You have to code:
- Feed handlers
- Back office
- Research platform
- Strategy execution
- GUI
You need to have:
- PB agreements
- Network access (telco the world over suck as doing this in a reasonable time)
- Exchange memberships / ISDAs (depends what you're up to)
I guess you could have spun out from a larger group with some of this stuff, but then you'd probably not crash and burn that fast.
I do agree with the sentiment that fast talkers get more money than they can handle.
I'm right now working on optimizing my long term investment strategy, but the hardest thing is that there's nobody to talk to it about it (unlike when I have other coding problems), and I have no idea when I'm doing something totally stupid in my code base. Getting the right metrics to optimize is really hard, as mostly I'm just looking at numbers and graphs.
I worked for a large investment bank, was paid well, but was also rather unhappy. I'm not a fan of office politics and also hated the fact that what we were doing was actually quite unsophisticated, yet we dressed it up like the most complicated thing ever to clients.
We were using wavelets for analysing market micro-structure and using any generated signals to influence our trades. Wavelets were the topic of my thesis, so I was a good fit for the team. I know it sounds complicated, but if you looked at the signals we generated, they looked awfully similar to a rather basic trend-following style regression model. I believe we found a very complicated way to compute signals that a simple trend follower would compute in far fewer CPU cycles.
Anyway, I got a fairly decent bonus one year (because markets were trending nicely), and decided I want to set up my own tech company. I was always a nerdy guy, and I thought I could contribute more in the tech space. With hindsight it was a good move, and financially I believe I am now better off than most of my trading colleagues.
My advice to new guys joining our desk (maybe it helps you a bit): focus on your exit, more than your entry, and if you can help it, be really, really, really lucky :P
Doesn't this describe nearly all of the financial industry? Do you happen to know of any exceptions?
The market is, in theory, not a zero sum game. Algorithmic systems, in practice, are. In theory the only way you can genuinely beat the market is when you find an inefficiency in it. And inefficiencies are generally based on a lack of knowledge. If everybody knows what you know, that inefficiency will no longer exist. And now pair this with the reality that most (and it's probably safe to say all) algorithmic systems are not really especially complex. That doesn't mean they're easy to make though. The 'secret sauce' is in exactly what data is used, how the pieces you have interoperate, the way inputs and outputs are massaged, and so on. But this drives a huge need for secrecy. Nobody who is successful is going to want to talk about how their system is designed largely because most would not be especially difficult to replicate if they provided more than very abstract details.
And given some metric like trading volume how much does that affect that number?
I've heard of some hedge funds raising way less than they could have, maybe because their strategies would be killed much faster with 500mm than with 50mm ?
You know those books that show you how to get rich doing X? Those writers make far more money from the book than they do from X.
No doubt you can find corners of the investing internet that will discuss these things, but you'll probably find an awful lot of chaff in your wheat, because the successful ones won't be chatting about it on forums.
Now on a more constructive note, optimising your long term investment strategy is probably best achieved by getting a pension with some cheap trackers, and a savings account. If you're already doing that then great because that's 95% of your optimisations there.
I wont recommend any web sites, because the details will depend on the country where you live.
How long did you do it? Is it possible to make a living as an algo trader?
I was officially trading (i.e. coding the strategy) for just under 3 years, then got offered a senior non-trading role (but my pay was heavily linked to the desk's performance).
Can you make a living? Yes, if you're doing it as a salaried employee at a reputable institution. If you're going to try and algo trade with your 50k of savings, I would say "unlikely", and you might cause yourself a lot of anxiety.
When you say yes to making a living but as an employee is that because of at an institution you are trading with much larger sum of money and hence there is enough return to pay for your salary bonus and then some or something else like getting a regular paycheck in a other wise very volatile return world? Essentially is the amount capital the key thing or something else.
Also how do traders typically come up with a strategy? Original insight or mostly copying the herd with their own variations?
Regarding strategy generation, it's a mix. Quants like me almost always take the systematic, research like approach - analyse data, see if you can ascertain any predictable patterns and then paper trade them in the live market. If it makes money on paper, it might make money in the real market. Then just iterate and refine. Some guys do trade with their gut, but are rarely successful.
I work at a big quant/algo prop trading firm. The reason you can't compete is that most successful algorithmic trading relies on economy of scale.
Yes capital to trade with is one aspect, but more importantly is the amount of knowledge needed to carry this off. Building a safe, robust strategy is hard even if you have a working idea.
It requires probably top 1% knowledge in distributed systems, Linux admin, networking, database administration, security and more. The chance that any individual (or even team of less than 5 people) has those skills covered in addition to the quantitative know how to actually come up with a strategy is quite small.
There is a reason why algo trading is dominated by large firms. Working at somebody like Citadel or Optiver, if you say "oh damn, there's this weird effect on our server. When x happens I get a period of noticeable slowdown" they will turn around and say "Ok, well John here is a core dev on the Linux kernel, he'll come to your desk and help you figure it out".
Imagine that but with every problem pretty much. Running trading strategies you will hit problems. The level of work to overcome all of them satisfactorily whilst not degrading your edge is so much work for an individual I suspect you would burn out pretty sharply.
A key takeaway is:
"One of the fallacies that people have is the assumption that because the people who are working at certain firms are smart, they must be successful."
The number of times a new hotshot hedge fund moved in to office building where I rent, only to be gone without a trace in a month is staggering. Usually, they'll raise money from an unsuspecting family office or two, employ a techy and an admin person to do the heavy lifting, whilst the smooth talking CEO alt-tabs between Bloomberg and reddit all day. Most have terrible risk management strategies, and the majority are simply trend following (sorry, machine learning/AI). Some of these firms are also my clients, and I have often needed to write off money they owe because they've literally gone bankrupt overnight.