A question of scale (part two)
In part one we talked about how scale could be an issue in the markets, but how?
If you are betting there is a maximum amount of money that you can bet ‘at value’. Obviously there is little point in betting outside of value, so by default that means it’s impossible to fulfill an unlimited amount at value. It’s also impossible to take all the money on offer and get value, so you realise quickly that there is only a finite amount available at value. To get more of your bet filled you have to progressively take worse prices, which can’t be value. So your activity is self limiting. You should immediately see the problem of scale, value just can’t be scaled.
When trading, betting on price movements, you face a similar problem in that if you use larger and larger stakes your activity also becomes self limiting. The process of doing something in the market actually modifies the behaviour of the market, the market will respond to your position. To profit from trading you also need to use much larger amounts of money, for example to earn £10 at 2’s you would have to trade £1000 in and out of the market one tick apart and green up; so the effect is exacerbated. Scale is a problem which ever way you look at it.
The curious thing about trading is that it can actually provide value for people betting. A lot of traders have little or no perception of underlying value, so this often leads them to overtrade into areas that are value. I pointed this out the other day on the football. This is why I have always maintained, especially for racing, that traders add more than just liquidity to the market. While it’s not obvious at times, it’s an accidental consequence of not knowing where value is.
So scale is limited by the general activity in the market and the market defines the opportunity. Try and exceed that and it goes into reverse. In part three we look at those implications.
You need to find within the scale of the market
Category: General, Trading strategies
