Small size means you can look for opportunities with a good return, but low capacity (e.g. some opportunity that could turn 10k into 20k, but couldn’t turn 10M into 20M). I think this is a much bigger deal than the low slippage advantage that comes from small size.
I’m kinda curious as to what sort of opportunities people think these are (especially in developed markets)
The sorts of things which have low enough variance to be “good” trades without doing them systematically would require large, concrete mispricings. I struggle to see how the opporunity is limited to ~$10k in those cases?
Where there are regular opportunities to turn $10k into $20k, I can assure you that that is not “too small” for trading firms. At the extreme, and HFT trading 1-lots is quite happy to trade things with tiny $ edge, but doing them at scale.
(Strongly agree with you re: weird things and time horizon though, they are definitely the biggest edges I can think of for retail)
I’m kinda curious as to what sort of opportunities people think these are (especially in developed markets)
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Where there are regular opportunities to turn $10k into $20k, I can assure you that that is not “too small” for trading firms. At the extreme, and HFT trading 1-lots is quite happy to trade things with tiny $ edge, but doing them at scale.
These opportunities are going to be especially not in developed markets. Or not things that a firm can do systematically.
I agree that 10k (or much less) profit per trade is not too small for an HFT shop, if it’s part of an overall strategy that does many trades. The capacity of a trading strategy isn’t how much it makes per trade, but how much capital you can productively allocate to it over its lifetime. And a firm is not going to devote weeks of an employee’s time to developing a strategy that’s only ever going to make 10k.
Instead, I’m thinking of weird, one-off things like:
taking advantage of credit card sign-up bonus arbitrages
deciding that a particular house for sale (not the whole housing sector) is undervalued
speculating on a rare book, or piece of art, or other collectible
betting on obscure cryptocurrencies that you’ve done some analysis of
taking advantage of DeFi yield farming schemes
These are generally going to be weird small things that a traditional firm can’t easily trade in a systematic way, such that it’s not worth their time to look into them.
Note that it might not be worth the retail investor’s time either, depending on how they value their time and their opportunity costs. But in some cases I think you can stumble upon knowledge that you can then take advantage of, without worrying that your knowledge / reasoning is mistaken because there shouldn’t be a $20 bill on the sidewalk. If you stumble upon some information that makes you think the S&P500 is undervalued, you should be a lot more skeptical of that than of some analysis that suggests some obscure collectible / penny stock / cryptocurrency / NFT is undervalued.
Okay, but your examples are now all the same as your “2.” (which I don’t disagree with). Size isn’t the advantage here, it’s being able to be involved in weird things. (I was disagreeing with your point “3.”)
Fair enough. I suppose I’m having trouble coming up with examples of opportunities that are both not weird, and also not systematizable. (Though I do think evaluation of individual penny stocks counts.)
I’m keeping that as separate from 2 though because I think that if you do find something like that, the retail trader is potentially advantaged. And in general, I think it’s true on a spectrum — the more capacity a strategy has, the more you shouldn’t expect to beat the market with it.
I think of the market as like an ecosystem. If you look at a cubic meter of rainforest, there’s a ton of activity going on at different levels, from bacterium up to tree. Different organisms are taking advantage of different metabolic opportunities of different sizes and types (and their activity provides opportunities to each other). Each creature has its niche.
I think of the market as like that. You’ve got big long-term macro funds taking positions that last for months. And you’ve got little nimble HFT shops making money off of the big slow macro fund’s predictable-on-short-timescales trading behavior.
And I claim the retail trader can potentially find a niche here too. And part of what they should look for are opportunities that are not worth the time of bigger firms. (Though note that this might just mean that this retail trader is currently being undervalued, if they can find opportunities that are worth their while, but wouldn’t be worth the while of an employee at a firm.)
I’m kinda curious as to what sort of opportunities people think these are (especially in developed markets)
The sorts of things which have low enough variance to be “good” trades without doing them systematically would require large, concrete mispricings. I struggle to see how the opporunity is limited to ~$10k in those cases?
Where there are regular opportunities to turn $10k into $20k, I can assure you that that is not “too small” for trading firms. At the extreme, and HFT trading 1-lots is quite happy to trade things with tiny $ edge, but doing them at scale.
(Strongly agree with you re: weird things and time horizon though, they are definitely the biggest edges I can think of for retail)
These opportunities are going to be especially not in developed markets. Or not things that a firm can do systematically.
I agree that 10k (or much less) profit per trade is not too small for an HFT shop, if it’s part of an overall strategy that does many trades. The capacity of a trading strategy isn’t how much it makes per trade, but how much capital you can productively allocate to it over its lifetime. And a firm is not going to devote weeks of an employee’s time to developing a strategy that’s only ever going to make 10k.
Instead, I’m thinking of weird, one-off things like:
taking advantage of credit card sign-up bonus arbitrages
deciding that a particular house for sale (not the whole housing sector) is undervalued
speculating on a rare book, or piece of art, or other collectible
betting on obscure cryptocurrencies that you’ve done some analysis of
taking advantage of DeFi yield farming schemes
These are generally going to be weird small things that a traditional firm can’t easily trade in a systematic way, such that it’s not worth their time to look into them.
Note that it might not be worth the retail investor’s time either, depending on how they value their time and their opportunity costs. But in some cases I think you can stumble upon knowledge that you can then take advantage of, without worrying that your knowledge / reasoning is mistaken because there shouldn’t be a $20 bill on the sidewalk. If you stumble upon some information that makes you think the S&P500 is undervalued, you should be a lot more skeptical of that than of some analysis that suggests some obscure collectible / penny stock / cryptocurrency / NFT is undervalued.
Okay, but your examples are now all the same as your “2.” (which I don’t disagree with). Size isn’t the advantage here, it’s being able to be involved in weird things. (I was disagreeing with your point “3.”)
Fair enough. I suppose I’m having trouble coming up with examples of opportunities that are both not weird, and also not systematizable. (Though I do think evaluation of individual penny stocks counts.)
I’m keeping that as separate from 2 though because I think that if you do find something like that, the retail trader is potentially advantaged. And in general, I think it’s true on a spectrum — the more capacity a strategy has, the more you shouldn’t expect to beat the market with it.
I think of the market as like an ecosystem. If you look at a cubic meter of rainforest, there’s a ton of activity going on at different levels, from bacterium up to tree. Different organisms are taking advantage of different metabolic opportunities of different sizes and types (and their activity provides opportunities to each other). Each creature has its niche.
I think of the market as like that. You’ve got big long-term macro funds taking positions that last for months. And you’ve got little nimble HFT shops making money off of the big slow macro fund’s predictable-on-short-timescales trading behavior.
And I claim the retail trader can potentially find a niche here too. And part of what they should look for are opportunities that are not worth the time of bigger firms. (Though note that this might just mean that this retail trader is currently being undervalued, if they can find opportunities that are worth their while, but wouldn’t be worth the while of an employee at a firm.)