Jason Ruspini and Caveat Bettor (who both are experienced Wall Street professionals) were kind enough to post a comment on my Don Luskin & Jeremy Siegel post.
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Jason Ruspini:
Active trading is very difficult. Most people should just invest in ETFs. – [Exchange-Traded Fund. A basket of stocks that is bought and sold on a stock exchange as if it were a single stock.]
As Don Luskin points out, there is a survivorship bias at work in the perception of successful traders.
Furthermore, it is in the interests of brokers and more sophisticated traders to make it seem easy. People want to believe this too because most jobs are not engaging and a lot of guys have the fantasy of instead rolling out of bed at 9:20, logging in, looking at a couple of charts with fancy indicators, declaring “pork bellies.. I knew it!”, making a couple of 3-pointers with the old Nerf basketball hoop and calling it a day.
Even if they had liquidity, prediction markets are zero-sum with no drift and no carry. In that respect they are probably even worse than trading stocks or even futures for most would-be Winthorpes.
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Caveat Bettor:
Trading in derivatives is different than trading in stocks, even though plenty of the open interest in options and futures is derived from stocks and stock indices.
Investing in stocks for the long term is a good thing, because of the value creation of capital markets and efficient capital allocation of public corporations, but prediction markets are more like futures and options trading. What fuels the whole derivative market is customer demand, which could be driven by large appetites for risk management and/or leverage. The banks and market makers that service this demand earn a pretty hefty vig, and we need look no further than the 25 cent spread on an out-of-the-money option with a $2 fair value. Everything builds out from there.
As far as the day trading goes, anyone can say they do it and make money, but as far as I can tell, the better the quants, models, traders, execution systems, the better the high frequency strategy–and day traders have none of that. And even all of that is no substitute for the flow that a Goldman Sachs or SAC sees, and the latter pays heavily for it. I’ve seen hundreds of quant resumes–PhDs in hard sciences who’ve worked at the biggest shops, but maybe 2% of them can make serious money. And every strategy, no matter how perfect, has it’s fat season and its drought, given market circumstances.
I value prediction markets because I think they present positive externalities. I enjoy them because, as I posted* early on in my blog: the need to Win, and to Be Right. As a way to make a living, not today and not anytime soon.
* http://caveatbettor.blogspot.com/2006/07/tell-me-why-tell-me-why.html
