A bilateral trading model with investment is considered. In a "cooperative" investment version of the model, the seller's investment stochastically determines the buyer's valuation of the good. The value and cost of the good are realized only after the investment is made, and the investment level and the realization of the good's value and cost are private information. I show that, under these assumptions, no contract made before the investment can simultaneously induce efficient investment and efficient ex post trade when the buyer's type is continuously distributed. This inefficiency result contrasts sharply with the efficiency result under the standard "selfish" investment model, where the seller's investment stochastically determines the seller's cost.Above is the abstract from an article written by Kazumi Hori (Hitotsubashi University).

There are many disadvantages to trading independently. Many independent traders cannot command the same low commissions received by exchange members and member firms. Trading on your own may also be isolating. At a firm, you have dedicated support teams handling equipment, software and hardware upgrades, and developing/acquiring new trading tools. That is beyond the budget of many independent traders.

It is natural, therefore, that many independent traders consider joining a trading firm. Having coordinated a training/hiring program for a Chicago-based proprietary trading firm, I have some familiarity with the challenges and issues involved in making such a move. Here are a few items for your consideration:

1) Many of the best career opportunities for traders are at large institutions, such as investment banks and hedge funds. These are often very well capitalized and able to invest in training and development of traders. The catch? These organizations like to hire graduates of finance and financial engineering programs. Quantitative and programming skills are in demand. If you're looking to build a long-term career in the financial world, I'd strongly encourage you to consider an MBA program with a finance concentration or a Master's program in financial engineering to provide yourself with the competencies and skill sets that are increasingly in demand. In such firms, you'll be an employee with benefits and a salary.

2) Can you afford to start out by trading your own capital? If so, this opens several doors. There are trading "arcades" that provide you with office space, tech support, equipment, and trading platforms and pass along economies of scale to you. These shops generally can command low commission rates and may or may not pass along some of their own commissions to you on top of monthly fees for the service, rent, and equipment. Note that in this structure, you are a customer of the firm, not an employee. That means no salary and, in all likelihood, no draw against future earnings. The upside is that you keep the lion's share of your trading profits. One nice variation on the arcade is the trader's co-op, in which a few experienced traders go in together to share equipment, office space, and other overhead, but trade their own accounts.

3) Do you need capital to get yourself started? Then you might be looking at a proprietary trading firm, in which you trade the firm's capital. The firm provides you with all equipment, space, tech support, software, and platforms. At some of these firms, you may be charged a commission on top of monthly fees. The firm, because it takes 100% of risk, will also take a good chunk of profits. You may qualify as an employee of the prop firm, which means that you would be eligible for normal employee benefits. A monthly draw against future profits may provide you with some stable income; straight salaries are not the norm.You'll be more competitive to join a bank or hedge fund if you have the education and internship placement experience.

You'll be more competitive to join a prop firm if you already have an independent track record of trading success. The education departments at the major exchanges, such as the Chicago Mercantile Exchange and the Chicago Board of Trade, publish lists of member firms and often are aware of training programs and hiring among these. Googling "Master's of Science in Financial Engineering" and looking into MBA programs with strong finance components (see who is publishing in the Journal of Finance!) will give you leads for training for institutional positions.The bottom line is that few organizations will take you off the street and put capital into your hands to trade. If you're not an experienced trader with your own capital, my advice is to find a graduate program or a training program within a proprietary firm and learn the business from the ground up. Think about building a career, not just getting a job.This article written by Brett Steenbarger, originally published at http://traderfeed.blogspot.com

As we have discussed before, this discussion forum is to explore the psychology behind the success or failure to trade successfully. As most traders with any experience know, the ability to “call “ the market is relatively easy in comparison to getting properly positioned within the market, and taking the most amount of money from your observation; that is where the real work of lasting trading success really lies. All of us have found the actual bottom or top of a significant move but failed to capitalize on that opportunity for one reason or another.

This month, I would like to address one of the more common trading errors. Everyone has made the error of overtrading at some point and many continue to make this error despite knowing they have this problem. Just knowing you have a propensity for a trading problem is half the battle but more importantly, you need skills and tools to correct your trading error. One of the more critical skills to develop in my view is to stop and confront the problem of overtrading.

Overtrading is a symptom of a deeper psychological problem which I like to call attachment to results. All traders have a certain degree of results they are pursuing in the markets; that is not the problem. The markets exist to exploit inequalities (real or imagined) in the supply and demand of something or financial instruments. It is a good thing to see an opportunity and assume the risk for the potential that is there. Once that action has been taken the only question is whether or not that inequality you perceived is an actual event that is unfolding over time. Between the time you execute for an entry and the time you liquidate for an exit; the markets will be moving. That movement is where the issue of attachment to results translates into your personal results.Attachment to results can actually be expressed two ways depending on your personal psychology and trade method. The first way is holding losers and the other way is overtrading. We will discuss the issue of holding losses at a later time but the net effect on your equity is the same whether your problem is holding losses too long or you overtrade. Attachment to you results is the bedrock problem behind either overtrading or holding losses. In the case of overtrading, it represents the psychological need for immediate results (or positive results) without the corresponding willingness to allow time to pass. I think it is safe to say that a certain amount of time is required for any trading style to generate a gain and the unwillingness to let the required amount of time to pass comes out in the markets as constant execution over some timeframe.

If you use an hourly timeframe to pick your points of entry it is safe to assume that more than one hour must pass in order to determine if your executed trade has potential as you see it. Should the market move against your position that is to be expected, it is unreasonable to assume you will “buy the low” or “sell the high” every time you trade. As the market moves, if you are attached to your results, that movement means something to you. It is personally helping or hurting your equity. As your account balance changes from open trade equity, your focus narrows down to how this is affecting you personally. Most traders with this problem now seem to forget the high degree of study, preparation and thought they invested into picking that spot to execute. For some reason, the long-term fundamentals are forgotten, the technical studies are re-evaluated in real time, the protective stop order might be moved and the limit order to take the gain is moved closer to the market. Or any number of things. Then this trader executes to exit the market. Prices remain near their entry or advance. Attachment to results now says “You are missing it! You were right!” and this trader now executes again for an entry. As prices return to the first entry price, this trader again has a small open-trade loss; again the trader’s attachment says the trade is not going to work.

This process may repeat itself several times over a short period of time, especially if the market is advancing in the intended direction. The problem is not the market price action; the problem is the attachment to results imposed by the trader creating an urge to action that is not consistent with normal ebb and flow of most market action. The trader has failed to allow time to pass and let the market do what it is going to do. During a major price advance or decline that was properly observed, this trader has small gains or even net losses when his just sitting tight for a period of time would have resulted in a nice gain.Solving this problem is a factor of learning patience as well as adapting your thinking to better fit with the market you trade.

I have observed from working with many developing traders that if they have the problem of overtrading, the simplest solution is to impose a new set of rules on their execution that allows time to pass. I have a very common sense based method that I would encourage you to try for yourself. Simply turn your screen off; the assumption here is that the market will do what it will do whether you watch it or not. The problem is not the market price action, the problem is attaching meaning to that action and executing. If you can’t see the price action, you can’t execute. So the first thing we do is impose the rule: After you execute you have to turn the screen off for at least one bar of your time frame as a minimum.In most cases, several bars are needed to either confirm or deny a trade potential is developing so often the trader must sit in front of a dark screen for several hours. The market is still moving, but in this case, the stop is also still where it was originally placed, the limit is still where it was placed and the trader cannot reevaluate the trade nor do anything except wait. During this time I also require the trader to write out in as much detail as possible exactly his hypothesis for the trade. This keeps the trader focused on the critical thought required to do the trade as opposed to how the tic-by-tic price action is affecting his equity. After enough time, this self-imposed isolation develops into patience to let the trade work. At some point, the trader will no longer need to be “in the dark” and he has the skill to simply sit still and let the trade work.

Next month we will talk more about attachment to results as it comes out when you hold losing positions. In the meantime, if you have a tendency to overtrade; try this method. I think you will be surprised at how fast you learn to let your trades work.

At a gathering of investment bank trainees in suburban New York last night, I was asked my opinion of the most common problem among traders. My answer was neither fear nor greed. It was overconfidence.

Studies in behavioral finance find that about 3/4 of all traders rate their prowess as "above average", despite the obvious reality that only half of us are better than the other half. This overconfidence, moreover, affects actual trading performance. Research by Terence Odean and colleagues finds that overconfidence affects frequency of trading, which in turn contributes to poor trading results. In one study of online traders, the group of traders favored high beta (volatile) small cap companies and tended to not diversify their portfolios. Their actual trading results slightly beat the small cap index, but after trading costs were factored in, they significantly underperformed the index. The most frequent traders were the ones who underperformed the index by the greatest margin.

One of my favorite studies of overconfidence came from the London Business School. Traders were shown price patterns and asked to figure out the market's next direction and indicate their confidence in their prediction. The price patterns were generated entirely randomly. The traders with the highest confidence in their predictions traded the most frequently and incurred the greatest losses. A completely random trader--50% right, 50% wrong--who trades once a day will have runs of five consecutive winners about six times during a year. It is difficult to not think you have the hot hand after such a string, become overconfident, and raise your trading size. Of course, the random trader will have an equal number of strings of losers. That is likely to burst confidence and lead the trader to cut trading size--assuming, of course, that he's still in the game at that point.Is it any wonder that traders seek help from coaches and psychologists? Few of those coaches and psychologists, however, will tell the trader the truth: You're trading random patterns and your problem is overconfidence in them.