AsiaPacFinance.com

Some question the ability of small private traders to make consistent profits in the markets. However we have seen and talked to many such independent traders working out of their bedrooms or small offices. They have not only survived but thrived on small but consistent profits year in year out. As a matter of fact, some private traders have been able to achieve higher annualized Sharpe ratio than some institutional players out there. All these achieved with their insignificant capital and modest software and hardware infrastructure. How could this be? It is easier to generate higher Sharpe ratio with hundreds of thousands than hundreds of millions. As a fund size grows enormous, it gets increasingly hard to generate sufficient alpha through the same strategy that worked before. Intense competition among the big institutional players creates a scenario of too much money chasing the same strategies. This lowers returns and thus encourages excessive leverage. The huge capital also makes execution a much harder job, increasing slippage and market impact costs. The niche of the small private traders is to research and develop the simple strategies that often do not interest the institutional players. There are plenty of such strategies where the assets are out of the radar screen of big players due to either liquidity concerns or compliance reasons. The numbers of restrictions on institutional players are stunningly high. Granted, some of these are put in place for risk management reasons. The others are perhaps just mandate restrictions of the portfolio. All these make for a gap in the world of trading strategies which is perfect for the small private traders to exploit.

Writer: Jay Ng spends time on trading strategy development and implementation, with particular focus on systematic trading systems and quantitative screening. Jay is currently Director of Asiapacfinance and previously a trader with a bulge bracket investment bank and hedge fund.