There are way too many hedge funds building trading systems. Some know what they are doing, but many don't. Trading algorithms are important, but choosing a financial instrument which one understands well and other people understand not-so-well is also critical.
Personally, I think that stocks are too simple. Many people understand them reasonably well. Microsoft's stock is not that different from GM's stock, though Microsoft builds software and GM builds cars. Bonds are more complex. Commodities are even more complex: trading crude oil is not the same as trading sugar or corn. Structured products are probably the most complex of all (not even the banks know how to price them), which leaves room for the small guys to dream of making a profit.
"Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him."
In my most humble opinion, this applies not only in the start-up arena, but also for small investors up against the big banks and hedge funds. Banks are famous for excruciatingly painful bureaucracy, which makes them slow to react to the market sometimes. Banks typically trade large volumes, which works against them. If there's an edge one can exploit is to trade instruments which one understands very well with people who do not understand them all that well.
Personally, I think that stocks are too simple. Many people understand them reasonably well. Microsoft's stock is not that different from GM's stock, though Microsoft builds software and GM builds cars. Bonds are more complex. Commodities are even more complex: trading crude oil is not the same as trading sugar or corn. Structured products are probably the most complex of all (not even the banks know how to price them), which leaves room for the small guys to dream of making a profit.
Quoting Paul Graham ( http://www.paulgraham.com/wealth.html ):
"Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him."
In my most humble opinion, this applies not only in the start-up arena, but also for small investors up against the big banks and hedge funds. Banks are famous for excruciatingly painful bureaucracy, which makes them slow to react to the market sometimes. Banks typically trade large volumes, which works against them. If there's an edge one can exploit is to trade instruments which one understands very well with people who do not understand them all that well.