The truth about trading: from high frequency market making to long term results

JohnnyDoe

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Jan 1, 2020
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What trading really is​

Forget what you've seen in the movies. Real trading isn't about dramatic phone calls and guessing the market's next move.
For the pros, it's a high stakes engineering problem. They're managing digital inventory, fighting over milliseconds, and finding thousands of tiny, fleeting edges, all while operating under strict risk limits. It's less like a casino and more like a high-tech factory.

Seasonal spreads: betting on the calendar

Ever notice how gasoline prices go up in the summer? The pros do, and they trade on it. This is the world of seasonal spreads.

The simple idea: You're betting on predictable, repeating patterns. You trade the relationship between two things, like different delivery months of the same commodity.
  • Summer drive: Go long on gasoline, short on crude oil as summer approaches.
  • Winter warmth: Go long on heating oil, short on crude oil heading into winter.
  • Harvest time: Bet on the price difference between "corn now" and "corn later" around harvest season.
The risk: What if a pipeline blows, a country bans exports, or a freak storm hits? In an instant, the entire market can reprice, and your clever bet can look foolish. The market might eventually correct itself, but the margin calls can force you out of the game before you get to see it.

Carry trading: the "get paid to wait" trade

Imagine getting a small, steady payment just for holding a certain position. That's the dream of carry trading.

The simple idea: You earn "carry", a yield from the shape of the market itself.
  • In commodities, it's the "roll yield" from the price curve.
  • In currencies, it's the difference between two countries' interest rates.
  • In crypto, it's the gap between the spot price and the futures price.
Your final profit is the price change, plus your carry, minus all the hidden costs (storage, fees, etc.).

The risk: These "steady" payments are anything but. In a market panic, the funding for these trades dries up, and all your high-carry assets can crash together. The small gains you collected for months can vanish in a single bad day.

Inside the machine: how market makers print money

Market makers are the plumbers of the financial system. They don't predict the weather; they make sure the pipes don't burst.
Their job is simple: constantly offer to both buy and sell, capturing the tiny difference between the two prices (the "spread"). Their edge is speed and infrastructure.

Their secret sauce:
  • Location, location, location: Their servers are physically inside the exchange's data center, connected directly to the matching engine.
  • Speed is everything: They use specialized hardware to process data in microseconds, with private microwave networks shaving milliseconds off communications between cities.
  • Risk control: Automated systems constantly monitor risk. If a position gets too big, the system liquidates it automatically. One bad software update can wipe out a year of profits, so the controls are ruthless.

Why the little guy is playing a different game

You might have a fast internet connection, but you're not playing the same sport.
The big firms win because they:
  • Internalize your retail orders.
  • Get paid rebates for providing liquidity.
  • Net out their risks across thousands of products.
  • Own the infrastructure, from the data feeds to the routers.
They are monetizing your need to trade right now.

And AI? Don't confuse ChatGPT with high-frequency trading. AI is great for scanning news or research over seconds. HFT is a microsecond-level physics problem of controlling an order queue. AI is a helpful assistant; it's not the engine.

So, how CAN a regular person actually make money?

Trying to beat the pros at their own game is a recipe for losing. The path to wealth for everyone else is boring, disciplined, and incredibly effective.
  1. Keep it simple: Own the whole market through low-cost global index ETFs and high-quality bonds. Keep a cash buffer for emergencies.
  2. Rebalance by rule, not by gut: Once a year, or when any part of your portfolio shifts by a set amount (say, 20%), sell a bit of what's gone up and buy a bit of what's gone down. This forces you to "buy low and sell high" automatically.
  3. Embrace the trend (simply): A simple trend-following rule: each month, check if an asset had a positive return over the last year. If yes, hold it. If no, move to safe Treasuries. This can help you sidestep major crashes.
  4. Beware of "income" strategies: Covered calls and cash-secured puts sound great, but they cap your upside and come with hidden risks. If you use them, do so in small, diversified doses.
  5. Diversify for real: Ten different tech stocks are still one bet on the tech sector. True diversification means owning different types of assets that don't all move together.
  6. Slay the silent killers: Taxes and fees. A 1% annual fee doesn't sound like much, but over decades, it compounds into a fortune you gave away. Use tax-advantaged accounts and choose low-cost funds.
The financial world is divided into two groups:
  • The plumbers: They build the systems, control the infrastructure, and harvest microscopic edges. It's an industrial operation costing millions to run.
  • The tourists: They try to outsmart the market, pay the costs, and feed the machine.
You get to choose which one you are. If you want to be a plumber, be prepared to build an industrual firm.
If you want to grow lasting wealth, own a diversified piece of the global economy, rebalance with discipline, and keep your costs microscopic. The market rewards patience and punishes excitement.
 
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You can have some success if you are disciplined in playing to your advantages over the big boys: patience and lack of pressure to make a position, and the longer time horizons that offers you.

Two recent examples: UNH and UPS

UNH - bought low and started collecting the ~3% dividend, it went lower but didn’t care because the time horizon is one year, and it went back up and it’s up 15% in three months with a little extra from the dividend.

UPS - ten year lows, ~8% dividend. They are paying 8% to wait while it turns around and makes money and it’s already up ~10% in three months.

Over the same period the S&P is up 5%. Very boring. Very obvious plays. Very easy income. The same can be done with crypto volatility. Grind out the singles and doubles consistently, and you’ll occasionally get a bonus home run anyway.
 
I Tried high frequency news trading in crypto as a side project.
Basically it would crawl the latest news on a few news websites and X accounts every 10 seconds - after retrieving them I did AI sentimental analysis to tell me what coin should be shorted (if the news is negative) or longed (if the news is positive).

I was amazed that there is a number of people that are doing the same thing lol 🤓.
Had some small profits.



Conclusion
I would not trust the machine to place the orders for me, it is not error prone.
Noticed other people in the market that were doing the same thing with automatic order placement would get frequently liquidated, because the news didnt have a big impact on the market, thus it requires a human to rationalise this.
It takes a lot of patience to wait for a profitable news to show up in order to place the corresponding trade.
You could wait hours to get in a one minute trade.
 
I Tried high frequency news trading in crypto as a side project.
This is not "high frequency" - proper high frequency is measured in milliseconds and thousands of trades per day. Market makers do this in crypto every day, with the advantage of not being regulated, so they can pull out whenever they want (see what happened recently), which is not possible on regulated markets.

Btw: buy the rumour, sell the news (when it works).
 

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