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The Instagram guys found an edge. It won them 730m. Fantastic. More than any edge ever won by me. But the market has changed so much since then, please be careful before you follow this course.

You are not wrong, but what you wrote here is applicable to any success story posted on HN.

Caveat lector. Always.




I think with the automated trading example, it makes it seem much easier for anyone to dip their cup in the stream.

When you think Facebook/Instagram, you think "Damn, those guys got lucky as hell". When you think automated trading, you think, "Hey, it can't be that hard", and start firing up your IDE and rolling out code to talk to an easily provisioned API.

Sure, it may take months to lose your shirt selling a photo service to Face/Goog/Apple. You can lose everything overnight with automated trading.

My father used to trade commodities for a living in the pit at the CME many moons ago, and when I was growing up I would be his technical side when he was trading out of our suburban Chicago home (setting up FM receiver/satellite dish/etc for real time quote data, staying up late nights with him running through trading scenarios in Tradestation on Win3.1 with data downloaded in bulk from Knight Ridder, and so forth).

Something very important I learned from him was: "The market can stay irrational longer than you can stay solvent." With a startup, you can hit bottom. In the right market, bottom is much further down than you can ever see.

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> You can lose everything overnight with automated trading.

I'll take it ad absurdum: You can lose everything in a second by not looking left and right while crossing the road. Or even by looking left and right while crossing the road, when someone else is driving recklessly.

It is possible to attempt HFT with not much more risk than stating a new InstaFaceGoogApple service. Put $10,000 in your margin account, and use a broker that practices proper margin checking. Tada! You're not going to lose more than $15,000 over that. (Yes, you can lose more than you put in your margin account, but not by much).

While that's more, upfront, than InstaFaceGoogApple, it is comparable to the 4 months of salary that you're going to forfeit while building the InstaFace service. And unlike most InstaFace apps, you have immediate market feedback, which can only be a good thing.

Note: Instagram did have immediate feedback from the public at large, forcing them to scale much earlier than they expected - but they did not have a feedback as to the financial value of their proposition. In fact, it wouldn't take much for instagram worth to be zero. Read, e.g. http://www.jamesaltucher.com/2011/02/my-name-is-james-a-and-... - a $100M acquisition back then is like a $300M acquisition in today's valuations; not Instagram but definitely nothing to ignore.

> With a startup, you can hit bottom. In the right market, bottom is much further down than you can ever see.

That's true. But you still have to remember that 90% of startups fail, and of those that succeed, many are just moderately successful. And yet no one keeps yelling "but most startups lose money!" at every HN story.

> When you think automated trading, you think, "Hey, it can't be that hard", and start firing up your IDE and rolling out code to talk to an easily provisioned API.

Which is what we should address, and these "it's a gamble" warning do not. When you see Suzanne Vega singing, you might think "Hey, it can't be that hard to sing". Many people do. And yet, they grow out of it, usually without trying to publish an album (and failing). This should be no different.

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No broker is offering the ability to engage in HFT for 10 grand.

In order to open an account with the neccessary infrastructure to engage in HFT one must be an accredited investor (typically means having a net worth of 1 million dollars or more) and the cheapest brokers typically require a minimum deposit of $500,000.

Not to mention the overall costs including hardware, co-location, market data and other vendor costs are on the order of 45-50k a month.

With $10,000 you can't even open up a normal day trading account as the law required a minimum deposit of 25k.

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Not true. I have a commodities trading account I use to trade corn, soybeans, and hogs. Minimum opening balance was $5K (Tradestation). Scottrade and others have a minimum of $500. Now if you're talking margin accounts, sure, you're going to need more.

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>>You can lose everything in a second by not looking left and right while crossing the road. Or even by looking left and right while crossing the road, when someone else is driving recklessly.

The point is you are lured into crossing the road, when you absolutely didn't have to.

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How are you "lured" by reading an article about someone who successfully crossed the road, any more than you are "lured" into a singing career by reading about Adele or "lured" into building an instagram clone?

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> "The market can stay irrational longer than you can stay solvent."

As long as we're quoting Keynes, let's also remember this gem from a letter he wrote to the regents of King's College about the performance of their endowment's portfolio (which Keynes managed).

"The management of stock exchange investments of any kind is a low pursuit, having very little social value and partaking (at its best) of the nature of a game of skill, from which it is a good thing for most members of our Society to be free; whereas the justification of Worlaby and Elsham lies in its being a constructive and socially beneficial enterprise, where we exercise a genuine entrepreneurial function, in which many of our body can be reasonably and usefully interested. I welcome the fact that the Estates Committee-to judge from their poker faces and imperturbable demeanour-do not take either gains or losses from the Stock Exchange too gravely-they are much more depressed or elated (as the case may be) by farming results. But it may be useful and wise nevertheless, to analyse from time to time what is being done and the principles of our policy."

Edit: Worlaby and Elsham was a farm that the endowment owned.

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Wow that is a gem. Keynes was a giant. Wish the political parties wouldn't run from him.

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A wonderful quote, but this is the only google result for it. Can you provide a source?

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http://www.capitalideasonline.com/articles/index.php?id=2049 claims that it's from a "Memorandum for the Estates Committee, King's College, Cambridge" dated the 8th of May, 1938.

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"You can lose everything overnight with automated trading."

Didn't your father teach you about "Stop orders"

You can't have your algorithm cranking away without supervision. And to be extra sure, lots of testing and LIMITS.

Limit the amount and value of orders.

With stocks, worst case: you lose the face value of stocks in your portfolio

Derivatives: you can lose more, even 'infinite liability' (still, it's constrained by the stock market inertia)

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Stop orders don't guarantee execution or any specific limit to the loss; During a flash crash, you'll realize that a "10% stop loss" order CAN become a 50% loss.

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This. I'm very familiar with stop orders. They're useless once the market goes to hell (the exact conditions you need them in).

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I don't disagree with you, still, 50% losses are not 100% losses (or even more than 100% losses)

So I guess they have a role in limiting losses (which had they not been there would be much bigger)

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I love this comment :)

What pains me is just this year I've heard in 3 separate occasions for 3 separate startup businesses {industries: ['transportation', 'social', and 'mobile ads']} people propose "Let's do the Instagram strategy." It may be obvious to you and me how absurd that sounds, but there are a non-trivial number of people who blindly follow headlines.

Edit: I agree with @toomuchtodo. It's just too easy to risk with HFT that the warning is needed here more than elsewhere.

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Agreed... in essence this is why we're all here. As entrepreneurs we all educated risk takers, and we realize any venture is essentially gambling if there is no edge. At any time, there could be a new idea that pushes any one HFT algorithm (or mobile photo sharing app, or words with friends clone) past the established mindshare into blue ocean territory. When that time comes, do you want to be caught with your pants down, lumbering under the excuse that you thought the oceans were too red for you to bother?

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