Monday, 28 May 2012

Trading Without Losers

There's an old Wall Street saying which is that:
"If you can get your hands on a hot new stock, you probably don't want it."
I'm probably not the only trader out there who sees what looks like a value opportunity, hits the 'Enter' button, and then goes through a number of emotions as the countdown ticks inexorably down to zero before revealing your fate - matched or unmatched. While looking at the Promotion market during Saturday's Huddersfield Town v Sheffield United game, shortly after half-time, I saw a decent amount, £2k + I believe, available to lay on Sheffield United. Having backed Sheffield United at 1.93 before kick-off, I could not understand how, after 45 minutes of football, and no goal, their probability for promotion had increased so much - from 52% to 57%. With no decent chances for either side in the first half, it was hard to see any logic behind this. Unfortunately, my fastest fingers were out of shape, and the money was snapped up by someone else, but in a contest that is essentially a coin toss, when you see a skewed price like this, it's value.To my mind, the price at this stage should have been 2.0, or at least close to it.

Back to the opening quote though, and there is always the concern that if something looks too good to be true, it probably is. Sometimes, but not always. The trick is knowing when the money sitting there all on its lonesome belongs to an idiot or a savant I guess! Or should I say, an outsider or an insider?

A Slate.com post by Harlan J Protass last Friday included this:
Trading on inside information, though, is fundamentally different than other types of financial fraud. It doesn’t cause other investors to feel a pinch in their pockets. It doesn’t trigger layoffs. It doesn’t bankrupt companies or shutter factories. And it doesn’t wipe out pension plans or 401(k)s. James Altucher, a Huffington Post financial columnist, has made the case that insider trading actually should be legal for the sake of transparency: If investors can see that corporate insiders are buying and selling stock, the market will more accurately reflect a company’s true condition and value.
"It doesn't cause other investors to feel a pinch in their pockets"? Mr. Protass is a lawyer, but even so, he should be aware that in trading, there is a loser for every winner. It's a zero sum activity.

I can certainly see the logic in the argument that insider trading should be legal, given that in practice it is naive to think that the small possibility of prosecution is going to stop people from making serious sums of money. It's similar to the thinking that, by making drugs illegal, people are going to stop (ab)using them. It doesn't work that way!

Anyway, I've railed on before about how short-term stock market outsiders are just gambling in the financial markets - if someone is selling me shares at £10, why would I want to buy them? I might be able to buy them and sell them on to a greater fool later, but I am almost certainly over paying, and when there is no greater fool to sell them onto, I am going to take a hit.

More evidence that liquid sports markets offer outsiders a better deal than the financial markets. The single, most important, requirement for trading profitably is information. If someone has better information than you, you're gambling without an edge, and in the long-term will lose. Very likely when trading stocks, currencies or options. If you have the same information as others, it becomes a question of who can make the best use of it. What weight do you put on certain factors? How much of an edge does a move give you - i.e. how much do you risk? Or you could be the Wembley half-time tea boy, and know something no one else knows - like what you just slipped into the Huddersfield Town players tea-cups.

Now just where did that £2k wanting to back Sheffield United at 1.75 come from? If it was the tea-boy's account, he needs to up the dosage.

A wealthy Blades fan overconfident in his team's chances? A wealthy Terriers fan looking to hedge the heartbreak, should his team lose? Someone looking to hedge a bet, but then why not do that pre-game?

I shall probably never know, but according to Mr. Protass, whoever it was "didn't feel a pinch in their pockets."

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