Probability of System Theft at a Retail Broker

[The Big D]

Imagine the following situation: you are trading a profitable system using a popular futures contract as the instrument. The system has a long run profit factor of about 2.5 and produces both a volume and size of trades that makes it a big long term winner. The system is 100% automated.

The system is fairly simple - any intelligent person looking at a list of the time, order type and price of your trades and comparing it to charts of the data feeds you had requested could, with a population of about 2 week's trades, figure out what the system was. They might not discover all the details, but more than enough to steal the system or manipulate price to screw with you.

Now, here's the question: what is the probability of this happening at a retail brokerage. Does it vary by broker? Let's assume that by virtue of trading this system the growth in your account will be notable. You will also be generating some good commissions for your broker as your account grows, so there's an incentive not to screw with you.

If you think the probability of trouble is high, how would you go about covering your tracks?

Responses by people with actual inside knowledge of brokerage operations are obviously more valuable than rants.

 

[indahook]

Quote from The Big D:


Responses by people with actual inside knowledge of brokerage operations are obviously more valuable than rants.

Brokers are the bookie for a reason. Win, lose or draw they make commission. There is absolutely no way even a nickel BD would risk their bread and butter livelihood to "steal" a system. The losing accounts outnumber the winning accounts by such a wide margin that its much more likely that a market making type approach would be taken than outright profitable system theft. Why not just aquire data on the consistent losers, then simply fade the consenus?

 

[SideShowBob]

Split your trades over multiple brokers, they will then have incomplete information and may have more difficulty figuring out your system.

 

[The Big D]

Brokers are the bookie for a reason.

Duly noted, but I know from first hand experience that competent bookies steal information from profitable/knowledgable bettors - not only do bookies pass off their bets as need be, but the bookie frequently tacks a little of his own money or unbalances his book to take advantage of the information.

So the bookie analogy is not exactly comforting.

 

[The Big D]

Quote from SideShowBob:

Split your trades over multiple brokers, they will then have incomplete information and may have more difficulty figuring out your system.

This would seem to be the obvious way to hide. The downside is that it potentially increases margin requirements by a factor of the number of brokers used.

 

[startraitor]

How is this not exactly comforting as it in no way "manipulates" or skews the outcome of events or payoff to the profitable/knowledgable bettor anymore than someone piggybacking your trades in a liquid market.

Quote from The Big D:

Duly noted, but I know from first hand experience that competent bookies steal information from profitable/knowledgable bettors - not only do bookies pass off their bets as need be, but the bookie frequently tacks a little of his own money or unbalances his book to take advantage of the information.

So the bookie analogy is not exactly comforting.

 

[The Big D]

Quote from startraitor:

How is this not exactly comforting as it in no way "manipulates" or skews the outcome of events or payoff to the profitable/knowledgable bettor anymore than someone piggybacking your trades in a liquid market.

If the only concern was piggybacking, then obviously that's nothing to worry about. It should be beneficial.

However, knowing the system it would be possible to front run it by getting trades in BEFORE the system trades came in. I don't know about ethical, but I don't think that's illegal - that's just anticipating market movement. It would also be possible to hunt the system's stops as if its entries in the dark side of the order book were exposed. That's obviously bad.

 

[olias]

Quote from The Big D:

Imagine the following situation: you are trading a profitable system using a popular futures contract as the instrument. The system has a long run profit factor of about 2.5 and produces both a volume and size of trades that makes it a big long term winner. The system is 100% automated.

The system is fairly simple - any intelligent person looking at a list of the time, order type and price of your trades and comparing it to charts of the data feeds you had requested could, with a population of about 2 week's trades, figure out what the system was. They might not discover all the details, but more than enough to steal the system or manipulate price to screw with you.

Now, here's the question: what is the probability of this happening at a retail brokerage. Does it vary by broker? Let's assume that by virtue of trading this system the growth in your account will be notable. You will also be generating some good commissions for your broker as your account grows, so there's an incentive not to screw with you.

If you think the probability of trouble is high, how would you go about covering your tracks?

Responses by people with actual inside knowledge of brokerage operations are obviously more valuable than rants.

I think it is very, very doubtful...especially at a retail brokerage firm. Who's going to take the time at the firm to do that? They have other work to do right? Who has the brain to do that? Even if they see that the system is successful, they are probably going to figure it's just on a hot streak and expect that it will turn cold when market behavior changes. They are not going to invest the time to do something like that

 

[The Big D]

Quote from olias:

I think it is very, very doubtful...especially at a retail brokerage firm. Who's going to take the time at the firm to do that? They have other work to do right? Who has the brain to do that? Even if they see that the system is successful, they are probably going to figure it's just on a hot streak and expect that it will turn cold when market behavior changes. They are not going to invest the time to do something like that

Why wouldn't they look? If I were a broker, and I had an account that just went up several hundred percent, I'd definitely be curious. I might not do anything with the info for ethical reasons, but it would definitely be worth a hour of my time to see what I could learn for knowledge sake if nothing else.

 

[Jeff700]

Quote from The Big D:

Why wouldn't they look? If I were a broker, and I had an account that just went up several hundred percent, I'd definitely be curious. I might not do anything with the info for ethical reasons, but it would definitely be worth a hour of my time to see what I could learn for knowledge sake if nothing else.

Little known secret in Trading is that topic you are talking about

is what separates boys from men

You'll find little real interest in this on ET for obvious reason. As for my view, brokers trade a lot, not just MMing, brokers take short term intra day trades with their own trading branch. IB has a trading branch. A good one too.

They are always on a lookout for freebies when it comes to systems. If you believe otherwise you are naive. In fact if you believe this is bunch of hooye I will make a prediction that you are not a profitable trader. Yet anyway.