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Posted: Sun Jan 11, 2004 7:37 pm
by Sebastian
Sorry, forgot something (else) that I don't get. :oops:
As to computerized institutional trading I happened to know something. For instance, I know that 700+ traders in just one division of a major institution very successfully exercized a speculative system trading program in stock market derivatives for several years. Were those traders susceptible to much fear, greed, hope? I doubt that (yes, verec, this is my opinion).
There would be no need for 700+ traders to trade a system that was computerized if those traders had no discretion to stray from the system's rules, would there? Whoever the firm was could just by-pass them completely and automate the trading, guaranteeing that there would be no human error and at the same time saving salaries and commissions for 700+ people, right?

So, logically, the traders must have had the ability to override the system rules? And the results whenever they over-rode the system rules were always positive and were never the result of emotions or illogical thinking? That seems a bit of a stretch, doesn't it?

Or maybe I'm just ignorant of how things work at the institutional level, which is more likely. :)))



Posted: Sun Jan 11, 2004 9:27 pm
by kalitka

Yes, you are right. The 700+ traders example doesn't illustrate very well my reference to computerized institutional trading. If it were fully computerized - traders wouldn't be needed. But that's the only real life example I have! I can't take those traders out of the picture since I know they were there, trading! I also know that a lot of research effort went into system's development with tons of talent invloved. Many people on this forum have agreed that discretional systematic trading is not much different from pure mechanical trading, so I thought that my imperfect example would still help to make the point.

And I'm the first to admit my ignorance, I'm sure that many people would know a lot more about institutional practices today, and I would like to hear what they think. It seems that most replies I got so far were stating that either the questions were wrong or the answer doesn't exist and at any rate it wouldn't help my trading. This, however, doesn't seem very constructive to me. At any given day among X contracts of heating oil traded, X1 was traded by institutions for speculative purposes, X2 by institutions making market, X3 by hedge funds, X4 by retail traders, etc. so that X1 + X2 + ...Xn = 2*X. The answer does exist.
Why do I want to know it is a different question, and if anyone's interested I could answer. After all why people search for answers? Why bother proving the Ferma theorem (which states that something does not exist and therefore cannot even be proven in a constructive manner.)
While it is obviously impossible in practice to obtain precise numbers, one can think of many ways to derive reasonable estimates. The winners/losers ratio should be even easier to assess. Independently audited large brokerage's accounts over several years would suffice.


Forum Mgmnt,

I apologize for being seemingly impolite to the thread's host. verec was adressing his post directly to me, so I thought that direct response would be appropriate. Part of it may be, that I'm not allowed to start my own thread. I'll try keep it nicer, though :D

Posted: Mon Jan 12, 2004 5:28 am
by verec
c.f. wrote:verec,

try not to be drawn into exchanges of negative comments, it doesn't help the forum.

Will do. I aplogize for having been carried away. Just another instance when emotions overtake your sense of rationality :?

Counterparty Analysis

Posted: Mon Jan 12, 2004 6:43 am
by brendo
kalitka wrote: At any given day among X contracts of heating oil traded, X1 was traded by institutions for speculative purposes, X2 by institutions making market, X3 by hedge funds, X4 by retail traders, etc. so that X1 + X2 + ...Xn = 2*X. The answer does exist. :D

I have almost 15 years experience in the wholesale Forex markets including 10 years as an Institutional Salesman. The sort of information that you seek certainly does NOT exist in Forex (the largest of the financial markets) as it is impossible to collect due to the lack of a centralised exchange. Notwithstanding that, in my humble (but well informed) opinion this type of data would be next to useless for trading for the following reasons:

1. The classification of market participants does not really tell you anything - e.g. is the Hedge Fund a trendfollower or a contrarian? or is the speculative trader closing out or opening a new position? Is the market-maker taking a view or passing-the-parcel?

2. What does it matter what everyone else doing? Most traders lose money no matter where they trade from. Some of the biggest-losing traders I've observed have worked for some of the most prestigious institutions e.g. LTCM. Some of the best traders I'v worked with were not well educated but they had learnt how to trade market patterns. Some retail traders make money every year, most lose. I've not found a consistent pattern amongst market participants.

3. Even if most participants were using mechanical systems, what does that matter? System-based trading could mean so many things. Is it a trend-following system or a fair-value system? Personally I will worry if I think everyone is a trendfollower, but I believe we are a long way from that ever occurring, there is too much infrastructure centred around fundamental analysis.

4. Searching for and analysing such data is really just a type of fundamental analysis. Personally I have not found fundamental analysis to be of any use other than to give a reason/excuse why things happened e.g. " the Dollar rose against the Yen as Hedge Funds took profits on their short positions ahead of the holiday weekend...". Market commentators will never say something like "...the dollar rose because there were more buyers than sellers..." because they are afraid that they will sound stupid and uninformed.

These are my observations and opinions gained from my career in the biggest market dealing with many big players. I used to be a fundamentalist, then I moved onto technical analysis. I feel I have now evolved into a more enlightened trend-follower that concentrates on money-management and exploiting good fortune.

I hope this post goes some way to answering your question..


By the Way - 700 Traders? All trading the same system for the one shop? Putting my old fundamentalist hat on that sounds like a stock I'd like to short.....imagine how much money that institution would have to make just to break even...imagine the bill for lunch...

Posted: Mon Jan 12, 2004 8:55 am
by Sebastian
kalitka, although it's not exactly what you're looking for you might want to look at John Bogle's book, "Bogle on Mutual Funds." He analyzes equity mutual fund performance (for which there's a lot of public data) against straight indexing, and the bottom line is this:

*60% of equity mutual funds typically underperform a diversified unmanaged index (like the SP500 or the Wilshire 5000).

*When you factor-in sales load, 80% of equity mutual funds typically underperform.

*Of the minority that outperform during one 10-year period, it's unlikely that they will also outperform in the next.

This information isn't related to the futures industry, of course, but I think it addresses your concerns ("Who am I up against?" "What are they doing?" "Can I beat them?"). Even with access to the best management, research, TA, money-management tools, execution, IT resources (and huge pools of money) institutions trading stocks generally can't beat the market, and even the few that can can't do it consistently.

That's a hopeful sign for people like us, isn't it? :D




Posted: Mon Jan 12, 2004 9:20 am
by verec
Sebastian wrote:Even with access to the best management, research, TA, money-management tools, execution, IT resources (and huge pools of money) institutions trading stocks generally can't beat the market, and even the few that can can't do it consistently
One thing to keep in mind is that most of those companies owe their survival to customers' fees and marketting hype, not to being successful in the market.

As if actually doing what they are charging their customer for was not goal #1 of their business. And indeed, that's good news for everyone on the other side of their trade. ;-)
Never attribute to malice what can be explained by sheer incompetence. -- anon
The "mind trap" that most "investors" trusting their money with those big institutions is that they beleive that being prominent, old and having an established reputation is enough to prove that they're going to be successful in the future. When in fact, most of their wealth comes from their customers fee structure...

Naked King, anyone ?

Posted: Tue Jan 13, 2004 9:22 pm
by Douglas
You would actually have to think, read, and do work to see the Naked King. Not many of the non-trader type people who I know do all three of the above with respect to money.

I'm curious to see how many traders still have money with ye olde skimmers-off-the-top mutual fund Kings. I'd be guessing, but I'd say it comes close to none.


Posted: Wed Jan 14, 2004 5:50 am
by verec
I think I read this in Michael Lewis "Poker Liar" ...

the actual Bank name is in the book, I don't dare reproducing it here

[XXX]-Bank reported annual profits, in 1990, for its trading division as $200 millions, as follows:

$600 millions gain in brokering fee and customer advice and service
$400 millions loss in actual trading

The bank then claimed that runing their trading desk, _at a loss, obviously_ was what gave them enough clout to attract customer business ...

When I read this, this forever put to rest the idea that I was up against a formidable competition that had tools and brain I wouldn't ever be able to match ... someone _actually_ gained those $400 millions from that bank ...

Posted: Wed Jan 14, 2004 6:15 am
by Forum Mgmnt
The Discussion about Synergy was separated into it's own thread since it was off topic and overhwhelmed the discussions here on this interesting topic. The Synergy topic is:


- Forum Mgmnt

Posted: Wed Jan 14, 2004 10:24 am
by MCT
I enjoyed reading this thread. just a short comment ...on Socratic Ignorance:

It is important to note that Socrates himself did not claim to know better than others - he thought he was in a better position than those that didn't understand the central role of ignorance in the human experience. i.e. what we don't understand we classify as random... He emphasized that he is ignorant of the answer. It is one thing to state one's opinion of how things are and should be. Powerful institutions are built upon such dogmas and the demands that others abide by them. Socrates, on the other hand, started from a position of ignorance and sought the truth. I bet he would have made a great trader. A great method for seeking the truth for ouselves, without any guarantee that we will find what we seek.


Posted: Wed Jan 14, 2004 10:54 am
by verec
Very interesting epistemologic branch in the thread! :)

It seems to me that in order to be able to use ignorance as a starting point, one must, at first, accept the idea. Which requires humility. But humility is not downplaying yourself out of existence either...

The problem with that, is that the western culture has empasized the idea of competition (rather than collaboration) where you absolutely need to be the best. But if this is what you strive for, you will have very little in the way of admitting when you are wrong (because the best are always right, aren't they?).

In my case, humility is something I fight to arrive at, because this means even fighting one's own beleifs, admitting that you're not more clever than the next guy, that you don't have as much knowledge or resources ...

I guess the liberating trick comes when you finally decide that none of this has any importance whatsoever... But this is a hard path. At least for me ...

Posted: Wed Jan 14, 2004 12:06 pm
by MCT
In the context of Chinese culture, liberation means, more specifically, a liberation from the strict rules of convention. Mistrust of conventional knowledge and reasoning is not all that strong in western culture. In the east all knowledge is suspect. It is based on the firm belief that the human intellect can never comprehend the truth.

“Probability is expectation founded upon partial knowledge. A perfect acquaintance with all the circumstances affecting the occurrence of an event would change expectation into certainty, and leave neither room nor demand for a theory of probabilities.â€

Posted: Wed Jan 14, 2004 12:24 pm
by Forum Mgmnt
MCT wrote:Judging decisions based on how they were made is far more important than just looking at results.
This is probably the single most important change in perspective that distinguishes successful traders, and those who are successful in life, from those that fail.

Outcomes matter over the long-term, but NOT over the short term.

- Forum Mgmnt

Posted: Wed Jan 14, 2004 12:58 pm
by MCT
c.f. wrote:
Outcomes matter over the long-term, but NOT over the short term.
Can you please expand on the above. where I don't understanding is: "but NOT". And how short is short term? Im not being flippant, I'm just trying to understand your point.

Posted: Wed Jan 14, 2004 1:08 pm
by Forum Mgmnt

I mean it in two ways:

1) That you should be running your trading and life based on the long-term impacts of a particular strategy not the short-term impacts

2) That often the right approach won't seem to be the right approach if one looks only at short-term outcomes. The right approach will always seem to be the right approach when looking at the long-term outcomes, otherwise it wouldn't be the right approach.

Very frequently, in life and trading, the best long-term strategies have negative impacts in the shorter term.

- Forum Mgmnt

Results don't play

Posted: Wed Jan 14, 2004 2:06 pm
by Zeke
Some thoughts, along the same lines as the preceeding...

A phrase I sometimes hear (and use) in gambling circles is "You can't play results" typically said in response to someone wishing they had made a negative e.v. decision that would have resulted in a win.

You make the best decision with the information that you have at the time and the result of any single play are simply irrelevant to whether you made the right decision. The right decision can only be evaluated by examining the information one had to make the decision with.

Of course, eventually you'll know whether you are making decisions with profitable principles by the results you get. How long before you know? That depends on the probability of winning, and the expected value of your bets.

Variance in something like sports beting can be very large where you have only 1-2% the best of it. The lower the edge the greater the number of trials has to be, to testify that the system is based on winning principles. What does it mean that a "system is based on winning principles"? To me, it means that the results gathered have only a 1 in 10,000 chance or worse of being generated randomly.

A very high edge, like 85%+ winners needs only 25 trials or so before results start becoming relevant. While if you believe you have 54% winners, 25 trials will tell you nothing about how accurately you've estimated your edge.

The gambler (or trader, I guess) who complains about his decision (or disowns it) based on the return from a satistically insignificant set is wishing they could play according to whatever the result may be (essentially unknowable) and to some degree ignoring the process of consistently applying principles that will show long term profit.


P.S. I have yet to read Alchemy of Finance, but I understand that Soros puts a lot of emphasis on acknowledging his capacity for error. Small surprise that he has such high regard for Popper.

Posted: Wed Jan 14, 2004 3:03 pm
by MCT
Forum Mgmnt,

I agree with you 100%. It is not truly realistic or scientific to take short views, and to sacrifice the future to immediate pressure. Succumbing to immediate desire surely is the road to ruin.

Having said that I believe there is an "optimal region" where one doesn’t look out too far nor is unduly concerned of the short term.

For more info check out the following:

Posted: Tue May 04, 2004 6:40 pm
by atima
Forum Mgmnt wrote: ...It seems you are now starting to see the real work of a trader, and why who you are is more important than the rules to your system...

- Forum Mgmnt

Thanks Forum Mgmnt,
Absolute truth. Simple, incontestable but difficult to accept!

Stefano Calamita

Posted: Sun Jul 31, 2005 7:37 pm
verec wrote:Some traders in MW said that they didn't know any other funds than their own that they would trust with their money."]
as i recall it Paul Jones said that sentence when Jack D. Schwager asked me where Paul wants to keep his money and then Paul said:"my fund is the safest place on earth for it"

good points verec.... :wink:

i also wanted to add about those academic geneuises who fail in the markets, too bad brendo already brought an example about LTCM... for those who dont know LTCM story just look for it in google, i got another confirmation that even Economics Noble Prise achivers FAIL in the markets and go BUST!
brendo wrote:4. Searching for and analysing such data is really just a type of fundamental analysis. Personally I have not found fundamental analysis to be of any use other than to give a reason/excuse why things happened
brendo i disagree with you about fundamental analysis is not being helpful. first i also thought for myself like you do today, however later on i understodd that in order to be a VERY good trader the one needs to fully understand whats going on in a real world and not on the bars of the chart exclusively. i just look at some extra ordinary traders and understand that, for example:
Marc Marcus said that he got his most money from those trades that went with 3 of his scenarios: fundamentals, technicals, and market tone (news and stuff) other trades that he took as he said: broke even and kept him amused.
Gorge Soros traded only from the fundamental point of view using his "reflexivity" concept which he was "testing" at the financial markets. Jim Rogers ONLY trades from fundamentals and doesnt know any chart patterns, i personally emailed Jim Rogers in Oct 2004,his web site is

and i asked him about Crude Oil, he said he doesnt short Oil today because fundamentals have changed, as we see Oil hasnt dropped lower than 49$ a barrel.

another greatest trader Bruce Covner, this guy as he says in MW book always keeps in mind those puzzels (fundamental picture) this made him an extraordinary currency trader. the list can go on...
however its only my personal point of view.

Kalitka, the best trader today is Steve Cohen ... _mz001.htm

however i wouldnt worry about who's on the other side of your trades as everyone on here told you, just trade the way you know works for you and you'll come out as a winner too.