Trade Following Apps

Over the course of the decade, I have seen a lot of companies doing “trade following”.  Essentially, it’s one trader that others sign up to follow.  You put your trade on right alongside them.  The thought is that you will make money following Mr. Successful Trader. Each of these platforms have a slightly different twist.

In Chicago, there is a company called Top Step Trader.  They are going through the Junto Institute program and I met them.  It’s certainly an interesting business model that was not possible when I started trading.  Besides, back then if you were a successful trader and found some edge in the market, it was not smart to share it with anyone.

Dough is a pretty cool company and has Bob the Trader.  They concentrate on a more esoteric part of the trading world, options.  You can follow traders there just like other platforms.  One of the best things about Dough is Tastytrade.  You can actually learn about the mechanics of research that go into trading by watching the show.  You can also learn how a trader thinks, and about probability.  One thing good traders know is there is no such thing as a sure thing.

The best thing big floor traders could do to trade followers was put your position on-then once everything was in place talk your book to them and have them follow you into the trade.  They could push the market farther, and they’d tell people.  Inertia could do some work for you and then when the time was right you could get out.  One of my friends called it “whipping and driving”.  All the smart trader was doing was moving the herd.  It worked well in smaller markets like pork bellies, but in financial markets that were more thinly traded, it could work too.

Most of the trade followers I saw on trading floors never lasted.  They couldn’t make consistent money.  Years and years ago, my friend was trading Forex.  He was one of the largest locals on the floor.  Goldman Sachs ($GS) put a person in the pit just to monitor his position.  They never could keep the position straight.  One day my friend stopped by the Goldman desk and asked to see where they had him.  He saw that it was wrong, and corrected it for them!  He knew they couldn’t keep up, and that by following him it was screwing them up even more.

I see Y Combinator has a startup that is trade following.  Instavest is the name of the company.  I don’t know if the company’s value proposition will work or not.  Certainly, the world has changed a lot since I started trading. the Millennials a lot.  Will they share in trading?  It is very hard to say.  It’s a lot different to share a photo than an edge in the market.

In order for this to really work well, someone would have to post 100% of their trades on a platform and the platform would have to auto execute for everyone.  However, this brings about a different problem.  The mechanics of getting into and out of a trade can be difficult. Can you get the trade on?

The fragmentation and structure we have today in markets sometimes makes it very hard to get big trades on.  That’s why hedge funds and bank prop traders are pretty secretive.  Trade following apps would argue that they are doing smaller trades.  It is different for small trades because arbitrage opportunities allow electronic algos to fill a lot of business.  However, get the whole internet crowd following one trade and it could be tough to execute.

The execution of the trade is not generally the hardest part.  It’s the pre-execution.  Call it the “content creation” of trading.  How does someone arrive at a decision?  How does someone go about doing the research and diligence before they enter the trade?  How do they pick their entry point?  How do they exit?  What’s their max pain point where they will puke and give up?  Those are the things that are truly important to trading.

I wonder about the returns to traders too.  I actually never figured out my percentage returns when I was trading.  I knew when I was making money and had no interest in raising outside capital.  With venture investing it’s different.  I have calculated my IRR and I am interested in raising outside capital.

There is a new company in Chicago called Typhon Access.  I am not an investor, but an independent board member.  If you are a family office, or high net worth individual it will be interesting to you.  They actually physically audit the returns of the CTAs and traders on the platform.  There is a lot that goes into that.   Often times, a person or entity will post some return.  Perhaps over the past year their strategy returned 80%.  But, maybe the team has changed.  People move around in the industry all the time.  Maybe the strategy has changed slightly.  Typhon verifies what they are saying is true, and then allows the easy transfer of money from strategy to strategy.

There are going to be lots of different businesses in finance looking to skin the cat different ways.  My own experience has been that very successful traders do some things differently than others.

  • Very high level of discipline
  • Incredibly smart, very street smart
  • Not afraid to be alone and go against the herd
  • Spend a lot of time doing the little things in homework that give them insight so they have more information than the market at any given time
  • Quickly take advantage of information, and synthesize it into a trading decision

Can those characteristics be commoditized and put into a platform?  We will see.  I am not saying no, but I am not saying yes either.  It’s way too early to tell.  There is only one thing for sure.  With Bitcoin, blockchain and all the other sacred vertical silos in financial markets  we are going to continue to see a lot of innovation and efficiency in fin tech that has the potential to gore a lot of sacred cows and topple existing silos.