How do big players trade?

[breadman]

interesting read so far,
does anyone know if the big banks/hedge funds trade on Astrology patters. RBS had a research paper with regards to buying and sell the market on new moons/full moons

http://pdfcast.org/pdf/astrology-research

 

[Oppi1904]

Oppi, I think another angle you should look at is Stoploss hunting and the moving of markets with large amounts of money.
Super huge players or goverment entities moving the market and being able to guarantee there position exits by knowing where large Stoplosses are and the volume available at these points. -Having total access to the 'books'
There is money being made using many different types of strategies, but once you get up into the higher tiers, you have to worry about where your Stops are and how you are positioned, because the big players will use your large volume to accentuate there strategies.

Of course! You have to be concerned about the factors that you mentioned.And this is the angle that big players look at those strategies as well. Rest assured that those big Hedge Funds would make sure that prior to implementing any strategies that they have sufficiently back tested them to find out the worst case scenario. In particular, they extensively use the "Monte Carlo Simulation" in order to find out the worst case scenario.They also see the risk/reward ratio and many other variables and they decide whether they will implement those strategies. If most of the criteria are not met they just don't bother and they look for other strategies....

They try to sufficiently diversify their position. By this I mean, they don't rely solely on one strategy rather than they have a portfolio of strategies. This way, they have a reasonable diversification. This is to ensure that if some of their strategies are turning against them some other will turn in their favor so the total position doesn't impose any "blow up" risk. However, this diversification works under "normal conditions". In particular, the models they use in order to ensure this proper diversification depend on the returns following a normal distribution. However this is not always the case, so many advocate that this is not the right approach (including Nassim Nicholas Taleb with his book "The Black Swan"-highly recommended!!!). Some periods you get those "Ten Sigma" events and ALL your positions turn against you. This was the case with Long Term Capital Management (more on this please refer to the book "When Genius Failed"). ALL their positions went against them AT THE SAME TIME so their diversification didn't work out. In addition they had large leverage so these were the reasons they went bust.Had they had the funds to hold those position, they would have eventually made BIG profits. But at that moment they didn't have the funds to continue operating. This was also the reason that Lehman Brothers collapsed. All their positions went against them simultaneously and they had high leverage (some same around 30:1 or even 35:1). However, there are not any other models that can sufficiently give you a good approximation to reality in a regular basis. So how do you cope with those inherent problems??? With less leverage and this has been the case since the credit crunch (some of the lessons of the past have changed the behavior of many market participants) .

Last, you mentioned that when you trade big volumes you may have some big players turning against you. That is more than true!!! And they know it. How do they cope with it?? Of course they try to minimize their impact by keeping their volume as low as possible so the other big players don't take advantage of their big volume. And this is one of their main concerns.They take this factor into serious consideration. Because your big volumes will definitely generate signals for other big players and get into serious trouble...

My point with my previous post was to pinpoint the way that those big players trade. As mentioned they use 3 approaches extensively. These are "Signal Processing" , "Machine Learning" and "Data Mining". The last approach is the main approach used. They "mine" into the data and try to identify patterns. Then they "teach" a machine how to identify those patterns and act on them (place trades). The "Traditional" Prop Trading at Hedge Funds and IBs is dead. That is partially because of the Volcker rule and partially because of some bad experiences (some Prop Traders blowing some institutions- seeNick Leeson ,Jerome Kerviel, etc). You, as a human being, have some flaws that machines don't (i.e. you have emotions that affect your trading). That friend of mine who is a High Frequency Trader at Merrill Lynch told me that 90% of the (traditional) Prop Traders have been fired and that the emphasis is being placed on "Stat Arb" strategies only...This is the way that most of the big players now trade...

Hope that my post was useful...


Evangelos

 

[Beakytrader]

1593612]Instead of the question:
How do big players trade?
Try
When do big traders trade and why?
It will go a long way in explaining why a lot of technical analysis does not work and will put paid to the myth that Forex is a zero sum game

[/I]

I read the thread and lost the will to live, till this post.
that post is very perceptive, albeit lacking some information.
I was a spot broker in the interbank mkt for many years, i've posted videos of where i used to work- see the Pressure thread.
To all the muppets who think they're stops are getting hunted- you're wrong!!
The traders that move the mkt, have no interest in the retail mkt.
In all honesty, if you'd have seen the ******s that i had to deal with, you would not get so hung up about the big boys.
Most of their trading, is off the back of customer orders. They are not speculating. Its very easy being the yen trader at a japenese bank, not so easy being the aussie trader at a japanese bank.A major jap bank will quote to industry, i.e Sony, Toyota etc. These organisations will require a quote for exchanging say, dollars for yen.The poor sap who trades aussie WILL have to speculate, because he has no natural orders.
Yes, the american banks and houses like to trade in size.Here's where i disagree-My view, is that only by technical analysis, can you see the footprints of the big boys.
If your losing money, its not your broker. You simply can't read a chart.

All the best.

 

[Oppi1904]

interesting read so far,
does anyone know if the big banks/hedge funds trade on Astrology patters. RBS had a research paper with regards to buying and sell the market on new moons/full moons

http://pdfcast.org/pdf/astrology-research

I didn't respond to your message earlier because I wanted to do some "proper" research. I had the view that this was not the way (i.e astrology patterns) that those big players trade and I waited for this afternoon.

This afternoon I had a cup of coffee with that friend of mine who is a high frequency trader at Merrill Lynch. I had a chat with him about those patterns and his shares the same view with me. Definitely ,at Merrill Lynch, they don't trade according to those patterns and he doesn't think that any big Hedge Fund trades this way. That is because there might be some connection between higher return and astrology as outlined by this research paper, however you can't prove them in a scientific manner. Since there is not any "satisfactory" explanation you cannot use those strategies. That is because there are always some rules when you implement those strategies. Can you imagine any big Investment Bank trying to justify any losses occurred by implementing strategies based on astrology patterns?? They would have hard time convincing any regulators that they were right following this approach. The same applies with Hedge Funds and their clients.

The same issue is present with weather derivatives. Since they depend on factors not quantifiable and highly versatile (weather conditions) there is not a proper pricing framework. This was something that was mentioned to me when studying for my Masters. Since it was a specialized Masters on Derivatives, we looked at a wide variety of Derivative product. When looking at those Derivatives (weather) we were informed about their uniqueness. As far as calendar effects are concerned, there are some explanations that can "satisfy" the scientific/academic community. There is the possible explanation that bad news are released during the weekend so that is why the Stock Markets regularly fall on Mondays. There is also the explanation of "window dressing" (google it)for the higher return on some specific months.

I think that the purpose of that paper was for research purposes only. They wanted to cause some responses and to pinpoint a path for other researchers in order to look for any patterns. However, I don't believe that they trade based on those strategies because of the reasons that I mentioned earlier. You have to take into account that most of the research papers are created in order to attract publicity. Most of the researchers don't trade (unfortunately) and their primary motivation is to present their findings in order to receive the merit of their work from the academic community. And I think this was the case with this paper.

This was also the case with my personal research on this topic. As mentioned, I have researched this topic quite thoroughly and found some patterns that are statistically significant. However, I have never traded according to those patterns because of some inherent limitations (I have also mentioned them). My primary motivation was to present those striking findings and to emphasize their existence to the academic community so I can get some merit out of it. You should also note that I am not a Quant Trader so I don't know exactly what is happening inside those Hedge Funds/IBs. However, I have some friends that they work at Hedge funds/ IBs, so I have some information (which may not be the whole truth though). So you should take into consideration those facts and be aware that this is only my personal view and nothing more....

Evangelos

 

[breadman]

thanks for your response,

breadman