Mr. Vig, Mr. Peep, Mr. House: One of my favorite stories that explains and justifies market phenomena involves the poor soul down on his luck with a meager $1,000 bankroll who hires a crooked mechanic to peep at the hands of his good friend, who also has a thou, in head-to-head poker play. The peep shows up. The poor soul wins $200 from his friend. But the next week at the regular game, the peep has a family engagement and he loses $200.OK, the situation repeats three or more times . One week on, the other week off. Then the players realize that they're playing each other with only $500 each. Yes. Each one had been hiring the peep the other week and the peep ended up with 1 thou and the two players each ended up -50%.

I was reminded of this recently when we became privy to news that a certain expert who invariably takes the opposite positions to all our trades was losing a fortune and close to calling it a day, after much fanfare about the theoretical virtues of his methodology and scholarship, and after many crocodile tears about our own fortunes, especially after such dramatic moves as occurred in the aftermath of Sept. 11, 2001, and the relentless declines surrounding the Long-Term Capital Management crisis of 1998,the Nasdaq crash of April 2000 and the terrible summer of 2002.

And yet, and yet -- whenever I'm nursing a trade late at night, the little woman comes in to wonder why I'm still hanging on for dear life after so many years in the game. If the guy on the other side of my trades has lost a few hunnies, where's my few hunnies? It's zero sum, right? What he lost, I made, right? Yes, but ... Mr. Vig ... Mr. Grind ... Mr. House..........oh beware, take care of those transactions costs. --Victor Niederhoffer (6/19/2003)

A Reader Writes: 

Greetings fellow specs,

Greek symbols have found their way into many Wall Street trading strategies, but
most small investors find themselves speaking French after Mr. House and Mr. Vig
have taken their hearty cut. Given the amount of esoteric knowledge that is
held by the house, it seems like most outsiders play the role of shark bait in
our Darwinian market ecosystem.

Explaining Feller to the masses may be too much to ask. However, comparing the
average vig and house take across different asset classes (including real
estate, timber, and other 'alternative' investments) with respect to the average
historical return for each asset class would make for a great MSN column.
Although I have not performed this exercise myself, logic and experience tell me
that the following rules should (and do) apply:
1) Ceteris paribus, low levels of liquidity = high vig/house take
2) Ceteris paribus, low levels of volume = high vig/house take
3) Ceteris paribus, high levels of leverage = high vig/house take
4) Ceteris paribus, high levels of volatility = high vig/house take
5) Higher historical returns = higher vig/house take

Regards,

Stefan Lewellen
Chicago, IL