Protecting your strategies

ExchangeBonds · Jun 27, 2012

I honestly don't know what the paranoia is about here. A system that does about 50 trades a year. I highly doubt you are going to get so front run that the edge would evaporate unless you somehow magically get the low tick all the time. The holding period for trades is very important here too. Are you holding for days? If so, how is a broker going to destroy that edge? Are these just very high probability daytrades? The ones that should be worried are scalpers, but seriously, what is with all this paranoia? I sincerely hope you are literally making millions to be this worried about someone stealing your code.

trend2009 · Jun 27, 2012

I know some one who is extremely successful in day trading only works on single chart. unfortunately I do not have many of his trades. possibly James Simons' system is abased on single chart too, since he diversifies among so many markets.

Quote from Epic:

Most (at least 95%) of traders on ET lose money. Why would you ever want to reverse-engineer a losing strat? Of the ones who make money, their system is either much more complex than 1-chart, or if they are trading a single chart they are most likely at least 50% discretionary, which is even harder to reverse-engineer.

achilles28 · Jun 28, 2012

Quote from Epic:

Key individuals should always have at least profit sharing, if not an equity stake in the company. Think about it this way. If the programmer were to sell the code, he has two options. One time payment, or continual payment. There is no way that it could ever be more profitable for him to sell it for a one time payment. Whomever he sells it to will have to agree to pay him in perpetuity which is what he should already be getting at your company.

You also seemed to miss the other point. They must be allowed to participate in the program for free. IOW, they are making a decent salary, sharing in the revenue from OPM, and allowed to put their own money to work in the program and realize geometric returns without paying fees. If you've selected a good employee in the first place, that will be enough to keep them loyal.

Okay. I understand all that. Thanks for the explanation.

My follow up question - is that how prop desks are run at Goldman Sachs, JP Morgan, DB, Morgan Stanley?

OddTrader · Jun 28, 2012

Thanks Epic for your comments.

How could you prevent others to use your signals? As an investor may place just $1 million with your CTA program, however he could actualy use the same signals of yours to invest extra $10 Million (i.e. 10 times) by himself under his own management, without paying you any fees for the $10 Million.

Do you use the same/similar sort of "NDAs, Non-Competes, and Non-Circs" you mentioned below?

Regarding Non-Circs, do you mean Non-Circulating, why?

Quote from Epic:

I used to be very concerned about this. I think that all traders who have a quantifiable edge are naturally a bit paranoid about it. This was a point of debate for a while internally. Setup a CTA and allow all clients the opportunity get a list of every transaction, or setup a CPO and keep things more secret?

After numerous meetings with fund of funds, family offices, marketers, FCMs, etc. I realized that the reverse engineering argument is all about incentive. If your system is good enough to copy it probably has a certain discretionary element to it, or if fully automated it is not simple. If it isn't discretionary or complex, then there are already many other traders doing it almost exactly like you are.

What it comes down to is that FoFs, Family Offices, Marketers, or any other placement/fundraising group has almost no incentive to steal your system. They've built a business around their ability to locate/hire the talent, not ripoff the talent. Their time is much better spent just having you execute your own system.

Re: FCMs, Brokers, Props, etc... Why would any serious CTA ever consider using a group that was even slightly sketchy? Ideally, the FCM will also serve as the primary broker. I don't have any use for intro brokers. So that eliminates having to worry about the middle man. Additionally, the FCM should never operate a market-making or prop desk. They must only be an FCM. That's it!

Your analysis/automation software should never be in the hands of any third party. As mentioned before, reverse engineering a complex strat with only transaction data is incredibly difficult. With even part of the code it gets much easier. That is my problem with companies that profess to take you all the way from raw data to execution. Who really owns the system in that case? All procedures and code should remain very well protected.

The most likely problem is going to come from your own programmer or IT specialist. Make sure that any such individuals who might have access to any significant part of the system are internal employees and properly incentivized to make sure that they never get any ideas. They should be compensated based on the profitability of the program and they should also be able to participate for free. Don't ever give them any reason to want to run it on their own. Just make sure that they will always make more money running it for you. If they aren't worth profit sharing, then they shouldn't have access to any key portions of the strat. Obviously, NDAs, Non-Competes, and Non-Circs are always necessary.

IMO, if you've taken those precautions and you aren't advertising how your system works, quit worrying about getting ripped off, and just worry about growing your assets and network.

oilfxpro · Jun 28, 2012

Strategies with fixed rules do not work consistently to worry about protecting your strategies, most successful strategies have huge element of discretion.

Price patterns and volatility patterns do not follow consistently repeatable patterns , although price may make regular up and down movements , these irregular patterns are not copyable. How price travels from a to b varies in multiple price movement patterns, deploying all the patterns together may produce profits on some , but losses on others.

intradaybill · Jun 28, 2012

Quote from oilfxpro:

Price patterns and volatility patterns do not follow consistently repeatable patterns , although price may make regular up and down movements , these irregular patterns are not copyable. How price travels from a to b varies in multiple price movement patterns, deploying all the patterns together may produce profits on some , but losses on others.

Excellent point.

achilles28 · Jun 28, 2012

Quote from oilfxpro:

Strategies with fixed rules do not work consistently to worry about protecting your strategies, most successful strategies have huge element of discretion.

Price patterns and volatility patterns do not follow consistently repeatable patterns , although price may make regular up and down movements , these irregular patterns are not copyable. How price travels from a to b varies in multiple price movement patterns, deploying all the patterns together may produce profits on some , but losses on others.

I disagree

Stan_MultiCharts · Jun 28, 2012

Quote from tenthousandmen:

The other ways someone can get a strategy are preventable - IT guy, some guy at Ninjatrader who wants to see the code because it might be causing a crash (happened to me about three times so far).

Tenthousandmen - on a separate note, is it just me, or was your negative review of NinjaTrader (along with your thread that used to be here - http://www.elitetrader.com/vb/showthread.php?threadid=245094) deleted?

If that's how ratings work on ET, can we get rid of all the ones with red down arrows removed from MultiCharts (http://www.elitetrader.com/so/?action=view&SR_ProductID=123) as well?

trend2009 · Jun 28, 2012

not true for mechanical strategies.

Quote from oilfxpro:

Strategies with fixed rules do not work consistently to worry about protecting your strategies, most successful strategies have huge element of discretion.

Price patterns and volatility patterns do not follow consistently repeatable patterns , although price may make regular up and down movements , these irregular patterns are not copyable. How price travels from a to b varies in multiple price movement patterns, deploying all the patterns together may produce profits on some , but losses on others.

Epic · Jun 28, 2012

Quote from OddTrader:

Thanks Epic for your comments.

How could you prevent others to use your signals? As an investor may place just $1 million with your CTA program, however he could actualy use the same signals of yours to invest extra $10 Million (i.e. 10 times) by himself under his own management, without paying you any fees for the $10 Million.

Do you use the same/similar sort of "NDAs, Non-Competes, and Non-Circs" you mentioned below?

Regarding Non-Circs, do you mean Non-Circulating, why?

Non-Circ = non-circumvent

It precisely deals with part of the issue you are talking about. They sign a legal contract stating that they won't attempt to circumvent my program by running $20MM in their own account, and $1MM with me. Or, using my trades as indicators to run their own program for other clients.

In any case, it doesn't really matter as they only have access to end of day updates sometime in the evening. I trade far more frequently than that. The likelihood is that if they tried to mimic the overnight position, they completely miss the intraday round-turns that have already been exited for a profit. The edge would be completely gone in that case and they would make more money just having me run the whole chunk, even after fees.