That’s the real trick - convince others to give you a lot of money and when you win you get a big cut and when you lose it’s not your money and you just do something else.

Seems to be the way all hedge funds operate, maybe can even charge membership fees too.

Part of the trick to convincing people to invest with you is having a significant amount of your own money in the fund. So that's one hurdle here. It's possible to raise enough that your management fee renders irrelevant whatever you might lose trading your own money, but at that point you're in big league hedge fund scale anyway and will be very tightly scrutinized.

Also, losing client money is just as emotionally difficult and stressful and guilt inducing--maybe more so--than losing your own for anyone with a half normal sense of responsibility and fiduciary duty.

Right... most traders get big bonuses when they win, but if they lose, at worst they get fired. If you can win for a while and then get fired eventually, you'll still end up on top.

Trader A makes $10m in year 1 and gets a $1m bonus. She loses $10m in year 2, and gets no bonus so the firm is down her $1m bonus.

Trader B makes $1m in years 1 and 2. That’s too low to trigger a bonus, but his firm is up $2m.

The system doesn’t reward trader B so he has to choose: do what’s right for the firm, or take big risks in the hope of a bonus

(Simplifying dramatically)

Many firms implement clawbacks for this instance

>and that is when you will make mistakes.

While some trades using this method may not work out, the idea that he must make mistakes simply because he is risking larger amounts is not at all a given. Some people have no sensitivity to such things.

I know a couple of advantage gamblers that sometimes play $10,000+/hand on blackjack, and it might as well be $5 to them - not because they are super wealthy, but because they know they have an advantage, and understand that the math will work out over the long term. Whether they win or lose on a given hand, or wind up winning or losing on a given day, is meaningless to them and they rarely get emotional about it. The same certainly applies to many stock traders.

True enough. I've realized that my investment strategy would be completely different if I was using Monopoly money, and I'd probably have made 10x as much money.

That "strategy" only works when markets are behaving irrationally, such as they have been for the last 10 years, where basically everything just goes up. If you tried that in 2000 (like I did) or 2008, you'd be quickly destroyed.

The business cycle is a thing. Passive investing means expecting that, and not selling at the bottom. (For short-term liquidity needs, you shouldn't be in the stock market at all).

If the cycle is long enough, like in Tokyo, where the Nikkei is only at about 60% compared to its 1989 value, then it is of no use at all, unless we think of the “in the long run we are all going to end up dead” as a good investment strategy.

There are also Black Swan-like events of stock exchanges and entire markets disappearing completely, like it happened in Russia after 1917 and in China after WW2.

There was a severe bubble leading up to that, characterized by corruption and negligence. I'm not sure it's a good example.

If something like the Russian revolution comes along then all bets are off, it pretty much doesn't matter what you did with your money as long as you didn't flaunt it.

Are you sure we are not currently in a “severe bubble characterized by corruption and negligence?”

I think I could argue both sides pretty convincingly. It is easy to see in hindsight, not so easy in the thick of it.

You’d need a fundamentals-based argument like “the economy is all based on lies” and “technological innovation has stopped” to proclaim something like that, not just “there’s usually a downturn every 10 years or so.”

The business cycle is a theory, which very well might be self fulfilling. Who makes the most profit from a market decline?

"Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day."

Buffett in 1988 prior to his net worth increasing a lot.

So you were able to successfully read the future yourself? Can you predict coin flips as well? ;-)

A straw man comparison. OP is saying that they can intuitively pick up (sometimes) on unreasonable downtrends (when they occur). These happen because of historical events and market reaction to those events. The probabilities are based on dependent events in the case of the market, and on independent events in the case of a coin flip, which is a critical distinction (but does not mean that OP can predict results 100% in either case).

My reply has to be read in the context of other comments from speedplane: “You're still trying to read the future, if you could do that well, you could make money betting on coin flips.”

"But every now and again, I see the market move in such a completely unreasonable way, most often hammering a stock on some bad, but not awful news."

These obvious moments do happen sometimes. Not always, but they can give an edge to knowledgable people paying attention (most HNers know tech better than the average stock analyst/trader). I remember the night Trump won, the futures market reacted like the world ended. While the world might end at some point in the future, it certainly was not going to end the next day.

With that said, these moments do not happen frequently enough and turn out correctly for the investor to consistently make money.

if they are 100% obvious trade options on margin and make a killing :)

That's why I said they a) don't happen that frequently and b) do not always turn out positive. Black swan events do happen. I joke with my currency trading friends about 'picking up nickels in front of a steam roller'. It works great, until suddenly it doesn't and you're broke.

To play Devil’s Advocate: How is this different from being a market maker? I am presuming that if the customer actually made money, these guys would pay them from their own pocket.

Or alternately, assuming zero or low enough transaction costs, if these guys just took the opposite position of their customers for each trade (also known as hedging) in the market, then wouldn't the net positions be exactly the same?

Basically, the crime here seems "technical" or some sort of "you lied to me", it's not that people actually got different returns than what their trades entailed.

If they are doing this without disclosure, they are adding counterparty risk without consent. Just because they didn't blow up does not mean they can't. It doesn't even have to be due to your trade but someone else's. There have been single trades that have blown up international banks. Rare, and probably irrelevant here, but a point for perspective.

It's this presumption that's wrong: "I am presuming that if the customer actually made money, these guys would pay them from their own pocket."

In a corporation, the owners enjoy limited liability, so should someone actually makes money, they can file for bankruptcy and never have to pay out.

You're right. It's not very different and I think this is perfectly legal if you register as an ATS and comply with Reg ATS. Reg ATS is not even all that onerous if you are already a broker dealer, but at a minimum it includes reporting trades correctly and telling your customers you may take the other side of their trades.

It is a "technical" crime. There are good reasons to regulate ATSs, and the brokers didn't follow those regulations. Instead of prosecuting the brokers here for an obscure crime like "operating an unregistered ATS", the SEC decided to prosecute them for fraud. Judges know what fraud is and as Matt Levine puts it in other articles, "every financial crime is also securities fraud".

> I am presuming that if the customer actually made money, these guys would pay them from their own pocket.

Set up a company, sell “shares” in Apple or whatever, and don’t actually buy the shares for your costumers. If Apple falls you make bank, and if Apple rises you declare bankruptcy. Either way the costumers loose.

That is the difference to market makers who actually buy the asserts, so the customers at worst just have a bunch of less valuable stocks not empty hands.

You're exactly right. In fact, retail brokerages are able to offer lower spreads than big professional investors get because their trading flow is so uninformed that there is reduced risk. A lot of the consumer facing trading companies get paid by larger institutions to send them their order flow.

Taxes would certainly play out differently.

> Nonko team decided to take advantage of this pattern by secretly providing some of Nonko’s customers with training accounts instead of live ones and simply pocketing those customers’ deposits.

Seems like a really dangerous move it they allowed trading on anything with low volume (options, smaller stocks). All it takes is one trader to notice their order never actually executed on the public market..

Just by the title I knew it had to be a Matt Levine story.

The man is a national treasure.

Trading is essentially an activity of showing numbers on a screen between funds deposits and funds withdrawal.

Traders are playing with numbers. No one actually expects the paper shares to be mailed after stock purchase.

Brokerage guarantees successful withdrawal event - and if not - then it's a present and clear fraud.

So if brokerage does not actually do anything, but properly updates the numbers on the screen according to security prices and commission schedules + guarantees proper handling of deposit/withdrawals - no one essentially cares?

In this case brokerage exposes a client to counter-party risk that client has no idea about.

Well, if customer prone to lose anyways - "brokerage" is in good shape to collect commissions.

They'd be in trouble if customer suddenly strikes high margin gold and want to withdraw.

Day trading is one thing (which IMO is absurd, if it's defined by not keeping positions overnight). However, if you compare two people picking stocks, one a professional trader and one a guy in his underwear at home or in a coffeeshop on his phone, the former has mostly massive advantages. But he's missing one: the guy in his underwear can afford time-wise to wait a longer timeframe. If I buy a stock I think is a value buy and it crashes, I can hold it as long as I need. The big bank trader has quarterly profits to worry about or his bonus is his jeopardy, if not his job. He has a pool of money he needs to grow and he's under tight scrutiny.

I don't recommend anyone do this, but I've achieved 27% returns trading in my retirement account (the past 12 months as of today). I don't trade random stocks, I don't buy and sell often, and I'm a news junkie so I'm constantly reading the news. If I screw up on a buy, then it turns into a 'buy and hold.'

Lastly, I've worked closely with traders in the past, in a tech capacity. I assure you, they're not all the sophisticated quant geniuses with carefully placed bets that the HN crowd seems to imagine.

(edit: grammar)

How did the SEC discover this… did someone submit an order and it did not show up on the exchanges?

It’s in the complaint. They were using a third party vendor for both the live accounts and the training accounts:

In the summer of 2014, the firm that owned and licensed Platform A discovered Nonko’s training accounts scheme, after a technical inquiry from a Nonko customer revealed that the customer wrongly believed that his training account was a live one. On August 29, 2014, the owner of Platform A sent out an email blast to all Nonko customers alerting them that accounts starting with “TR” were training accounts; the firm then discontinued its relationship with Nonko, accusing Nonko of deceiving its customers.

Ah, thanks for the update. The wheels of justice turn really slowly though. Some of those account holders could've been long dead before they got their money back. :(

Well, for starters, they were operating as an unregistered broker. [1] So I'm guessing that they were already in trouble for that, first, and the rest was turned up in the course of investigating and prosecuting that case.

[1]: https://www.sec.gov/litigation/litreleases/2017/lr23830.htm

This is notable because in the United States the form of leverage common else where, a contract for difference, is banned. Outside America it is much easier to run these kinds of bucket shops. The key is offering leverage, Kelly's formula suggests that stocks should be traded with a rather narrow band of leverage, under two in most cases. Yet these shops always offer leverage ratios more similar to forex. You would be hard pressed to convince me that ten times leverage should ever be used with equities.

Meanwhile forex markets are even worse. Leverages there in the past were over a hundred. Which explains why there is so much money to advertise forex. Shady online ad markets are filled with ads offering high leverage online only forex accounts. One can be fairly sure those shady forex accounts are nothing more than bucket shops.

In general leverage is a mistake for most investors. Yet the appeal of hitting high returns with low investment (retail investors using leverage tend to measure return with no relation to risk), mean far too many retail investors are playing with options than is safe.

IG will offer me, here in Australia, 5% margin on shares (20x leverage), 0.5% margin on forex (200x leverage), 0.5% on indices, and form 0.7-4% on commodities [1].

I set up a demo account a while back, and it's pretty impressive the amount of money you can quickly make (and lose) with CFDs. It was possible on a $30,000 capital to make (or lose) over $1000 per day.

I'm a pretty risk averse guy, and also can't be bothered doing enough market research that short term trading is a sensible idea, so I didn't end up investing any real money.

[1] https://www.ig.com/au/cfd-trading/charges-and-margins

> It was possible on a $30,000 capital to make (or lose) over $1000 per day.

Maybe there is a typo in your example? Making or losing 3.3% in one day does not seem that impresive...

I was trading while I was still at work doing my real job, so I wasn't putting 100% of my attention to it.

3.3% daily (if you could consistently make a profit) is a very good return, think about how fast that compounds. Most savings accounts aren't even 3.3% per annum.

Head over to /r/wallstreetbets if you'd like to get a nice dose of adrenaline / heart attack.

Hey, if they made sure to credit clients with any gains, does it really matter where the losses went?

Edit: It could be in the ToS. "How can we offer such huge margins? Simple. If our algorithms indicate that you're a loser, we just don't place your trades. But whatever happens, your account will always be credited for gains that you would have earned.".

If they hadn’t used third party providers they wouldn’t have been caught. Nonko only got caught due to bad service/infrastructure design. So really the systems in place to defend against this kind of thing aren’t working. Or not working well enough. This is just an observation. I have no idea if this is the sort of thing which can be detected.

This article is typical of the complete lack of ethics in the banking and finance industry. As he acknowledges, this is straight up fraud / theft and yet he is sympathetic to the perpetrators. It's the kind of amorality and lack of ethics that was so visible in the financial crisis. At least in this case there appears to have been some actual enforcement unlike in the financial crisis where essentially nobody in the industry was held accountable for their actions.

It's not ok to defraud people or steal from them just because you think they're stupid, either legally or ethnically. This is obvious to most people but apparently not to the finance industry.

Matt Levine is typically a voice for greater ethics in the industry. He just happens to also have a very ironic sense of humor.

I'd always wondered if crypto exchanges actually bother to buy the crypto that you ask them to. For most people they wouldn't know the difference as eventually they'll withdraw in fiat money anyway

Very few crypto exchanges support fiat withdrawals. Most are crypto-in, crypto-out, only.

You don't trade against the exchange - you trade against counterparties that deposited as well.

Isn't this sort of what the investment firms "dark pools" are doing? not executing order in the public market but in their own private market?

I think the subtitle is much more informative:

> Boiler room guys knew customers were going to lose their money, so they allegedly spent it themselves.

But it was also illegally long.

you just gotta love Matt Levine headlines, though. The title is as much a play on his constant "laws of insider trading" running gags and part of his daily newsletter.

How about thermal imaging of oil tanks at Cushing Oklahoma!


We detached this subthread from https://news.ycombinator.com/item?id=17931545 and marked it off-topic.

I hope you’re joking.

The level of sophistication is insane: microwave networks tuned down to nearly theoretical min latencies, specialized hardware systems where teams worry about shaving nanoseconds, data cleansing teams, research teams, automated news/sentiment analysis...

And that’s on top of all their non-technological advantages: connections on the street, getting preferential deals with exchanges, banks, brokers and other counterparties, lobbyists ensuring their interests are protected, etc,etc...

That being said, there’s always another angle to get a leg up. I’d love to hear how you can beat them. If you can, they’ll hire you soon enough or figure it out pretty quickly.


There’s a classic [0] scam: send 2^12 letters to 2^12 random people. Half say that some stock will go up next week and the other half say it’ll go down. 2^11 of them will be correct [1]. Send those people similar letters the next week, half with one prediction and half with the opposite. Repeat until you have, say, 2^4 people who have seen 8 consecutive correct predictions. Now offer them more predictions at $500 a pop based on your track record.

It is, of course, quite possible to fool yourself based on this fallacy.

[0] no citation — it’s folklore as far as I know.

[1] I’m ignoring issues like the stock simply not moving.

Omg, this is so meta. In the comments on a post about guys running a shady day trading site is a guy trying to hawk another shady day trading site?

I think you’re barking up the wrong tree. This HN crowd is usually pretty skeptical and you’re making wild claims.

Ehhh, I pay pretty close attention to the Bitcoin threads.

Shady trading site ;) If people want to pay me money to make money like I am making it, I am not going to say no. If you reject peoples money, that's absurd. I am not saying, come pay me, I am saying, if you want to make money, come pay me. If you want to sit on the sidelines, then feel free to do so. I am not trying to make a sale, I am trying to make a point. I would love for a Warren Buffet, or anyone else, to come challenge me. I will destroy them. :) If anyone wants to post their returns at a trade deks, I will beat it in 2018/2019

No, my claims are not wild, maybe being the best is, but being profitable is easy. If you don't think so, you haven't done your due diligence. There are hundreds of people that are profitable, how do you think I learned?

Also, as to the HN crowd being skeptical, I think one person already subscribed and made enough to pay his subscription, we will see how they do for the rest of the year. Also skeptical is good, I want skeptics, because I like silencing my skeptics and trolls.

Why does the site has 4 movie clips of shady people? SEO or to weed out false positives or just because.

A good indication that you aren't a great trader is that you try to sell services based on being a great trader.

If you had a strategy that worked, you would not be looking for competition.


We detached this subthread from https://news.ycombinator.com/item?id=17931637 and marked it off-topic.

He is hawking his own service, his bio says it all. Arent there rules against this?

Anyone who sells services like this is obviously full of shit - if their ideas worked, they'd be making money off them, not selling them to other people.

Anyone can make money in a bull market.

I seriously doubt you have been beating the S&P 500 for the past 20 years day trading.

and I don't care about your results if you've only been doing it and gotten lucky for the past 5 years.

Is money less green if it was made with luck vs "skill" ?

Show your tax returns for the past decade.

How can you do your taxes if your trades are not executed?

You use the numbers provided by your broker at the end of the year.

So the IRS has no way of validating these numbers (they do require brokers to provide the numbers these days)? Overall I'm just not buying that this story is true, in other words.

What makes you think the operators are giving correct numbers to the IRS, or that the IRS would necessarily detect something like that on a fairly small scale?

(I have no idea how any of this works, but I would assume that if they're willing to defraud their own customers they're probably not acting entirely above board on the associated tax paperwork either.)

I just think this story is not worth talking about. Two people created a fake website. That is the story. This is a span story.

Honestly, this sort of seems fine as long as they covered winners.

It doesn't actually matter from a black box standpoint who took their bets as long as they were given the proper outcomes.

It isn't any different from running a casino really, except it has potentially better odds.

You know they probably can't cover the winners, though. The SEC doesn't make stuff like bucket shops illegal on principle; they make it illegal because people got scammed.

Until one in ten thousand of the losing accounts hits the jackpot and Nonko can't cover it, thus taking down all customer funds in it's collapse.

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