Capacity constraints outside of the order book
Why the tiniest slots - on a homepage or in a market, can deliver the fattest Sharpe when you push them to capacity.
Before I got in to trading I was running a tour operator. A lot of business came from media, where we’d pay for a media slot and try and make more than the cost of an advert.
We had three main websites/newsletters that we’d place ads on. Some performed better than others, and some forms of media performed better than others.
One of the forms of ads you could place with one of the websites was a homepage listing, that would last a week. There were only 6 slots on the homepage up for grabs and you could only have three at a time. On a Wednesday they’d run a newsletter to 14M subs. Evidently the best day to get a newsletter placement up would be then, so you get all the traffic from people that click through the site.
These were massively underpriced compared to the newsletter ($350 vs $10k starting). These performed at incredibly high Sharpe and you’d never lose money on them but the downside is obviously that you couldn’t get a lot of size behind it. The same way that in trading sometimes the best edges are often capacity constrained - but when you find them you should be taking them to capacity.
