Fake Trading Is Hard Work
Prop trading, non-bank lending, IPO pricing, crypto treasury and Epstein’s wealth.
A stylized fact of financial markets is that there are some risk-loving retail traders who like to make highly levered bets on stocks, currencies, commodities and crypto, and in the medium run almost all of them will lose almost all of their money. The bets are of the form “if Thing X goes up 2% I double my money, but if it goes down 2% I lose all my money”; this works for a couple of days and is fun, and then they lose all their money. This trade seems to have a ton of very robust negative alpha, which makes it very valuable to take the other side.
How do you take the other side? The most obvious answer is “literally take the other side of their trades”: Buy what they’re selling and sell what they’re buying. This isn’t bad, and it is in some approximate sense the business of retail market makers in the stock and options markets. It’s not perfect: A lot of the retail traders’ negative alpha comes from their leverage (it’s not that they never pick stuff that goes up, but rather that one losing trade wipes them out), so just trading against them does not make you money as quickly as they lose it.