Entry, Exit and Trading Profits: A Look at the Trading Strategies of a Proprietary Stock Trading Team
Read the paperopens doi.org in a new tab
What they found
The authors obtained the complete trade records of 15 proprietary stock day traders at a U.S. firm over three months in 2000, covering nearly 100,000 trades. The team was profitable in aggregate, earning about $1.4 million, and the source of profit was execution: traders bought at the bid and sold at the ask using limit orders on ECNs, effectively earning the spread as informal market makers. Their trades were extremely short-lived (median holding time of a few minutes), they took small positions, and they rarely held overnight. Profits were concentrated in the most active Nasdaq stocks with wide spreads.
What you can use
- A profitable prop day-trading team in 2000 made its money by capturing the bid-ask spread with limit orders, not by predicting direction.
- The edge was structural (access to ECNs, low costs, speed for the era) and has since been automated away by HFT.
- Retail traders who pay the spread are on the opposite side of this trade; that is the structural disadvantage.
Caveats
Fifteen traders over three months in the dot-com era on Nasdaq, when spreads were wide and decimalization had not yet happened. Not representative of today's markets.
Tags: professional, prop-trading, day-trading, spread-capture
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.