[lzhou]

I'm not sure that's completely true.

1) Are there places / markets that ST Arb and HFT won't go because it's too illiquid or too idiosyncratically volatile?

2) Are there edges so small that you won't chase?

3) Are there one-off opportunities (2010 flash crash, UST flash crash recently, etc.)?

4) Is there a set of strategies that manual traders know (which they should probably transfer to HFT strategies) that the HFT/ST arb shops don't know?

I think the answer to all of those questions is "yes". They probably take on a lot more risk per trade. They would also be better served by automating their strategies. But I think it's not as cut and dry as you state.

Each individual trader might be "amateur" -- but the firm as a whole might end up with a decent return / risk.

[dhammack]

#4 is the only one which I would say does not hold. I'd be very surprised if a firm of manual traders could consistently outperform the market (or beat a Sharpe of 1).

[lzhou]

I think 4) holds.

We have 2 spectrums for all known strategies (the amount of gold in the veins is another question):

* Strats that are automatable vs non-automatable.

* Strats that are unique (known to a few) vs well-known strats

Automatable:

Well-Known - This is where HFT becomes an engineering problem. It's also the easiest business decision to make. I hire some engineers + buy some computers and I can mint some money for a time. This is also a race to the bottom -- where there will be some easy money to be made at equilibrium, but it'll be unsustainable for HFT firms at the margin. I would say manual trading has 0 impact here -- and they'll likely get crushed.

Unique - These are strategies that only a small set of firms know. Eventually these strategies become well-known as people move around companies. There must be some secret strategies, though. Otherwise, why would Rentech & Citadel sue their own employees (unless we are to believe Simons & Griffin are simply vindictive). I think manual trading could work here if there is a strategy that simply haven't been discovered by the HFT & quant. It's might be hard, but not impossible. These secrets aren't anything you'll find online or in some trading forum, though. Or perhaps they are, but no self-respecting quant would go there (lest they become laughing stocks in their fund).

Non-Automatable:

Well-Known - PE is an example of one. In terms of liquid assets, maybe penny stocks are another area. If a group of "manual" traders couldn't get permission to delve there... it's probably even harder for a quant fund. It's also the territory of insider info and rumors.

Unique - Maybe being there for the liquidity crashes I stated earlier is a good example. But there are certainly non-automatable unique strats around.

Depending on how much gold you believe is in the veins, all strategies are heading towards automatable & well-known. However, in the interim, I can see manual traders still making money (even with a sharpe > 1). In fact, I would say there are well-known strats you can execute manually (in say, your PA, that return sharpe ~0.8ish).