Wednesday, December 14, 2011

full time retail traders (my take

(a blog post)

Whenever I hear someone is play the stock market or FX market full time, I wonder if this person has any stable income. Do you know any FTRT having a stable income?

It's not uncommon to see a "winning strategy" that makes money for months even years, then suddenly suffer a big loss (or losses) that wipes out all the gains.

Some seasoned players (including day traders) accumulate many small gains. They take fewer risks. But I was told they too can suffer a big loss that wipes out all gains. (Personally, in 1997 I was a newbie trader taking small gains every day, but someday market opened with a drastic move, big enough to wipe out 100 small gains, fast enough to leave me no time to react.)

In all these unlucky stories, the annual average income of this FTRT is close to $0, when US median household income is around $55,000. This guy can't even pay his bills!

These are retail traders, but how about investment banks? Investment banks typically make money from less unpredictable businesses -- asset management fees, IPO fees, M&A advisory fees, stock lending, pass-through brokerage (commission based). In bond trading (and single-name stocks?), they tend to monopolize an entire market for an issuer -- low chance of losing control, but still can lose control...

Market making is more risky for an i-bank, but should be less risky than our FTRT. The reason why market making is less risky is presumably due to systematic and disciplined hedging.

For an i-bank, the real risky business is prop trading. Apparently big banks suffered big losses just as badly as the FTRT. But I think banks often make big money for many years, then lose, so if you average their PnL, i think it's positive. (However, some funds declare a negative average PnL, such as the hedge fund started by Citigroup CEO Vikram.)

Compared to investment banks, hedge funds have an /backdoor/ option known as "close down" -- All the investors' money is declared as lost. Effectively, traders use OPM (other people's money) to gamble. If he's lucky, he profits; if he bets wrong, other people lose money and he disappears, completely. In contrast, big banks often has to hang in there because it has other businesses to prop up. A family man vs an orphaned bachelor...

In conclusion, FTRT is a dubious concept to me. Big players do employ full time traders because they have more influence on specific markets they choose to play. Still trading full time with one's own money is highly risky.

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