Can institutional, quant, or other professional traders “prey on” (make money from) retail investors?
"I can address what it means to ""pick off"" all those trades... As quantycuenta & littleadv have said, it is absolutely true that professionals ""prey"" on less-sophisticated market participants. They aren't in the market for charity's sake.  If you're not familiar with the definition of the word ""arbitrage"", look it up.  One possible strategy that can be employed with HFT machinery in order to arbitrage successfully in the stock market is to 'intercept' orders that are placed on various exchanges. In order to do this, an HFT organization watches all the transactions at once to find opportunities to buy low and sell high.  A good explanation of it is described here in this NY Times article; I'll paraphrase what that article lays out.  Stocks are traded through multiple exchanges The first key point to understand is that stocks listed on one exchange (i.e. the NYSE) can be sold on multiple exchanges. That's where the actual ""I would like to sell 100 shares of Ford stock"" is matched with ""I would like to buy 100 shares of Ford stock."" There are multiple clearinghouses on the various exchanges. Your order gets presented to one exchange at a Time An ideal market maker would like to look at the order books for a given stock, say Ford, and see that in exchange A there's a sell order for 100 shares of F at $15.85, and in exchange B there's a buy order for 100 shares of F at $15.90.  Arbitrage Market maker buys from A, sells in B, and pockets $0.05 * 100... $5. It's not much, but it was relatively risk free. Also, scale this up to the scale of the US' multiple stock exchanges, and there are lots of opportunities to make $5 every second.  Computers are (of course) faster than people To tie it in completely with your question about 'picking off trades', HFT rigs can be set up and programmed to go faster than an average retail investor's order.  Let's say you execute the trade to buy 100 shares @ $15.85 as a retail investor. The HFT rigs see your order starting to make the rounds of the different exchanges that your brokerage works through, and go out in front in a matter of milliseconds, finding the orders that are less than $15.85 and less than or equal to 100 shares. They execute a transaction, buy them up, sell to you, and pocket the difference.  You have been ""picked off"".  It's admittedly not the only way to use HFT equipment to make money, but it's definitely one way to do it." "The primary advantage of HFTs is their speed to act upon opportunities that exist for only fractions of a second. The reason why they are able to do this is because they invest heavily in hardware, custom software, and custom algorithms.  Most of the fleeting advantage, as they all manage to top each other's hardware seemingly every other day, is from the hardware investment.  To see the extremes that HFTs will go to invest in hardware, one might view this. It is highly likely that the trader with the market making algorithm could have been ignorant of the ""hide not slide"" order and missed out on many more opportunities while still being successful.  Haim Bodek, who is very much against this order type, was not so lucky. If it was truly an investment bank then it was unlikely that they were actually front running, which is very illegal and easily possible with much more low tech means, since companies like Citadel handle most orders now, and they have not been successful in investment banking. The reality of HFT is slowly coming to light, that while HFT can provide extremely consistent returns with enormous sharpe ratios, the capital investment is equally enormous, and the amount of capital that can be employed is also as enormously limited.  After all, the richest people on the planet are not HFT owners. Also, when it comes to time periods longer than 500ms, their results become very human."
"You can call CBOE and tell them you want that series or a particular contract. And this has nothing to do with FLEX. Tell them there is demand for it, if they ask who you are, DONT SAY YOU ARE A RETAIL INVESTOR, the contracts will be in the option chain the next day. I have done this plenty of times. The CBOE does not care and are only limited by OCC and the SEC, but the CBOE will trade and list anything if you can think of it, and convince them that ""some people want to trade it"" or that ""it has benefits for hedging"" I've gotten 50 cent strike prices on stocks under $5 , I've gotten additional LEAPS and far dated options traded, I've gotten entire large chains created. I also have been with prop shops before, so I could technically say I was a professional trader. But since you are using IB and are paying for data feeds, you can easily spin that too." So how often do investors really lose money? The short answer is, every day. Let's first examine your assumptions: If the price of the share gets lower, the investor can just wait until   it gets higher. What are the chances that it won't forever, or for   years? There are many stocks whose price goes down and then down further and then to zero. The most apparent example is, of course, Enron. The stock went from about $90 per share to zero in about 18 months. For it to have been sold at $90, obviously, someone had to buy it. Almost no matter where they sold it, they lost money. If they didn't sell it, when the stock was worthless, they lost money. https://en.wikipedia.org/wiki/Enron#/media/File:EnronStockPriceAugust2000toJanuary2001.svg There are more modern examples of companies that are declining in a rapidly changing market. For example, Sears Holdings is getting beat down by Amazon and many other on-line retailers. I suspect that if you buy it today and wait for it to go higher, you will be disappointed. https://www.google.com/finance?q=NASDAQ%3ASHLD&ei=E8_fWIjWGsSGmAGx7b_IAw The more common way to lose money is to either not have a plan or not stick to the plan. Disciplined investors typically plan to buy quality stocks at a fair price and hold them long enough for increasing sales and profits to bring the stock price up. If, later, he hears a bit of bad news about his stock and decides to sell out of panic or fear and become a trader instead of keeping to the plan to remain a disciplined investor, he is likely to lose money. He will lose because no-one can predict accurately that a stock is going down and will never recover; nor can he predict accurately when a stock is going up and will never falter. The chance of bankruptcy (especially for huge companies like Apple) is   really low, as I see it, but I may be wrong. Thousands of people lost billions of dollars thinking that about Enron, too. I too believe Apple is a fine stock with excellent prospects, but technology changes and markets change. Twenty or thirty years from now, it may be a different case. "The fund will take a small percentage of its assets to cover the expenses.  Reported returns come after the expense ratio has been factored into things. Money market mutual funds can have a zero yield in some cases though breaking the buck can happen in some cases as noted on Wikipedia: The first money market mutual fund to break the buck was First   Multifund for Daily Income (FMDI) in 1978, liquidating and restating   NAV at 94 cents per share. An argument has been made that FMDI was not   technically a money market fund as at the time of liquidation the   average maturity of securities in its portfolio exceeded two years.[7]   However, prospective investors were informed that FMDI would invest   ""solely in Short-Term (30-90 days) MONEY MARKET obligations.""   Furthermore, the rule, which restricts the maturities which money   market funds are permitted to invest in, Rule 2-a7 of the Investment   Company Act of 1940, was not promulgated until 1983. Prior to the   adoption of this rule, a mutual fund had to do little other than   present itself as a money market fund, which FMDI did. Seeking higher   yield, FMDI had purchased increasingly longer maturity securities and   rising interest rates negatively impacted the value of its portfolio.   In order to meet increasing redemptions the fund was forced to sell a   certificate of deposit at a 3% loss, triggering a restatement of its   NAV and the first instance of a money market fund ""breaking the   buck"". The Community Bankers US Government Fund broke the buck in 1994,   paying investors 96 cents per share. This was only the second failure   in the then 23-year history of money funds and there were no further   failures for 14 years. The fund had invested a large percentage of its   assets into adjustable rate securities. As interest rates increased,   these floating rate securities lost value. This fund was an   institutional money fund, not a retail money fund, thus individuals   were not directly affected. No further failures occurred until September 2008, a month that saw   tumultuous events for money funds. However, as noted above, other   failures were only averted by infusions of capital from the fund   sponsors. Thus consider how likely is Fidelity Investments prepared to have people question how safe is their money with them which is why fund sponsors rarely break the buck." As a sole trader you would fill out an Individual Tax Return and complete the Business and Professional Items Section P1 to P19, then enter the amounts from that section into Item 15 in the Supplementary Section of the Tax Return. Any business income as a sole trader will be included into your taxable income for the year together with other sources of income you may have earned in the same income year. Whether you get a tax refund will depend on the amount of taxable income you make, the amount of tax you have already paid in instalments throughout the year, and any tax deductions and tax offsets you can claim. Since Brad answered with a great reply, I'd like to offer another comment: Be careful with the results. Annualized returns of short term trading can produce some crazy results. For example, a 10% gain in a week isn't unheard of for individual stocks, but (1.1)^52 = 142. or a 14,100% return.  This may be obvious, but may help those who aren't so familiar with the numbers to understand that data running less than a year isn't going to provide as much useful conclusion as longer term. Note: Even a year doesn't really reflect success in a given strategy. There is a difference between trading which is short term focussed and investing which is longterm focussed. On the long term what drives stock prices is still the overall economy and the performance of the underlying business aspects. I do not think that any trading algorithms will change this. These are more concerned with short term profits regardless of the underlying business economics. Therefore I think that longterm investing using index funds is still a viable strategy for most private investors. Your basic assumption is incorrect. You don't normally go to a bank to borrow money to invest, but brokerages do it all the time. It is called trading on margin. Probably not.  Once the formula is out there, and if it actually seems to work, more and more investors chase the same stocks, drive the price up, and poof!  The advantage is gone. This is the very reason why Warren Buffett doesn't announce his intentions when he's buying.  If people know that BRK is buying, lots of others will follow.