Jun

12

An edge can last a long time, but when a paper is published outlining a system with an edge, sagacious people note the edge and start trading that system and natural market forces move that edge to zero. We all know people who have shared their systems and their edge. Regrettably, I've given away a few myself. Once they're shared, in my personal experience, they tend to disappear quickly and may not reappear for a very long time. That's why I would no more give details of my methods than I would give perfect strangers a glimpse into the most private areas of my life. The only consistent edge is to pay the price to have exchange privileges, able to buy at the bid and sell at offers on the inside market. You won't get rich but probably won't get killed either. But then again, I should be talking…….Ceres decided to give me an auto da fe today, with musical accompaniment, and she used a cat of nine tails in 7/8 time.

Jordan Neuman writes: 

Hi Jeff,

Interesting note. I have found that edges go away even when I don't give them away — if I am paranoid, I would think I am in a Truman show. Others start talking about what I discovered eventually, and I also wonder if I discovered it because of what others have talked about previously. Thus, I am not sure if edges go away faster if you discuss them versus the null of not doing anything. I think it also depends on what the edge is…some like the January effect will last a long time because of tax arbitrage while others might fade to equity-like risk/reward and then lack the "natural market forces" to fade further.

Regards,

Jordan


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5 Comments so far

  1. Ed on June 12, 2013 9:49 am

    Great points Jeff. I had actually (just recently) considered setting up a small side business selling trading ideas - including some of the stuff that I have made good money with. My logic was, why take risk when i could convert an idea into a risk free revenue with very favorable economics (margins, overhead, etc).

    Two problems occurred. First, the initial subscribers were not the small retail persons I had hoped for, but professionals affiliated with proprietary trading companies. In two cases they didn’t hide it at all, it literally was purchased under the business name of automated trading companies.

    It suddenly hit me that I was being an idiot - a nauseating feeling, actually. I quickly canceled the service and took down the payment page.

    My efforts to get more scale on my operation will have to take a different route.

  2. Peter Sliney on June 14, 2013 12:21 am

    Hi Jeff. You make a good point. In my endless practice of price pattern recognition I’ve come across patterns that used to work and now no longer and patterns I thought had run it’s course start to work again. It seems that edges work until they don’t and then you discover a new edge that works. But keep watching and the old edges of the past reappear. That’s been my experience anyway.

    Best Regards

  3. Vikram Krishnan on June 18, 2013 6:36 am

    For further details see Stiglitz Grossman (1976) and Stiglitz Grossman (1980)

  4. Ralph Di Fiore on June 18, 2013 12:30 pm

    Hi Jeff,

    I disagree with your comments that market makers do not get rich. In Martin Mayer’s book Markets, he clearly pointed out that all the market makers he had known were rich, retired rich or died rich.

  5. Jeff Watson on June 19, 2013 2:46 pm

    Ralph, Martin Mayer is a financial journalist(which is one step higher on the trustworthy index than crooked politician.) If he indeed said something like that, his second hand ignorance about markets is startling, talk about the blind leading the blind. Furthermore, his contention is wrong as evidenced by the spectacular failure of Knight Capital, and many others before him. If all market makers became rich, retired rich, and died rich, there would be a gold rush towards the career of market maker, articles extolling this career path would would be on the cover of Forbes, the Economist, and the WSJ. This publicity of a guaranteed path to riches would increase the costs of entry, make the quotes more competitive, and the mistress would adjust accordingly, decreasing the edge and allowing them to make less money. Quotes and spreads would narrow further. Remember the mistress does not favor the market maker any more than she favors the lowliest spec trading a 1 lot. She is an equal opportunity dominatrix. A market maker gets a crack at the inside market(the ability to buy at the bid and sell at the offer), and has quicker transaction times and lower costs, but it would be wise to consider that 1/2 of the trades on the inside market are wrong or poorly executed.

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