Saturday, June 22, 2013

Respecting the proprietary trading business model

So I'm in Shanghai, heading a proprietary trading project, and I can already sense the need to replace a few of the locals in the team as they seem to have concluded this is more of a game than serious business. To make the operations profitable, every part of the business must be executed near flawlessly and on time, and we simple cannot take on the risk of second guessing little details such as "are these transaction costs in USD or RMB?"

How a lot of new guys lose money even with net profitable EV trading strategies

Once the business model is understood, a lot of the new guys assume that profits would come without much work whatsoever. From my experience, this is exactly the point where things start to go south; fat finger mistakes, miscommunications around order submissions, PnL accounting errors, violations of risk limits, etc.

Some tedious (maybe fun for others), necessary work for the trading entity

  • Accurate book keeping, Mark to Market on a daily basis
  • Negotiations with brokerage firms for best possible transaction costs
  • Solid risk limit implementations in real time
  • Daily research minimum to confirm availability of currently exploited inefficiency

0 Reflections: