Percent of trading profits for software development

qlai · Sep 13, 2017

Hello, what do you think is a fair percent of profits to share with developer for implementing a strategy? Assuming there will be ongoing maintenance and support. Also taking into a consideration that the developer is not risking own money.
Something that would be worthwhile for the developer yet not too taxing on the trader(s). Maybe something tier based? I'm NOT talking about hundreds of millions AUM shops.
Thank you for your input.

Sprout · Sep 13, 2017

50/50, expenses off the top is a fair deal. A fair deal being one where you would take either side. If you only want the one side, the deal is not so fair.
At a point, everyone who is at the table is bringing something other than money to make a deal work. If a deal is structured well, money flows to it like water seeking it's level.

tommcginnis · Sep 13, 2017

What you are describing is a software assignment, no different than placing traffic cones or planning landscaping crews. For this, you pay them as software developers.

As Sprout implies, if capital is on the line, then it's two separate deals.
And if they are doing the actual trading, that too is yet another deal.

But for software, an hourly wage and a retainer are pretty standard.

birzos · Sep 13, 2017

qlai said:
Hello, what do you think is a fair percent of profits to share with developer for implementing a strategy? Assuming there will be ongoing maintenance and support. Also taking into a consideration that the developer is not risking own money.
Something that would be worthwhile for the developer yet not too taxing on the trader(s). Maybe something tier based? I'm NOT talking about hundreds of millions AUM shops.
Thank you for your input.

Actually you have three cores to any situation, management & strategy (c-suite), business (methodology design), and technology. Then you have architects in the middle to communicate between the three, so 20% to 35% would be balanced depending on the architecture involvement. Then of course you have investors (capital) which in your case would be yourself so 15-20% would be the net. Yes, I have many years of experience in all five areas, now, your chance of finding someone is virtually nil but that's another subject.

qlai · Sep 13, 2017

Perhaps my phrasing of the question was a bit misleading.

I'm the developer implementing the strategy. I have no idea if the strategy is profitable. Even if it is, I don't know how scalable it is. I am not interested in an "hourly wage." There a couple of reasons for this, but main ones are -
1) The initial up-front costs would be quite prohibitive for the trader.
2) I'm not interested in making a couple of extra dollars, but rather to make an "investment" with an upside potential.
Percent of trading profits seems to be the best deal for both sides - no out of pocket expenses for the trader and no financial risk for the developer.
The tricky part is to come up with the right percent (of net profits) without knowing strategy's potential. Too large will put too much pressure on the trader and will not be worth the risk to run it. Too little will not worth the effort for the developer to recoup opportunity costs and maintain/improve.
So I was thinking in terms of profit tiers. Something like this maybe:
Net profit $1 to $500K => 10% royalty
Net profit $500K to $1M => 5% royalty
Net profit $1M and up => 2.5% royalty

Keep in mind that most strategies have pretty short (a couple of years IMHO?) lifespan.

Thank you

Sig · Sep 13, 2017

qlai said:
Perhaps my phrasing of the question was a bit misleading.

I'm the developer implementing the strategy. I have no idea if the strategy is profitable. Even if it is, I don't know how scalable it is. I am not interested in an "hourly wage." There a couple of reasons for this, but main ones are -
1) The initial up-front costs would be quite prohibitive for the trader.
2) I'm not interested in making a couple of extra dollars, but rather to make an "investment" with an upside potential.
Percent of trading profits seems to be the best deal for both sides - no out of pocket expenses for the trader and no financial risk for the developer.
The tricky part is to come up with the right percent (of net profits) without knowing strategy's potential. Too large will put too much pressure on the trader and will not be worth the risk to run it. Too little will not worth the effort for the developer to recoup opportunity costs and maintain/improve.
So I was thinking in terms of profit tiers. Something like this maybe:
Net profit $1 to $500K => 10% royalty
Net profit $500K to $1M => 5% royalty
Net profit $1M and up => 2.5% royalty

Keep in mind that most strategies have pretty short (a couple of years IMHO?) lifespan.

Thank you

You're a pretty rare developer then! May I ask how long you've been making a living doing software development? As a break into the industry strategy or a side project for fun strategy what you describe is fine. As a long term strategy to make a living, well you'll find out how that works out I guess.

qlai · Sep 13, 2017

Sig said:
May I ask how long you've been making a living doing software development? As a break into the industry strategy or a side project for fun strategy what you describe is fine.

Yes, you got it - more of a side project. I've been a developer in the financial industry for a very long time (don't want to date myself here

, but automated trading for about five years. Definitely agree with you - not to make a living, but maybe passive (relatively speaking) income generator - PIG

Cheers

thaitye · Sep 14, 2017

qlai said:
Percent of trading profits seems to be the best deal for both sides - no out of pocket expenses for the trader and no financial risk for the developer.

You have to keep in mind that you are taking a financial risk. Your time is worth money, and if you do work and the system doesn't make any money then you essentially lose the time that you used to put into the development of the system. You know what they say, "time is money". So a reasonable solution could be this, what is total cost of your wage, if it were valued monetarily. Then you could potentially use that amount to reference how much of a portion that amount is to the initial investment size.

Person A has the know-how of trading and capital
Person B has the know-how of development and time

These two things can potentially be equivalent in terms of monetary worth. Especially if Person A highly values you as a partner.

Sig · Sep 14, 2017

thaitye said:
You have to keep in mind that you are taking a financial risk. Your time is worth money, and if you do work and the system doesn't make any money then you essentially lose the time that you used to put into the development of the system. You know what they say, "time is money". So a reasonable solution could be this, what is total cost of your wage, if it were valued monetarily. Then you could potentially use that amount to reference how much of a portion that amount is to the initial investment size.

Person A has the know-how of trading and capital
Person B has the know-how of development and time

These two things can potentially be equivalent in terms of monetary worth. Especially if Person A highly values you as a partner.

The value of your time is very different if you're working for a wage vs working for a potential payout. If I offered you $100 an hour to do a project for me, or something that may be worth $100 an hour or may be worth nothing and in either case it won't be paid for months or years, the rational person would always choose $100 cash money. To get you to work for that uncertain payoff, you need to value the time at a multiple that reflects the risk that you'll ever see it. What that multiple is will be different for everyone based on their perception of the risk, but it will never be less than or equal to 1.