Bahamas Trading

Bahamas Trading

01-03-2022

20:03

1/n. Thread on strategy development process. Here I will attempt to describe my personal process when it comes to building systematic strategies. The main underlying theme between all my strategies is the following: "Play the easy games".

2/n. When thinking about which games are "easy", consider the following questions. 1. Can you be faster/better than the competition? 2. What is the strategy capacity? 3. Do you have the tools/resources to compete? 4. Can you carry risk others are willing not to?

3/n. The above questions will help guide which direction you should focus your attention on. You are essentially trying to find "games" in a casino where you can be a top player; while avoiding big tables with monopolies and you have 0 edge (think CEX top of book MM)

4/n. On finding inefficiencies. For this start with products/exchanges which bigger players avoid. Twitter can be useful here. For the short vol system, a low realised vol regime in BTC gave a unique opportunity to exploit.

5/n. Once you identify a potential opportunity, start collecting/buying market data to validate your hypothesis. In the case of the short vol system, just by looking at the mid price of the contracts showed that there was indeed a opportunity here.

6/n. The basic idea was since realised vol < implied vol during this time, one could simply SHORT the daily MOVE contract on open and attempt to hold till expiry, collecting the premium over t. What needed more refinement was risk management.

7/n. Since shorting the MOVE is +ev due to theta decay, the only issue to solve here was to avoid getting caught offside if BTC starts to move. If we identify volatility is about to increase, we would want to reduce/exit our position as the tails of this strategy can be bad

8/n. What was needed was a predictive feature that would indicate momentum picking up in BTC. The choice here was the "Tape Speed" feature from my feature toolbox. This simply measures the speed of arrival of market orders. Higher speeds can be used to signify volatility.

9/n. The "feature toolbox" was created using ideas borrowed mostly from discretionary orderflow tools such as Bookmap and Jigsaw. More info on the Tape Speed indicator

10/n. We connect the "Tape Speed" indicator across the most active BTC markets to get a holistic view of the general speed of the market. When the speed of oderflow picks up, we reduce our exposure (the "Tape Speed" value needs to be normalised which I will leave as an exercise)

11/n. Deploy a quick prototype to production. Clean/pretty code is not required here, we are simply here to make money. Most issues are normally ironed out by running a system live and if the invested amount is small, bugs should not cause any major issues.

12/n. Profit 🙂. This system generate a few K USDT a month during its lifetime. Eventually most inefficiencies cease to exist but the strategy framework can be applied to future work.



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