Forgive me if this has already been addressed ...

So in Black Swan, Nassim Taleb distinguishes between two types of occupations: scalable and non-scalable. Scalable is that which has no limit of growth for one's domain, and thus a handful can take over the whole market place. Non-scalable is where one's domain in the overall marketplace is very limited, but also fairly secure. More on that here:

http://casnocha.com/2009/03/scalable...e-careers.html

But anyhow, trading is clearly scalable. The best traders' accounts keep growing until it's them against everyone else. With this in mind, I don't understand why companies keep hiring and training new traders. Wouldn't they be better off just giving all the funds to a handful of their experienced best traders?

And besides, much of the trading volume today is performed by algorithms anyway. So between the algorithms and the best human traders, how is there any profitable room for a bunch of new traders? Why even have them? Most of them would have to be losing funds.

It just doesn't make sense to me. If someone could explain this or point me in the right direction I'd appreciate that.

1. The market and edges change, often unpredictably
2. Luck and randomness obscures true winning strategies
3. Plenty of things in the market are only partly scalable; profit diminishes with size
4. A diverse range of winning strategies is more robust than a single one.
5. If in fact, if it is true that winning strategies are highly scalable, and impossible to know which one is best, the best strategy is to have lots of traders using lots of different strategies and let natural of the winners pick the best strategies.

1. The market is moved by plenty of mechanisms not currently comprehensible to algorithmic analysis, but comprehensible to human reason
2. The algorithms and best human traders only control a fraction of the money, especially during runs; there is room for others to take the same or related strategies.
1. Yes
2. It is more rational to be optimistic than pessimistic, particularly if a typical case is break even.

So our office, and I assume many others as well, has a bread and butter strategy with which we trade using around $700 million in buying power. So yes the strategy is very scaleable but there are advantages to having the total sum managed by 40 people. Things can get extremely complex when dealing in that size when it is managed by one algorithm or one human trader. The technical risk is diversified across many different human traders, algos and brokers/platforms so that one bad algo, order handling problems by the broke dealer or human trader's fat finger doesn't burn the entire office's account. The most important is the human element. Trading is a big intellectual investment and there are many extremely different games that can be played. There are many instances where someone who is good at x will likely never be good at y due to the time/resources/skill sets required to master both. Even with in the same strategy, one trader cannot always trade every opportunity well. They frequently have to pass on some and focus on others. If a firm keeps adding traders, people will start to learn what is crowded/neglected and allocate capital accordingly, such that at the perspective of the entire firm, more of the strategy is being captured.

traders have and lose edges and different times and according to certain market conditions and some just blow up. not to mention an arcade only has a certain amount of margin and requires less if people are on different sides of the same product.

I am a trader at a prop firm which pretty much has one basic strategy that most people are taught, which cannot be automated. The difference in how different people implement this fairly basic strategy is pretty vast. Numerous people come and go, but the people who are able to adapt, improvise, learn, and use good risk management are the ones who make the most money and are profitable.

Lots of good points so far. Trading is scalable but often only up to a certain point depending on the strategy and then it can actually be dangerous to be beyond a certain size. Read about LTCM and how they were raped unwinding their positions.

Does your firm do market making or directional trading?

I'm curious how there can be a strategy that is not automated. Is it something that is not able to be automated now but will likely in the future?

yeah, I would recommend people read "When Genius Failed" if they haven't already, it's tangential to the topic at hand and an interesting read.

the world changes, not all winning regs adapt. it's human nature.

We do market making, but they are not related to the prop trading section at all. There is some directional trading, but it is a very small percentage of what we do overall.

I don't see it getting automated ever tbh, not sure how to explain why without posting the actual strategy itself.

Interesting. Thanks for sharing what you can.

I'm currently interviewing for jobs at prop trading firms and have been working on learning as much about the industry as possible so I really appreciate it.