Protecting your strategies

[logic_man]

Quote from amazingIndustry:

Dude, it happens all the time, most cases just never make it to the courts or public because many hedge funds and sell-side desks design very opaque contracts on purpose. Hedge funds have never been more active to "harvest" strategies. They are right now on a "hiring binge", on the surface saying they want to hire PMs and have them bring on board their successful strategies (with track record). Once the code makes it into the firm it is so fast copied or reverse-engineered that you cannot even blink faster with an eye.

The only protection against that are solidly programmed and obfuscated code libraries. I generally test fund's attitude towards that by saying that "I am happy to bring my strategies on board but I like to trade them in a black box type of fashion and that I am very solid coder and am confident the code cannot be reverse engineered. I also built in a permission algorithm that connects to an outside server and should I ever leave the firm and take my code with me (the one I brought with me not in-house written code) the permissions will be revoked and the strategy cannot be traded anymore".

Guess what happens then: I hit brick walls. In almost all cases funds used all sorts of excuses that such deal would not work out. No logical explanations given, only obscure excuses. Makes it very clear what they are really after. I am not saying there are no other funds out there. Some more trustworthy firms who look to seed traders mentioning they would not have any objections about my policy whatsoever.

This, in my opinion, is the only way to protect against outright theft. Do your own work and never trust anyone, no broker, no hosting firm, no hedge fund, nobody. If you have something that generates risk-adjusted stable streams of PnL then you are on most investors' most wanted list, well not you but your code.

Shit, I really do want to get away from this thread because it's full retard, but I'd rather not let my statements get mischaracterized.

You are talking about professionals trying to steal from other professionals, not brokers trying to steal from retail traders.

At least stick to the original thesis I was calling paranoid if you are going to criticize my position.

I already admitted that "corporate espionage", which I would say your example amounts to, exists and part of the reason we know it exists is because people get caught and prosecuted for it. But the OP of this thread wasn't talking about someone who was working in the context of interviewing at a hedge fund to become a PM and may have been suckered out of some IP, he was talking about a retail trader who was having some success but then worried that his success would draw attention from others, up to and including the possibility they'd try to steal his strategy. That was the only hypothetical I was discussing. If the thread was about whether or not you should divulge details in a discussion with a hedge fund you are interviewing with, any response from me would have been totally different. It's amazing just how little your response actually addresses anything I've said. It's like you were responding to someone else who said something else.

Don't make me out to be some wet-behind-the-ears kid who doesn't know that every single word said or not said in the context of speaking with the money sharks matters, because that's completely untrue. In those situations, paranoia is entirely justifiable. The guy with the retail account at IB probably can rest easy at night, though, because I doubt any hedge funds will be installing keystroke monitors on his computer via the Stuxnet virus any time soon.

 

[Epic]

Quote from OddTrader:

Thanks again.

How about, in a CTA program, each of the trades lasts minimum one week? Any protection?

The only real protection against free-loaders in this example is to form a CPO instead of a CPA.

When it really comes down to it though, you shouldn't be accepting every client who wants to participate. I have a direct relationship with every client. I know what type of person or organization they are. Most people are in a situation where they wouldn't really gain anything to try to run the system on their own. Why put that kind of effort into running their own program, when they could participate in yours for zero effort, no headache, and they are free to go about doing something more productive with their time?

I make sure that every client understands this and I actually prefer clients who really have no interest in trading at all. Family offices, HNWs, etc. generally have better things to do with their time. Even FoFs make more money if they just focus on capital placement and funnel money into profitable systems. As soon as any of these groups tries to run a discretionary trading desk, they take on more headache, more expense, and they stray from their core profit drivers.

 

[WinstonTJ]

It's threads like this that make my business next to impossible to grow. All it does is fuel the paranoia over getting strategies stolen. Are there scumbags out there - of course but not everyone.

I host servers & provide connectivity for a couple of legit market making firms as well as a couple mid/small hedge funds (and a few trusting individual traders). They have no problem with trust or paying me every month. I don't even know if I have access to their source code or strategies, I have admin & backup rights over all their stuff so probably... I know I can see pretty much everything that the NYSE guys have just because of compliance & reporting - but I have better things to do and I'm so much happier not trading anymore.

My business would be great if I could add 15-25 more individuals or small groups... but they are all PARANOID and think that someone is out to get them.


Please read this 100 times if needed to get it through your head:

I want you to pay me for IT related services. I want to take your money and as much of it as possible... BUT I can't take blood from a stone just like you can't pay me if you aren't profitable. It is in my best interest for you to make millions or billions of dollars so that you can pay me and I can earn a living.

Please understand that there are scumbags out there - but the paranoia isn't justified.

 

[achilles28]

Winston, with all due respect, you're a nice guy swimming in a shark tank.

 

[OddTrader]

http://www.elitetrader.com/vb/showthread.php?s=&threadid=231864&perpage=40&pagenumber=4

Quote from Epic:

This is just my opinion. So take it with a grain of salt.

If it is at all possible to execute your same strategy in futures only, then that is what I would do. The tax advantages are large, and running the business is much easier.

If you can form a CTA and run managed accounts, then that is also what I would do in your case. It is much easier to setup and get running. Also, much cheaper to operate each year because NFA compliance is easier.

I also wouldn't worry too much about your strategy getting ripped off. I was worried about that for a long time, but then I started to realize how difficult it would be for someone to do it. And like Heech says, why put in all that effort and risk when they could just hire me and know what they are getting? Keep in mind too, that the only way the clients would have real-time access to their accounts is if you let them. With IB, there are two ways to setup client accounts, with or without trading access. If they do not have trading access, then they only have daily access to trading activity statements. If you enable access, then they can login to TWS and follow along in real-time. I only allow one client to do that and will be removing that privilege soon. There isn't any good reason why a client would need to follow along in real-time.

Many thanks Epic. I think your another comment above would be also very helpful.

Do you still allow that remaining client having trading access in real-time?

Quote from Epic:

The only real protection against free-loaders in this example is to form a CPO instead of a CPA.

When it really comes down to it though, you shouldn't be accepting every client who wants to participate. I have a direct relationship with every client. I know what type of person or organization they are. Most people are in a situation where they wouldn't really gain anything to try to run the system on their own. Why put that kind of effort into running their own program, when they could participate in yours for zero effort, no headache, and they are free to go about doing something more productive with their time?

I make sure that every client understands this and I actually prefer clients who really have no interest in trading at all. Family offices, HNWs, etc. generally have better things to do with their time. Even FoFs make more money if they just focus on capital placement and funnel money into profitable systems. As soon as any of these groups tries to run a discretionary trading desk, they take on more headache, more expense, and they stray from their core profit drivers.

 

[Van_der_Voort_4]

Quote from WinstonTJ:

It's threads like this that make my business next to impossible to grow. All it does is fuel the paranoia over getting strategies stolen. Are there scumbags out there - of course but not everyone.

I host servers & provide connectivity for a couple of legit market making firms as well as a couple mid/small hedge funds (and a few trusting individual traders). They have no problem with trust or paying me every month. I don't even know if I have access to their source code or strategies, I have admin & backup rights over all their stuff so probably... I know I can see pretty much everything that the NYSE guys have just because of compliance & reporting - but I have better things to do and I'm so much happier not trading anymore.

My business would be great if I could add 15-25 more individuals or small groups... but they are all PARANOID and think that someone is out to get them.


Please read this 100 times if needed to get it through your head:

I want you to pay me for IT related services. I want to take your money and as much of it as possible... BUT I can't take blood from a stone just like you can't pay me if you aren't profitable. It is in my best interest for you to make millions or billions of dollars so that you can pay me and I can earn a living.

Please understand that there are scumbags out there - but the paranoia isn't justified.

it is in your business interest to shout (capital letters) that they are paranoid ,

 

[Van_der_Voort_4]

Quote from logic_man:

Shit, I really do want to get away from this thread because it's full retard, but I'd rather not let my statements get mischaracterized.

You are talking about professionals trying to steal from other professionals, not brokers trying to steal from retail traders.

At least stick to the original thesis I was calling paranoid if you are going to criticize my position.

I already admitted that "corporate espionage", which I would say your example amounts to, exists and part of the reason we know it exists is because people get caught and prosecuted for it. But the OP of this thread wasn't talking about someone who was working in the context of interviewing at a hedge fund to become a PM and may have been suckered out of some IP, he was talking about a retail trader who was having some success but then worried that his success would draw attention from others, up to and including the possibility they'd try to steal his strategy. That was the only hypothetical I was discussing. If the thread was about whether or not you should divulge details in a discussion with a hedge fund you are interviewing with, any response from me would have been totally different. It's amazing just how little your response actually addresses anything I've said. It's like you were responding to someone else who said something else.

Don't make me out to be some wet-behind-the-ears kid who doesn't know that every single word said or not said in the context of speaking with the money sharks matters, because that's completely untrue. In those situations, paranoia is entirely justifiable. The guy with the retail account at IB probably can rest easy at night, though, because I doubt any hedge funds will be installing keystroke monitors on his computer via the Stuxnet virus any time soon.

is that your best shot?

AmazingIndustry wrote best advice you can possibly get

 

[WinstonTJ]

Quote from achilles28:

Winston, with all due respect, you're a nice guy swimming in a shark tank.

Trust me I know how slimy Wall Street can be - but if all you do is spend your time trying to protect yourself you let them get the better of you and you will never trade a single share.

I know people who have made a living from stealing other's strategies and I know a lot of lower tier bucket shops still try to operate that way. If you don't have a head on your shoulders you are going to get taken advantage of no matter what... but again, stop spreading the paranoia and fear to everyone else.

Everything, especially in trading, is going to be full of trade-offs. If you take the easy way out - going to the cheapest no-name prop shop because they will give you the leverage and rates you want... using a programmer who is cheap/free and promises the world because you don't want to hire your own or take on a partner and split P&L... If you take the easy way out of things you will get taken for a ride but short of cutting corners and being foolish all you need to do is worry about yourself and your trading.

There is no one looking out for you but you. That's all you need to know.

 

[OddTrader]

Here is an interesting comment from another thread:

http://www.elitetrader.com/vb/showthread.php?s=&postid=3041893#post3041893

Quote from xxxxx:

If you are worried about someone looking at your prints and trying to reverse engineer your strategies based on that – I suggest you find another place to execute trades because there is virtually nothing you can do to avoid that. In terms of someone front-running your orders or internalizing orders without your knowledge – same thing applies, find a legit place to execute and know/understand EVERYTHING about your system and the network it is on. If you blindly plug your machine into a network and don’t ask questions you deserve what you get – might be nothing might be getting your stuff stolen.

 

[Swan Noir]

To begin with I am purely discretionary and have no dog in this fight -- no code to protect.

Winston, you have always been generous with your advice on hardware etc. here on ET and to the extent you promote your business you have always taken the high road. You are a class act and, I believe, one of the good guys. But what do I really know about a man I have never met?

Even a cursory reading of a few of Shakespeare's History plays -- he was after all a master of human interaction -- gives some solid sense of the evil which lurks in many hearts. In fact his own writing of history is perverted by his need to tailor it to suit the ruling families.

While paranoia is always a mistake since it warps your judgement and frequently makes you vulnerable to the very thing you fear most, many people in the industry (and to be fair in business in general) are sufficiently flawed to make one man's paranoia the next guys prudent way to operate. What you own and value you have an obligation to protect. How far you go to do that is a matter of personal choice.

Quote from WinstonTJ:

I know people who have made a living from stealing other's strategies and I know a lot of lower tier bucket shops still try to operate that way.