The first order of business when setting up a proprietary trading firm is to be able to describe its business model in a concise manner. We like the idea of sketching out a business model in one page and we have found the Business Model Canvas to be very useful for this purpose. So, what does the Business Model Canvas of a proprietary trading firm look like?
Before we can definitively answer that question, we need to have some idea about what it is that we are building. In other words, what is the equivalent of a "Minimum Viable Product" (MVP) for a proprietary trading firm, especially when there are no actual products or customers as commonly understood?
In this post, we shall explore the implications of these two important questions as they relate to our trading business:
- What does the Business Model Canvas of a proprietary trading firm look like?
- What is the equivalent of a Minimum Viable Product for a proprietary trading firm?
When Eric Ries first used the term "Minimum Viable Product", he described it as: "that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort." In the context of a web business, for example, MVP is a strategy and process directed toward making and selling a product to customers, i.e., a strategy built upon an iterative process of idea generation, prototyping, presentation, data collection, analysis and learning. In other words, one seeks to iterate quickly around the Build-Measure-Learn loop until an acceptable product/market fit is attained, or the product is deemed non-viable. Steve Blank used the alternative term of "minimum feature set" to refer to minimum viable product.
In thinking about what MVP means for a trading business, we came to the realization that: "a Minimum Viable Product for a trading business is the smallest thing one can build that delivers trading profits from day one". It is as simple as that. There are no prospects to convert and no sales funnel to optimize. Our view of MVP is thus closer in spirit to the stricter definition proposed by Ash Maurya. In our case, the global foreign exchange markets, in a very real sense, is the customer. The customer value that we are racing to deliver, in the abstract, is any which ways we can find that can make the global foreign exchange markets work more efficiently for which we can expect to capture a small premium for closing the inefficiency gap. In practice, of course, "any which ways" are defined by the constraints of our computing resources, the scope, resolution and timeliness of our data feeds, the forecast abilities of our models, and the algorithmic execution of our strategies.
Our initial design of a trading business model, which we call the Minimum Viable Business Model, can now be readily sketched on the Business Model Canvas as shown here:
It is clear from the minimum viable business model sketched in the above that a certain level of "strategy/market fit" is critical for overall success, or the trading business is deemed non-viable. In other words, the choice and design of an initial "minimum strategy set" is perhaps the single most important factor that determines overall success of any new proprietary trading business.
Our approach at Space Machine is to develop dynamic trading strategies that are "market friendly". That means we focus attention on deploying proven strategy types built upon just a few well-understood models; but combine them in a multitude of new and interesting ways to create the desired variations to better survive a rapidly evolving market. That's what we do in a nutshell, for now. We'll have more to say about this in a future post.
- Osterwalder, Alexander, and Pigneur, Yves (2010). Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (1st ed.). John Wiley and Sons.
- Ries, Eric (2011). The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. Crown Business.