Tuesday, December 27, 2011

Expansive Thinking for Financial Trading

Here's some interesting thinking off someone I had worked with, who once traded the floor over several Asian exchanges.

The Bid/Offer Spread

For a while, a number of intraday trades were liquidity-taking, and we constantly discussed limited transaction costs around size of the bid/offer spread.

Then came the thought "Why can't we be the ones making the spread? (as addition to other edges)" So instead of struggling and crying about this formerly assumed "necessary expense", a whole bunch of great ideas and trades resulted.

Pick offs

The options market making scene has become relatively saturated in Asia, today. Of course for the traditional market maker, a growing risk arises from pick-off frequencies. Pick-offs being the markets moving so fast that effective delta hedging becomes very difficult, even with co-location and etc.

Naturally, everybody wants the good old days back, and many focus on ways to avoid these pick-offs. I believe more progressive, innovative thinking lies in capitalizing off the pick-offs, i.e. WE become the ones doing the pick-offs, and perhaps find ways to exploit the other "pick-off traders".

Innovation is everything

Like all industries, financial trading is no different. No edge/trade lasts forever, hence the need for constant R&D. There is no magic formula that makes money consistently forever. This is why very few private traders make it over time.

0 Reflections: