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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: Agamemnon who wrote (381)	4/22/2003 10:31:07 AM
From: GraceZ	Respond to of 4907

I was working with these guys (and gals) I tried my damnedest to explain to them that after years of being market makers they wouldn't be able to succeed any easier then someone with no experience. A market maker has expected positive return on their side. Not only do they get the spread instead of pay it but they are constantly pushed to take the other side of the public action when it reaches extremes and this is what makes them the big money. Imagine if by chance you were pushed to be short when the price action reaches it's peak and forced to be long when it reaches the lows. The public trader has the opposite of that action and that is what gives them the inverse of the MMs positive return, the negative expected return. I had no luck explaining this to them even after several went bust, I watched the rest of the room go bust one by one. These were people who had made in excess of half a million in bonuses when they were MMs because they were so good at pulling down profit for the firm. But then they were backed up with 10 million of the firm's money instead of their own savings. In this particular trading firm there was the one guy who day after day had outsized returns and that's what hooked them into thinking it can be done. Meanwhile they'd follow him into some of his big trades only to get creamed because they just happen to follow him into the trades where he gave a pile back. So what they did one by one was to get more and more risk averse in their trading. When you become risk averse you limit your losses but you also limit your gains. So all they wound up doing was losing slower.