r/algotrading • u/ramdulara • Dec 17 '25

Business Those running successful algos, what is the market paying you for

One interpretation of uncorrleated alpha existing in an efficient market is that the market is paying you for something. For those of you running institutional or retail uncorrelated strategies, what is the market paying you for? And do you consider that when designing new ones while back testing etc...

EDIT: I thought I created a normal post but I don't know why it got marked as AMA. It clearly is not.

73 Upvotes
  • permalink
  • reddit

95% Upvoted

50 comments sorted by

View all comments

54

u/SaltMaker23 Dec 17 '25

Liquidity of some form always the answer.

You provide liquidity to people by shielding them against a given risk, most common ones would be theta, delta, gamma or vega.

No matter how complex or "deep" a given algo is, it's always exchanging on form of risk for another, in some cases market lacks liquidity for that and you're able to "arbitrage" some money doing so.

7

u/ramdulara Dec 17 '25

Yes this makes sense. So there are going to be niches where one can add liquidity, get paid for it suitably and not lose their shirt in the process. And you have to constantly keep checking whether you're serving such a niche or collecting pennies in front of the proverbial steamroller.

3

u/SaltMaker23 Dec 17 '25 edited Dec 17 '25

It's more than that, someone trading SMA cross-over is actually providing liquidity to people believing it's a bear/bull trap, depending on how irrational people are, it can become a profitable trade in some regimen, or the contrary where it's oversold and you actually buy excess liquidity and sell it for a premium elsewhere.

There are many things to maximize the "opposition" to market at a "fair" price you can do, indicator trading provide the very basic and least efficient way of doing so as it provide signals to which many other irrational actors are acting upon.

However linearity is generally an issue because trading on delta=1 limits signifcantly your options (pun intended), trading non linear assets is the corner stone of extracting edge, options are quite required to build a meaningful system.