Steal ideas, not implementations

Imagine you’re a relatively small, independent trader trying to turn trading from a hobby into a serious business. If that’s you, then there are a few concepts that will help you pick the right trades to get after. This is important because picking the right trades is most of the game.

First, the Market Gods give no prizes for difficulty.

So, to start with, you’ll want to play the easiest, most reliable, hardest-to-mess up, least-dependent-on-skill games you possibly can.

Second, the Market Gods give no prizes for originality.

So you want to know what serious traders are doing, especially with their own money. These include:

  • Proprietary trading firms
  • Hedge funds, and hedge fund prop capital
  • Serious solo traders

You should be looking for ideas and concepts to apply. You should NOT try to copy implementation.


Because your “small but beautiful” pot of capital affords you opportunities and constraints that are different from others. Here’s an example.

Adventures in statistical arbitrage

You find out about a style of trading called “Statistical Arbitrage.” This phrase can refer to many things. One idea is that we can find assets with similar risk sensitivities, then use relative price moves to determine when a given asset is relatively under- or overpriced.

If we can find occasions where assets tend to diverge and converge to their “equilibrium price,” then we might be able to get paid, on average, for trading them “back towards equilibrium”.

There are a couple of reasons these opportunities might appear:

  1. Supply and demand for assets can be lumpy and unpredictable – and the impact is not always able to be fully absorbed and offset by normal liquidity providers.
  2. Structural mechanisms by which new information is incorporated in asset prices can manifest as lead/lag relationships – where certain assets can “lag” where you’d expect them to be trading, given where peer assets with similar risk sensitivities are trading.

Imagine if you were hearing about this for the first time. You might be thinking: “That seems like a good and useful concept, I wonder how I might apply it?”

So you talk to quant traders. And you read papers like this one. And you read books like this one.  And you get an idea of how stat arb strategies are implemented out in the real world.

And you learn quant techniques to uncover and model latent relationships in return processes in liquid assets. And you learn techniques to put optimal portfolios together, maximize mispricing opportunities and minimize other risk exposures and trading costs.

And you think “Boy, I’ve gotta get myself some of this stat arb quant magic.”

But you don’t really… because you forgot the most important thing. You forgot to ask WHY.

Why do those implementations look like that? Why are those traders working hard to uncover subtle relationships in liquid assets?

Because they have to! They have lots of capital to put to work – their quant strategy needs to scale.

Don’t emulate the big boys

You, with your “small but beautiful” pot of capital do not have these concerns. You can afford to look more directly. You don’t necessarily need to mine for unobservable latent relationships. With a bit of nouse, you can identify small obvious opportunities.

  • Does an ADR trade sloppily enough that you can trade it, with FX hedged, against the stock?
  • Equity index futures on exchange x and exchange y are nearly the same – but they’re noisy enough I can trade convergence.
  • Similar altcoin futures trade on multiple exchanges.

These are much more direct expressions of the core idea – of supplying liquidity, on average, to unbalanced supply and demand pressures that can’t be absorbed fully by the usual suspects.

As a smaller trader, you can’t really get away with this sort of stuff in super liquid markets anymore. But you don’t need super liquid markets. The people trading at scale would love to be trading this stuff, but they can’t, thanks to their constraints.

You have different constraints. So your focus needs to be different from the institutional quant trader.

Your main concerns are less sophisticated quant modeling and more of the stuff that gets you a seat at the right games:

  • Market smarts to identify opportunities
  • A willingness to go into murky places
  • Operational effort, attention to detail, good business processes, constant improvement.

For example, the problems you want to be solving are more along the lines of:

  • How do I access Thai futures? (for example)
  • How do I deal with trading holidays across timezones?
  • How do I manage collateral across crypto exchanges?
  • How do I execute a cross-venue spread for the best price with the least leg risk?

If you’re serious about trading small capital, you can afford to get your hands dirty. Don’t worry about trying to emulate big money when you don’t have their constraints.


If you found these ideas interesting, check out Trade Like a Quant Bootcamp, where we show you exactly where it makes sense for the smaller, independent trader to go hunting for edges in the market – including several example strategies from our own trading. 

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