Prop firm asking for source code and strategy??

[WinstonTJ]

The more I read stuff on ET the more I realize that the majority of posters have no clue what they are talking about. This thread has been ruined – I wanted to hear from firms and traders and get feedback as to their experiences and practices, instead we get a bunch of bickering that doesn’t get anyone anywhere. I spoke to Don a little over a year ago and we couldn’t agree on terms so we went our separate ways. I would expect that anything “shared” would be nothing more than “sales pitch” type material and that source code and currently executing strategies would be kept separate – at least that’s the impression I have gotten from almost every firm I spoke with.

Are there any traders out here who have been outright asked for source code due to “regulatory reasons” or are there any firms who require traders to outline general strategies for risk/compliance issues?

 

[NY0BScalper]

Quote from Don Bright:

Concept could equal " send in a zillion orders away from the market, hoping to snag after hours programs that are off by a dollar" (I've heard that, believe it or not.....

That's clearly a concept that I don't my Firm associated with - our Clearing Firm would freak out, and it's legally qustionable.

Don

How is quoting away from the inside market by a few points in order to catch erroneous orders exceedingly risky or legally questionable???

 

[LeeD]

Quote from NY0BScalper:

How is quoting away from the inside market by a few points in order to catch erroneous orders exceedingly risky or legally questionable???

I wouldn't use the exact terms "legally questionable"... but there are market rules that allow for cancelling "clearly erroneous" trades. The rules are not specific in the way that 3% away from the market is intentional and 30% away is "erroneous".

Following these rules, for example, lots of equity trades that happened furing "flash crash" in May got cancelled. A number of people who traded on that day thought they were flat overnight but had one side of the trade cancelled.

The basic idea behind these rules is the same as behind "misselling" of financial products. It's OK to profiteer from other market participants but it should be done in an orderly manner.

 

[bone]

At least in the futures world, a prop firm or brokerage has absolute control over risk metrics. Maybe an introducing broker or smallish retail type storefront might not, but the FCM he has a give-up agreement with certainly does.

Firms can set stop-loss levels for traders, where if he reaches a certain preset pain threshold he is unable to enter orders which do not offset his existing positions. Firms can also lock a trader out and offset his positions remotely and very quickly. Many futures risk managers firms treat all orders (even the ones away from the market that are resting) as risk - so in the futures world, the margin usually has to be there for a 'worst case scenario' given working and filled orders collectively. In the electronic futures world, all FCMs have risk management systems that assign both realized and modeled 'hypothetical' risk based upon working orders.

In the futures world, automated systems used by a firm have to be registered with the exchange - the orders are typically tagged differently by the exchange. In fact, most automated futures orders are marked internally as 'contingent' by the exchange - therefore, they are ALWAYS matched last in the order queue compared to other order types. That is a big reason why, in fact, I use automation less than I used to - with the FIFO order matching algorithm you are 'tail-end Charlie'.

For a futures strategy, I cannot think of a legitimate regulatory reason for a firm to insist upon access to a client's source code given the control they have over the risk quality for the orders that person can show the market. If they hire you as an employee and pay you on a W-2, they have a legal right to it.

IN MY MIND, AUTOMATED TRADING STRATEGIES ARE THE VERY WORST METHODOLOGY TO SEEK PROP BACKING FOR - ESPECIALLY THE HIGHER FREQUENCY PROGRAMS. Inquiring minds can match up your messaging to your fill timestamps and reverse engineer the thing. You can plot fill timestamps and backtest out technical studies for that matter if there is enough frequency. If you're successful, what's stopping someone from building a 'shadowing' program that duplicates your orders and fills within milliseconds?

 

[WinstonTJ]

Quote from LeeD:

I wouldn't use the exact terms "legally questionable"... but there are market rules that allow for cancelling "clearly erroneous" trades. The rules are not specific in the way that 3% away from the market is intentional and 30% away is "erroneous".

Following these rules, for example, lots of equity trades that happened furing "flash crash" in May got cancelled. A number of people who traded on that day thought they were flat overnight but had one side of the trade cancelled.

The basic idea behind these rules is the same as behind "misselling" of financial products. It's OK to profiteer from other market participants but it should be done in an orderly manner.

like everything else in the markets if there is an arb there it will be exploited. if they are sending orders within the boundries and the opposite side is not "clearly erroneous" then what is wrong?

 

[propseeker]

Quote from WinstonTJ:

The more I read stuff on ET the more I realize that the majority of posters have no clue what they are talking about. This thread has been ruined – I wanted to hear from firms and traders and get feedback as to their experiences and practices, instead we get a bunch of bickering that doesn’t get anyone anywhere. I spoke to Don a little over a year ago and we couldn’t agree on terms so we went our separate ways. I would expect that anything “shared” would be nothing more than “sales pitch” type material and that source code and currently executing strategies would be kept separate – at least that’s the impression I have gotten from almost every firm I spoke with.

Are there any traders out here who have been outright asked for source code due to “regulatory reasons” or are there any firms who require traders to outline general strategies for risk/compliance issues?

the bickering has actually been on topic. the ethics of how and why strategies are being shared is being hashed out. there have long been rumors of strategies being outright stolen from traders by props. for instance, a certain 'well known reputable firm' was accused by a group of koreans back in the day of "sharing the concept" of a now infamous strategy, they were pretty pissed. hearsay of course, but i've heard the rumor from higher ups at both assent and echo not to mention dozens of traders, so you could say some rumors certainly have deep roots. you started a pretty controversial topic, i'm not sure what you were expecting.

to answer your question about regulatory, i've never been asked, but have read a letter sent to a firm from their ib forwarded from the sec to save all code for working strategies on x date. have heard of quite a few shops and even individual traders receiving these. the primary basis for the sec recently being able to successfully ban foia and external auditing was to increase 'trust' from firms to share this type of information. of course, they're way outside their legal bounds here, and firms are starting to reorganize outside of sec jurisdictions to prevent that level of scrutiny. certainly, the greatest risk in trading today is regulatory.

as for firms, assent and bright are the only ones i've heard of in the commission charging with cap contribution b/d arena. if you're salaried and drawed though, you can pretty much expect that (firms like schony/trilliam, etc)... as you should though since you're essentially taking no risk with little to no costs and excellent infrastructure. all a trade off in the end... some more than others.

 

[TraDaToR]

Quote from bone:

In the futures world, automated systems used by a firm have to be registered with the exchange - the orders are typically tagged differently by the exchange. In fact, most automated futures orders are marked internally as 'contingent' by the exchange - therefore, they are ALWAYS matched last in the order queue compared to other order types. That is a big reason why, in fact, I use automation less than I used to - with the FIFO order matching algorithm you are 'tail-end Charlie'.

I didn't know that. Why would a firm register a system ? When you submit an order through a platform, there is no way of knowing it is automated. It would give a platform API user an edge over more sophisticated collocated systems. I doubt most of the "good fills" I see nowadays are obtained by manual traders...

 

[walterjennings]

Quote from TraDaToR:

I didn't know that. Why would a firm register a system ? When you submit an order through a platform, there is no way of knowing it is automated. It would give a platform API user an edge over more sophisticated collocated systems. I doubt most of the "good fills" I see nowadays are obtained by manual traders...

Interesting that they give priority to manual traders, I'd imagine that isn't true for the market makers. I'd still imagine some automated systems taking advantage of that dichotomy by controlling and submitting orders though a manual front end.

 

[TraDaToR]

Quote from walterjennings:

I'd imagine that isn't true for the market makers.

Market makers only exist on certain instruments like grains, meats, mini-crude... All the rest is supposed to be algo -matched with no special privilege and I have never seen anything that would suggest the contrary.

 

[adadadog]

I have to respond to this. Each time I look at the title, I am irritated by it.

Either the OP got the strategy easy or the strategy is not working one. Easy come and easy go.
Otherwise, when people get their working strategies with tears and sweat, they would not ask this kind of question. Sorry, I have to went.