I'm a Brazilian software developer for the financial market. I also made some financial courses on the same university that the authors.
Brazilian stock exchange market has exploded in the last years and most of my friends decided to 'work' as traders. None of them with prior knowledge or experience in the market. All of the posts on Instagram every time they earn some money.
The cause for this fever was the marketing around 3 or 4 companies who sell the dream of financial independence through high-risk financial market lessons. Normally they offered courses to famous people for free and use their image to convince the rest of us.
One interesting thing: they normally sell the course with a private platform to trade the stocks included. I believe that they use that platform to collect data and operate against the traders that use that platform. They know the strategy that they are going to use (because they teach them), so it is easy to operate against.
You’re assuming a complex strategy is needed when a simple one can easily suffice: simply pretend that you executed the trades, give the clients their profits, and keep the losses. In other words, the broker can take the opposite side of every deal and keep the spread and commissions. If, indeed, the client is trading based on no information whatsoever, then the broker wins and the client loses.
To improve this, the broker can throw out the best performing clients, since they might genuinely know what they’re doing.
I’m not suggesting that this is what any particular broker does, but it’s a strategy that works very well, at least in principle.
I guess the difference is that in a market third parties eat the spread by market making whereas in a bucket shop the market itself profits off the spread?
They offered the 'service' of being able to trade large nominal amounts at the last market price, without market impact, but had incredible levels of margin -- 50-1+ or something like that.
This meant that customers often hit margin limits, incurring additional 'commissions' to close out their positions.
Operationally, the bucket shop netted long and short positions, and either actually traded the residual or, occasionally, would use market orders (e.g. aggressive sells) to push the punters into margin calls, which they would then execute. They would then buy low and cover their earlier positions.
Jesse Livermore managed to beat them through astute technical analysis and through the installation of a direct telegraph line from the exchange, thus beating his 'brokers', who promptly kicked him out.
It matters when things go badly wrong, because with a Bucket Shop you're left penniless, it was all imaginary anyway. Whereas with a futures market even if the exchange blows up those are real contracts you can sell to somebody who wants the commodity you were trading in, at worst a mild inconvenience and a small haircut to your final profit.
In the US, securities brokers are very heavily regulated — see “regulation NMS”.
In a parallel space this is happening in the UK with bookmakers. Winning punters either have their accounts heavily restricted, i.e. only able to place small value bets, or their accounts closed entirely.
Certain states in Australia had to introduce legislation to guarantee a bet size the bookmakers must stand. From memory it was $500 on country race meetings and $1000 on metropolitan meetings.
To improve this, the broker can throw out the best
performing clients, since they might genuinely
know what they’re doing.
https://augur.net is an Ethereum-based betting market that will help traders/bettors avoid these kinds of malicious practices. Augur v2 is being developed now, you can expect it to be Really Cool by about April 2020. Millions of dollars will be wagered on Augur for the 2020 election.
Maybe front-run them a bit if you're into that.
If this were the case, wouldnt both sides just make 0$ on average over a long period of time? (or whatever the avg growth of the market was during this period)
I guess the broker would earn fees, but that still doesn't exactly sound lucrative
Every time someone comes up with a "get rich with this training/tool/etc." it's very unlikely to make you rich, because if it would work that great then why isn't the seller of the training/tool using it to get rich, instead of selling whatever they're selling?
Send them $10, and you get a letter that says: "Place a classified ad that says: How to make money at home! Send XXX $10 for information."
If the proposed strategy really really works, then you would get investors and offer them a share of the pie. "Teaching" them accomplishes nothing and reduces your profits.
My experience from the dot com day trading frenzy was that there were three kinds of investors;
Those that had no clue and just followed a bunch of investment "tip" sources and did what ever was the investment of the day (these people were essentially gamblers, and like gamblers were up one day and down the next, only to eventually bottom out).
Then there were the folks who had read up on how the markets worked, maybe taken a finance class or two, and read a bunch of Morningstar reports on various funds and their strategies and tried to create some sort of meta strategy that was a mix of the funds they found impressive. These people had good days and bad days and over the course of a couple of years basically matched the S&P500 or other widely diversified stock indexes in gains. What I learned from them is that if the market in general is up 9% and you're up 10% you are only doing slightly better than the market, even though you feel like "hey I'm getting 10% a year, I'll double my money in 7 years!"
Then there were the very serious folks, these folks read annual reports and 10-Q statements and prospectuses. They kept a databases of people who were executives, board members, and advisors of different companies. They consumed four or five different regional news streams (usually London, Tokyo, New York, Chicago, and Washington) They kept indexes and stock price histories in their own databases and mapped current events to stock motion. They broadly characterized every stock they watched closely by who managed the entity, what markets it was most effected by, and least effected by, and what government policies could help or hurt it. I'm sure if they could afford a Bloomberg Terminal subscription they had one of those too. They did well for themselves but they invested 80 hours a week into doing well.
Not surprisingly there are lots of people in the first group, fewer in the second, and fewer still in the hard core group. I personally see myself in the second group, and over the years my own portfolio has done slightly better than the market.
A unique strategy one person I knew took during the dot com bubble was to convert gains into "things" on a regular basis. At one time he had about a dozen different Porsche sports cars, two houses, and some acreage in the Livermore valley that he rented out as a vineyard. He did pretty well selling that stuff to recover losses from the crash.
Brazillians, you can ask any American about this. We've been there. It does not end well.
One other thing, the Simons Foundation funds Quanta Magazine, whose articles frequently appear on HN:
When you factor in the money they saved from dodging taxes and how they managed to compound the growth on that money, their returns end up being no more impressive than any other hedge fund.
Even if it turns out that what they did wasn't illegal, the bulk of their profits beyond what would have been made just investing in an index fund came from their tax scheme rather than from any kind of insight into the financial markets.
I suspect you don’t work in the industry, because what you’re saying is absolutely ludicrous. The S&P 500 lost like 40% in 2008. Meanwhile Medallion doubled up after fees. So a total return of 145%. What you’re saying is simply not possible with a tax loophole.
There’s not a single hedge fund analyst or PM on the Street who doesn’t think that RenTec is anything less than amazing. No one thinks they are as good as those guys, no one. If you want the real story about Simmons and RenTec, check out the MIT Sloan fireside chat with him on YouTube.
It either means inflation is incredibly high, productivity growth is incredibly high, there is some exotic "dark market" that most investors cannot access (probably made out of dark matter) or other people are losing a lot of money.
Except inflation isn't high, productivity growth isn't high and I just made up the "dark market" so only one explanation remains.
Even so, I must admit, their profability and success is outstanding. But then again, so are Apple’s and Google’s. The only difference is thst no one knows how RenTec makes buttloads of money.
This is false. RenTec generated outsized returns for a decade prior to entering into the derivatives with Barclays and DB beginning in 2000.
> the bulk of their profits beyond what would have been made just investing in an index fund
This is also false. For example, RenTec generated 99% return in 2000 net of fees, while the S&P 500 lost ~8%.
And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair).
No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves.
as a former insider at a different, less successful-than-rentec-but-still-successful firm, I doubt it. They have better data, technology, and employees than most other market participants. So then the question is how did they get there:
> No one is smart enough; no algorithm or model is future-proof
I agree with the sentiment, but the way it worked was in the early days, it was much easier for one person or a small team to get those advantages. Then, as the market matured and simple algorithms became less profitable, they made new, more complex ones. It became harder for new entrants to jump-start the whole process from scratch. Simons started rentech in 1982. Teleport that Simons to today and his fund probably wouldn't even get off the ground. He would still be a genius, but a billionaire? I don't think so. As you say, no one is smart enough. It was right place/right time, and they built on their advantages.
I had read this and seen some other things about his activities.
Since Mercer and his family seem deeply wrapped up in something that has some worrying ties to hostile foreign nations, a company who has been recorded saying they've done REALLY shady things along those lines, etc...
How feasible is it that RenTech used similar technology and god knows what data to directly impact the geopolitical landscape, and traded off of that? If you can for example...create major disturbances in certain areas, or draw certain attention to various things at a certain scale, could that impact markets?
I want to clarify that I know absolutely nothing about the regulations and mechanisms in place to catch such a thing with the SEC, etc., and don't want this to come off as a conspiracy theory. It's just...with what's come out so far the conspiracy is kind of writing itself, so I wouldn't be surprised if something like this were at play.
What keeps me up at night is not rentech but state actors, like you said, hostile foreign nations. They have the resources to pull it off and plenty of motivation...trading profits would just be icing on the cake, really.
Here's an amateur-level manipulation example you may find interesting . Could rentech do this more subtly with 10x impact? Like I was saying, it may be feasible...still kinda doubt it. If this happens my guess it would be a fund that was no longer profitable, on it's way out, they have nothing left to lose, all this computing power laying around...
And you assert this on what basis? There's enough that's been published to get some broad idea of what happens within the firm.
> And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair).
If they were engaging in illegal activities, it's very likely the firm, which is undoubtedly scrutinized by regulators, any such activities would have been discovered.
> No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves.
RenTech constantly updates its algorithms. Alpha decay is a well known phenomenon. The firm utilizes sophisticated risk management techniques in order to avoid drawdowns, in all likelihood. Assuming this is the case, they're able to more effectively compound returns while simultaneously levering positions. Here's an example of a risk parity strategy , which may help explain how risk management works.
There isn't one smart guy or one great strategy - there are dozens of smart guys and loads of strategies and they can win because they outsmart the city types.
As I remember, beaucoup back testing, hilarity ensues anyway.
*edit: I'm not a serious student of this aspect, but I recall that none of the top independent hedge funds took a bath in the 2007+ collapse (that is, those that weren't in-house funds from a major wall st. company). They all had their risk management in order and all did pretty well in buying distressed assets. Some like Bridgewater really managed to grow non-stop right through that.
Coming up with the predictor is often the hard part. For example, take the tweets of a (sane) president and run sentiment analysis on it. If it is positively correlated with mentioning an equity, the sentiment of the tweet might be a good linear predictor of the stock price.
The math is simple once the feature is well defined.
Feature development is the current frontier, as I understand it.
During the 1990’s they also beat the market.
“Medallion, which is open only to current and former Renaissance employees, has generated returns of about 40 percent after fees for decades by using computers to spot market patterns. It’s distinct from the funds Renaissance makes available to outsiders, such as the Institutional Equities Fund.
Medallion earns most of its money through short-term trading of securities and other assets. Such earnings typically get taxed at the same marginal rate as salary. The tax code rewards longer-term investments with a preferential, lower rate.
The dispute centers on transactions the firm carried out with Barclays Plc and Deutsche Bank AG between 2000 and 2015 that had the effect of transforming short-term trading gains into long-term returns. Rather than own securities directly, Renaissance instructed the banks to buy and sell them within a portfolio of assets. It then bought an option from the banks tied to the portfolio’s performance”
Ren says "we bought an option and held it for a year". The option's counterparty was a bank, I guess, so they just form a company to hold the bag, and the company that is created reports to the IRS that they don't have any assets, just a basket of assets to offset the option they're responsible for.
At the end of the contract (and there can be more than one of these going on at the same time) the assets can be sold, and would be sold, in order to pay for the option contract which was now held for a year. Some money would go to the broker for executing the trades over time, etc. but much less than the taxes that would otherwise be paid.
So, the part that has the tax man scratching his head is that if Ren was directing the buying and selling of the assets in the basket constantly, is that really holding on to an asset, or is it just a lie? They say they got a tax lawyer to sign off on it, so it goes to court to see if it's a defensible position. If not, they'll probably pay a slap on the wrist and won't get to do it again.
It's not done in isolation IIRC. This sounds a lot like how I understand swaps are done, so it may be that this is only slightly unusual.
That's a bold claim that you should be prepared to defend. If not, you should remove it.
I think it was on "Thinking Fast and Slow" that I read it's pointless to analyze the stock market winners, since it's a random process. Imagine there are 30 million entities that own stocks in the US - individual, companies, funds, etc... If on a given year half of them did better than average (with some rounding liberty):
1st year: 15M better than average
2nd year: 7.5M better than average
3.486 x 10^(-91)
The actual probability is a lot smaller btw.
Why do people keep posting this tired argument over and over? It’s not true. There’s no evidence that it is true. The math strongly suggests (see above) that you can beat the market.
Sour grapes. Easier to pretend _nobody_ beats the market than honestly admit you're not willing to put in the effort to constantly discover new alpha. And it's fine to not be willing to do that -- it takes a lot of effort and skill to discover alpha and most people will be better off improving their skills in their day job and just tracking indexes.
Doesn't mean it's impossible to beat the market, especially as a small investor where you have some advantages over larger players (your orders aren't large enough to move markets and reveal valuable information)
Joel Greenblatt had 50% yearly returns for a decade.
Renaissance Technologies uses algorithms.
Also, I don’t think you would expect someone to beat the market every year, but over a ten year period, for example.
The discussion reminds me of a fun exercise we did in one of my B-school classes: everyone stands up and flips a coin. If you flip heads you sit down and stop the game. Everyone who flipped heads flips again, with the new tails flippers sitting down. At the end when there’s one person left, the prof interviews him, asking “how did you become so skilled at flipping heads?” and “what advice can others take to get as good as you!”
This is what we are doing when we admire stock pickers and try to figure out what their secret is.
See my above comment about how statistics does not bear out your fooled by randomness theory.
Scholes & Merton got famously wrecked in the markets.
The reason why they got the RICO.
"From 1969 to the end of 1987 the amount invested rose from $1.4 million to $273 million. Its limited partners saw their wealth grow at 18.2 percent annualized after fees. PNP had no losing years — and not even a losing quarter."
The regulators thought that it was a Ponzi scheme based off that information or did they...
"But most knowledgeable observers believed that the charges — filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act — were also intended to get the Princeton Newport principals to testify against Michael Milken, the controversial “junk bond” trader who had upended Wall Street conventions and who had dealings with PNP."
The regulators thought that it was a Ponzi scheme, when in reality, they mastered the tax code and created losses via hedging, which was legal at the time.
"The resulting charges were related to trades that PNP had made to create losses that would offset corresponding gains that arose during the firm’s hedging maneuvers."
"The Princeton Newport attorney, Theodore Wells, a Harvard Law and Harvard Business School alumnus known for high-profile white collar criminal defense, argued that the trades were allowed under IRS regulations. They even had a former IRS commissioner, Donald Alexander, prepared to testify in their defense. The judge would not permit it."
>I don’t have a dog in this fight but Ed Thorpe has one of his funds liquidated via RICO.
First off, his name is Edward O. Thorp https://g.co/kgs/jfpjL1 not "Thorpe"
>Ed Thorpe has one of his funds liquidated via RICO.
Please post a source because almost all of the charges were overturned.
"Ed Thorp, who was not greatly affected by the criminal charges, was able to restart his hedge fund activity. In 2012 Thorp’s net worth was estimated at $800 million."
All of this information came from this source.
How about you go ahead and mock up a probability model about how a company like Jump Trading can make 100s of market neutral bets every day for ten years, and end up being lucky to make money on 95% of those days. The probability of that happening due to randomness around a 50% probability on each trade is probably lower than 1 in the number of atoms in the universe.
Pull up Goldman Sachs, go to page 95ish:
https://www.goldmansachs.com/investor-relations/financials/c... (p. 95)
https://www.goldmansachs.com/investor-relations/financials/c... (p. 94)
look at the distribution chart. That's days where rev was positive vs. days not.
In the video they covered 2014/2015/2016 which I why I went a looked at 2017/2018. They are right a LOT. And year over year.
I don't think it's magic. I think they are paying attention and using information to their advantage.
And it is a hypothesis that can't be disproven or proven, since, in a round-about way, it concerns non-computable concepts like Kolmogorov Complexity/Randomness (The efficient market hypothesis basically states that the stock market is an optimally compressed computer program, there are no discernible patterns left to reduce the "file" size).
There are numerous tried and tested ways to beat the market, including:
- Have more information than other players
- Have better models than other players
- Make faster decisions than other players
- Have enough energy to perturb the system and predict the outcome (this is the big one that is out of reach of most individuals and non-Physics PhD's).
Survivor bias is of course a very real phenomenon, but like other incomplete information games that can be won, or even solved, algorithmically: Poker, international diplomacy, ..., we would not conflate pure luck with the real skills required to play those games consistently well.
Yours is the kind of folksy explanation that appeals to the masses. It seems like the kind of thing Bernie Sanders would say in a speech. But in this case it leads to an astoundingly inaccurate conclusion.
For whatever reason, people seem to think "50/50 chance of beating the market" = 50% chance of generating 40% return on any given year.
Try randomly picking stocks over the last 20 years, and run 1 billion simulations and see if you get anywhere near that (even letting you have survivorship bias for free)
Yeah, quants like to coyly say they're figuring out where pennies might drop, and then they bring in leverage. Without the leverage, they'd be beating the market by less than a percent in so many cases.
As long as people keep buying a stock, it's price will continue to go up. Same thing the other way.
Now also keep in mind I can sell stock and you buy it, and we can both make money as I bought my stock lower than you.
If a world class mathematician says he will do something, I see the probability of success wildly higher.
It's like when you go to a writing class, and someone inevitably is admonished for doing run on sentences, and then they say "well Charles Dickens did it". Why yes, he did. But you probably aren't going to have Charles Dickens levels of talent.
A favourite type of investment that came up now and then would be a stock that had seen a sudden sharp drop in share price triggered by some announcement that sounded scary but actually made perfect sense if you understood the industry, so it panicked investors who were only looking at the numbers and left the price-to-book low or sometimes even below 1 at the time he bought. That's probably as close to a certain profit as you're ever likely to find trading stocks.
In any case, he almost always invested in "real" businesses and for the long term. He would set stops to protect himself, but he wasn't really a day-trader in the sense we're talking about here.
The last I heard, his average annual returns were something like 15-20% before taxes and fees, which is a pretty impressive record given he'd maintained it for many years and through both bull and bear markets. I doubt most people could do what he did -- the amount of patience and discipline he had were extraordinary -- but it was fascinating discussing it with him, and strangely satisfying to watch him do well by going with common sense and considered choices against a market that was temporarily confused about something.
"Day Trading" is actively taking positions with the intent to sell in the "short-term".
But yes a study of individual stocks and certain sectors would be better
Or following those individual accounts to see how they grew based on everything it traded would be interesting
Is there a basis for believing this?
The number of confounders you need to control for before you could confidently not make this assumption is staggering.
For example if market data operated on a significant lag in Brazil for amateur investors, but didn't in the UK, this would represent a structural disadvantage which might make it impossible to beat the market except through dumb luck in Brazil.
It wouldn't mean it's definitely possible to beat the market in the UK, but it would be something one would want to control for in a study which makes a global prediction based on data from a sample in one nation.
However political events, as I understand you to mean, are one of the things most traders are specifically backing themselves to predict in a futures market.
So my question is: what's the basis for believing that there are structural impediments to retail day traders which are present in Brazil but not present in the rest of the world? Everyone in this thread is absolutely certain they exist, but nobody seems to be able to outline what disadvantages are present for a retail Brazilian futures trader which are not present in the UK outside of red herrings like "Brazil is less stable".
Day traders may well believe they can predict political events in Brazil effectively. And yet, there may be some quality about Brazilian political events that impacts the cohort of Brazilian day traders systematically differently than say Korean political events affect Korean day traders.
For example, maybe a new cabinet member was just appointed in Brazil who likes to leak new political announcements early to an old business partner with connections at several large banks and trading shops, and so regular day traders are at a significant disadvantage in just this one market.
Or maybe during the time period of the study, there were political protests that disproportionately involved young people, meaning the average age (and perhaps skill level) of the observed cohort of traders was artificially too high just in the window of time of the study. Or any number of possible things like this.
You can’t assume these effects don’t exist when looking at different cohorts that have real reasons why they might not be probabilistically equivalent to a more general population. You have to actually account for the possible sources of confounding (in this case the country of the exchange), either by proposing some prior counterfactual model, or by collecting data across different cohorts and explicitly controlling for the confounder with whatever type of model you are fitting.
To be clear: none of this requires you to know in advance what the confounders actually are, and indeed in most causal inference models you literally cannot know what they are. The best you can hope is that you measures things like, e.g. country of exchange or age of the traders, that correlates with the hidden confounders well enough that they allow you to control for the confounding effects in your model.
It is not a thing in professional statistics to expect researchers to already know the sources of confounding before postulating that there could be sources of confounding that need to be controlled prior to believing the results are generalizeable.
Biologist: "Whoa, you see that in the distance? That's amazing! All cows in Scotland are brown!"
Physicist: "Hold on -- all we know at this point is that there's a population of cows in Scotland that's brown."
Mathematician: "No, all we know is, there exists at least one cow in Scotland such that this side is brown."
With that said, I agree that it's an excessively narrow sample for the kind of conclusion they're trying to draw.
That being said, this seems like a double-standard.
Also it says "impossible" but the article actually shows it's difficult and rare.
I've heard low single digits of traders and investors deliver Alpha. Impossible? no. Highly efficent? Yes
The post's title is click bait.
HFTs will target big insitutional traders who have to shift a billion dollars at rebalancing time in a single day.
Even that is a dying business today because they themselves have been arbitraged away to a degree.
I only trade US equities and in particular large caps or soon to be large caps.
That said, the fact that the market is bad, is just randomness and shows one of the major difficulties with relying on investment income to support your life. Sometimes stuff just sucks, for very long periods of time. Meanwhile you must pay your bills.
That doesn't even get in to whether or not these people dramatically underperformed the market. They very likely did, but I also bet some of them outperformed based on luck or skill.
Stock market investing is something everyone should try at somepoint in small doses just to understand how difficult it is. Its probably the hardest way to make money in the world and even the best investors usually have a bad few years which ends their careers.
Just no. Certainly it's not easy. But the hardest? I'd say there is a long list of occupations which most people would consider harder on various dimensions.
I think they aren’t saying that it’s a hard profession by itself in the way that you are talking about — only that the expected returns are negative for almost anyone.
So in that case it’s not calling day traders smarter or harder working than others. It’s saying that no matter what your level of intelligence or other personal attributes there is likely some other job that would have much higher expected returns.
For person A it might be to be a firefighter, for person B, to be a gymnast, for person C, to be a brain surgeon, for person D to work as a maid. Etc etc.
At least that’s the way that I read it.
Since that, I consider any job with a desk a god damn luxury. Bonus point: you have your own toilets.
not only that but futures can be shorted too so i don't think its unfair to use "are they profitable" as the criteria in a down or sideways market.
i do wish they showed a breakdown of under vs overperformance relative to the bovespa during their trading period.
The study doesn't literally say "impossible" but "virtually impossible" and they do say that a very small percentage was able to make about $310 a day which is about ~110k a year.
The more interesting trend, which isn't covered in the abstract, is that profitability is inversely correlated with how long you stay at it. It was 30% of people who day traded for one day and gave up on it, and steadily dropped down to 3% for people who kept at it for more than 300 days.
As a stats person, that struck me as a very evocative distribution. The paper put it nicely: "This peculiar pattern is similar to what we would find, for instance, in the casino roulette."
The next thing I would want to know is, if you model the stock market as a machine that simply gives random payouts drawn from some distribution, what is the probability that a set of 1,551 groups of 300 random draws from that distribution would contain at least one set that averages more than $310? If the paper ran such a model, I didn't see it.
The abstract says the trader who made $310/day had a standard deviation of $2560 (presumably per day). Over 300 samples, that's a standard deviation of 2560/sqrt(300) or $150/day. So if he really had a breakeven strategy and got lucky, he was 2 standard deviations from the mean, or in the top 2.5%, and you'd expect 40 other traders to have done just as well, and it would be vanishingly unlikely that nobody else did.
Not quite what you were asking, but I don't think there's enough information at least in the abstract to answer your question. The payout distribution will be largely dependent on the size of the traders' positions and riskiness of their strategies.
In the short term it's not that unusual to flip a coin and get 5 heads in a row, but the more you throw the closer to a 50-50 split you'll see.
My hypothesis is that their average returns would end up being much higher than the returns they realized by day trading that whole time, due to less money being lost to fees.
$310 * 5 days a week * 52 weeks a year = $80,600
Just because something is hard doesn't mean it's impossible. Day trading, like many other risky ventures, is something that is very hard and unlikely but for the few who succeed ends up being very profitable.
My interpretation of this, is that those they tracked in this study, it's not even all that profitable for the few that beat the odds while being exposed to significant risk.
Imagine we tracked a group of 1000 randomly picked individuals who wanted to be a brain surgeon. I don't know for sure but I wouldn't be surprised if of 1000 randomly chosen people, only 3 people managed to succeed at it after 4 years.
But no one would ever say "Study shows it's impossible for an individual to become a brain surgeon." or imply that it's just random luck to be a brain surgeon. Instead we conclude that being a brain surgeon must be very hard and require a great deal of dedication and commitment.
The reason day trading is singled out whereas brain surgeons are not is that the barrier to entry to become a day trader is very low, anyone can try to become a day trader and many people think they can succeed at it.
The proper conclusion to take from this is isn't that the stock market is pure luck or just a form of gambling... it's that one shouldn't be deceived by the low barrier to entry into thinking that they can succeed at it. It's really hard, soul crushing work to be a successful day trader in much the same way it's really hard work to do anything in life that pays well.
Some group of people are guaranteed to become brain surgeons.. the demand is there, the training is there, so it is a near certainty. In fact in the US at least, you can know very closely how many brain surgeons there can be per year. Who will fill those slots isn’t too kind to all takers. It is dedication, hard work, and luck (ie ovarian lottery).
Also the majority of those that “fail” at obtaining a neurosurgery training. If they were on the path to medical training will end up falling back to any number of high paying jobs in medicine or surgery.
This study found no one did terribly well at day trading. Random chance implies there will be some outlying outcomes, but that is a fundamentally different objective than having too many people for few slots.
Also your final paragraph seems to imply a causal relationship between how hard you work and remuneration. Hard work doesn't hurt, but luck is very important.
Which isn't to say day traders can't get those things, it's just that you stop calling yourself a day trader and start calling yourself an investor when you start to intentionally build up structural/institutional advantages.
Either daily movements of stocks are not at all like a random walk, or I am just one heck of an astronomically lucky guy. Now I do consider myself fortunate and privileged, for sure... but the amount of luck it would take to repeatedly make money on the market day after day that can fund a decently sized team of high paying engineers, data center costs/hardware costs, so on so forth... it's unthinkable.
The stock market, at least to the degree that I am involved in it, very short term market microstructure, doesn't behave anything like what economists say it does.
What makes commodities easier to trade?
Ed Seykota has been doing it for decades:
You’ll quickly get big or go home.
(However trading on embargoed government press releases is illegal. Though rather than kidnapping Clarence Beeks on the train, you can just interview the Florida farmers yourself.)
You would definitely have an advantage in trading oil/gas futures if you had access to ExxonMobil's seismic exploration reports, for example.
But the insider trading you suggest above, is predicated on having material non public information of ExxonMobil’s.
IMO the main difference is that, while in both cases you'll see a small number of successes and a huge number of failures, in startup land the net expected value is positive while in day trader land it is negative.
How would you interpret the phrase "It's impossible for an individual to play the lottery for a living"?
Technically we both know it IS possible, technically. But in the real world? I don't know, but I wouldn't be suggesting anyone out there try make a living playing the lotto.
The market always goes up. Even if right after this comment, if the sp500 tumbles and we enter a recession, your share of vix doesn’t go anywhere. Youd just wait for the market to recover and hit the price you bought it for.
However, day trading isn’t really viable unless you have a lot of money to take advantage of every dip and hill and get around day trading restrictions.
If we consider a tech startup a single gamble, then living off trading is a continuous stream of independent gambles.
While individual gambles may turn out better than the average (even many in a row), repeated gambling will always see the total outcome return to the normal.
This is why the house always wins.
> the top individual earned only US$310 per day with great risk (a standard deviation of US$2,560).
The very best day trader made around the same as an entry-level SWE, which does not scream immense profit to me.
In a major tech hotspot, working 8 hours a day
It would be easy to find data to show that 99.99% of people aren't the best tennis player or fastest runner or best Scrabble player in the world; therefore, nobody can be the best at it. According to this reasoning, at least.
And when I say rational basis, that's its own challenge. There is a huge potential for emotional thinking disguised as rational and for self-delusion. Everyone wants to believe they are the top 0.01%, and most of them are wrong.
Day traders rely on technical analysis which is the equivalent of astrology in the financial sector.
This is a statistical reality, you can literally crunch the numbers! Behavioral finance has nothing to do with it.
I've always hated the argument of this book: yes the markets are chaotic and short term movements appear random, but the appearance of being random is not equivalent to being caused by a random process. The book makes a big deal about how technical analysts saw patterns in random data so it must be bunk, but this doesn't really say anything about the predictive power of technical analysis when the data is generated by the aggregate actions of thousands of traders instead of a coin toss.
Price action is not the result of investors literally buying or selling at random. Each action is undertaken in response to external conditions and it is far from absurd to believe that patterns can exist in the price.
Seems like an institution with dedicated employees performing due diligence will know much more than an individual day trader, and thus will be able to make better decision about when to buy and sell?
Anyway, my bias has always been that day trading is really gambling.
Or, just get lucky.
The only personal example I have is from buying NFLX stock about a decade ago. I saw a news (Slashdot I think) story that Netflix's servers were having an hours-long outage. I can't remember if it was mentioned in the story that their stocks took a dip, or I just happened to look. Either way, I noticed that their stocks were down about 30% on that news, which seemed silly to me. The market was treating this like it was some kind of disaster for the company, whereas I was pretty confident it was a temporary blip.
I bought the stock, just a few hundred worth since I was in my first barely-over-minimum wage job at the time. Netflix got their servers running again, and the stock recovered the next day. I decided to hold on to the stock because, why not? Today, it's worth about 20x what I bought at.
If only I'd bought more.
My point is, I knew that the market was wrong, and an hours-long server outage wasn't a reason for Netflix to suddenly be worth 30% less than it was the day before.
To successfully pick stocks, you have to have some kind of expertise or insider knowledge to know when the market's wrong, and you're right. Most of us, in most situations, don't have that kind of expertise or insider knowledge.
> We show that it is virtually impossible for an individual to day trade for a living, contrary to what course providers claim. We observe all individuals who began to day trade between 2013 and 2015 in the Brazilian equity futures market, the third in terms of volume in the world, and persisted for at least 300 days: 97% of them lost money, only 0.4% earned more than a bank teller (US$54 per day), and the top individual earned only US$310 per day with great risk (a standard deviation of US$2,560). Additionally, we find no evidence of learning by day trading.
The Longer I live, the more I see people profiting off knowledge.
A personal example I see of this is in Tech. If you understand tech, you can find areas people don't understand. Those are what's worth investing or shorting.
Although if you are limited to day trades I'm not sure this is relevant.
It's difficult to, for example, learn how to become a brain surgeon on the job.
I believe there’s some good evidence for weak form efficient markets hypothesis in the most liquid markets, which implies you can’t make money by trading only on ‘technical signals’ in the price. This is what you might expect day traders to try to do, so in that sense it’s not a particularly surprising result this paper demonstrates.
But the consensus is, I think, that the strong form of the efficient market hypothesis might not be true in real life - being good at fundamental analysis can lead you to outperform the market.
Illiquid markets are a bit different again - you can potentially get ‘paid’ a lot more just for providing liquidity to the market there, which is different again.
Doesn't this amount to telling you your education is useless?
If the stocks themselves are random walks, then the underlying company performance must be random walks. If your education does indeed improve the outcomes of the business you manage and run then that would mean stock performance can be influenced by things other than luck.
Unless of course you are operating under the premise that company performance and stock performance are unrelated.
> "We follow all individuals who day traded mini-Ibovespa futures contracts for their first time from 2013 to 2015, a total of 19,646 individuals."
I know nothing about the Brazilian equities market, but it seems like it might be harder to for individuals to reliably make a profit on something heavily traded and fungible (Ibovespa is an index), where you're competing with much bigger players. Smaller stuff might work better--for one person--because it doesn't scale.
Liquidity is a very important aspect of any market. If you are the largest player in a small market (i.e. it has low liquidity), you are market making, and the problem with that is information asymmetry comes into play: you're trading against people who know stuff you don't know, and they will only trade against you when you're wrong.
If you are in a highly liquid market, the market represents all the information out there, so you need to think about where your informational edge comes from.
Most day traders seem to focus on technical analysis in the belief that there are underlying probabilities that drive market movement and this alone is enough to find an edge.
The linked paper is not one I have read completely yet, but it seems to align with my own experience and those observed elsewhere: that might be true, but you need to find the edge nobody else has seen yet, and that seems to be very difficult and carry some risk.
Making a living on craps or roulette? Not mathematically impossible, but highly improbable. How do they get their edge?
(Oh, and most tables have maximums, so you can't keep doubling your bet to infinity.)
Unfortunately this falls into the "too good to be true" category. A very unscientific categorization but surprisingly accurate in real life.
To me the worst conclusion is that "Additionally, we find no evidence of learning by day trading."
Which leads me to believe that despite your best efforts at obtaining knowledge, luck in timing still plays too much of a role in the outcome. That doesn't add up to a viable alternative to a regular day job.
If you've got a million dollars and put it into an index fund you'll make ~$100k/year. If you day trade and make "Decent money" of say $70k/year you're still at a loss vs if you took the less 'risky' approach. Even if you made $150k (50% over the index) it's still a loss due to lost opportunity cost. As the $100k index + a job at McDonalds making $30k/year still puts you ahead due to long term vs short term capital taxes. And if you've got the knowledge to day trade and earn more than 50% over an index you can probably command a better job than fast food.
If you don't have a million in capital it becomes harder and harder the less money you have.
Your friends would need to consistently beat the market by a percentage of their capital for it to be considered a 'win' imo.
It seems like the existence of 'trader' as a job at all of these financial institutions kind of disproves EMH if you have enough market data
After the Volcker rule the big banks had to close their prop trading groups:
The idea that investment banks are filled with human "traders" is Hollywood nonsense.
Most trading activity (and even filling of retail order flow) is now done by quant-driven funds.
I stand by my point, the idea that Goldman is full of traders in the Hollywood sense is nonsense.
Goldman Sachs, et al, would not lobby the government to get rid of a law that prevents them from doing something unprofitable.
Not a level playing field. It's exactly because you're going up against guys like GS that's the reason for day trading being suicide.
Not sure I understand this study tho, and whether or not it relates.
Which isn't to say that technical analysis is unfounded. And I do believe that there are opportunities that exist for individuals that haven't been arbitrated out of the market by the professional quants simply because they don't represent enough money to be interesting on an institutional scale. But it takes something like a bear market to really know for sure if you've found those opportunities, or if you're just riding a rising tide that lifts all boats.
As someone that trades on fundamentals I like to think of that as reading tea leaves. Literally non sensical. Oh yeah sure that pattern is the upside down elephant so we should go short...
No smoke without fire though so I assume some are making money with it. Just doesn't seem like a sound idea to me.
Most folks who feel the allure of day trading don't realize that to make it work it has to be your full time job. You can't just make some trades, go off and do something else, and expect to make any money.
In fact I'm surprised that day trading in Brazil is not more popular than it already is. It's basically legalized gambling. I do remote work as a software developer in Brazil and I've been playing a bit with options swing trading on the side (which is even cheaper than day trading); I don't plan to make a living out of it, but it can be fun (and a bit addictive).