A Basic Problem with Systems for Sale

Discussion in 'Educational Resources' started by TGregg, May 27, 2003.

  1. TGregg


    Somebody showed up in a chatroom and spoke of Camarilla today, and that reminded me of a basic, fundamental problem I have with anybody who tries to sell a system to trade ES. Essentially, the problem is that if the system is any good, the author can make piles of dough without going through the various hassles of selling it, and watching the system break down as the market learns it's inefficiency.

    So, let's see how this works. ES is liquid enough that one could surely trade 100 contracts (during normal hours) without noticeable effect on the market. One could probably trade much more than that, but let's take 100 as our example. Let's say Bill and Ted's (most excellent) Super System (BTSS) generates an average of 2 measly ES points per week, after commissions but before taxes, data fees, Elite Trader memberships :)D ) and all that other stuff.

    That's $10,000.00 a week! And, if you check out these systems, it's cakewalk (supposedly) to do - easy enough to write a program to do it for you. Then, all you do is play Doom III on your gaming computer while keeping an eye on your trading system to make sure it's running. You're raking in nearly half a million a year, doing very little.

    A little down the road, you have a nice bank account. But, you'd like to make even more money. "Give ol' Bill a run for his money," you think. You have a couple choices (assuming you don't want to develop a brand new system) - trade bigger/more positions (either in ES or other contracts, or even other stocks), or sell your information.

    But WTF would you sell the info for significantly less than you could make on it? Take Camarilla for example, imagine that you are the dude who created this awesome system. Would you rather sell the calls from it for peanuts to people who jump in and reduce the maximum amount you can trade? Or would you rather scale up to absorb as much of the market inefficiency as you can?

    Let's go back to our friends at BTSS. 2 points a day, starting at say 25 contracts. Let's assume they have a max draw down of 2 points and a margin requirement of 1.9k, so that's 50k in their trading account. After 48 weeks, they are trading 243 contracts and have nearly half a million in their account. They are also pulling in over a million/year - they are awash in cash. It's wwwaay more profitable for them to diverge into whatever other investment vehicles their system works on, instead of selling it to you.

    On the other hand, if a system doesn't really work, and the creator has to earn another stake to trade - well why not sell the system?

    EDIT: Before anybody gets upset, I'm not talking about any discretionary systems, or indicators or any of that. I'm strictly referring to systems that say "When this happens do this, and when this other thing happens do that."
  2. and......
  3. eyecheck


    TGregg :

    I don't sell systems yet but have considered it. Two problems with your analysis:

    1) Many good developers can't trade 100 lots because MM issues/margin won't let the---yet. Selling systems helps build cash to be able to trade more size which allows you to make more trading which.... (you get the picture).

    2) I would never sell my best system but I have many that I have created. If the system is solid and allows somebody else to make $ while at the same time makes me cashflow, what's wrong with that?

  4. Camarilla is free on my site but there are guys that one would feed with a spoon that it wouldn't serve :D. Your reasoning is completely wrong : one will never pyramid like you would be doing because of scalability limitation.

    Now why I will tell you why they sell the system : because it is just a few work for them, they just give a calculator that's all so for 150$/month/person with up to 5000 subscribers that's not bad you know :D. That's so few work that I just give it for free in complement to my own system which require much more calculation and sophistication but much more complete than Cama (for example Cama won't give the target of 8769 I gave today http://www.elitetrader.com/vb/showthread.php?s=&threadid=17973 or the consolidation at 8529 but knowing level IV of cama with my own numbers can trigger a secure entry point).

  5. TGregg


    Thanks for your critique, eyecheck. I'm not sure what MM issues are, but as for the second part of point 1, it is clearly better for the system developer to pyramid up on his system, rather than burn market efficiency to build trading capital. Should the developer have zilch, surely he could find one or two capitialists. . .

    He certainly could get a cash advance on some plastic :D.

    As for point 2, if you could earn more money by selling the system than using it, then the people who buy it will not recover the cost of the system.
  6. TGregg


    No harry, that's exactly my point that there is a scalability limitation. If there was no limit, somebody could invent a system, give it to all of us, and we'll all be rich. Just like Socialism :D.

    I'm saying that developers lose when they sell their systems due to that limit, and they can make more by not selling and scaling to the max level they can.

    Of course, if they were truely evil, they'd keep it a bit overscaled (and thus unprofitable) for a bit to sell a reverse of their system. Then, they'd clean up :D.
  7. prox


    Chances are a legitimate developer would be selling you his 2nd or 3rd best systems, that still work .. or rather - "backtest" well.

    Therefore, they try to make a few bucks off it before the edge goes away or someone posts it to a message board and everyone knows it.
  8. TGregg


    People should view somebody selling a purely mechanical system as if they were selling a stack of money. Why would they sell it for less that it's worth? If they sell it for what it is really worth, how can you make money from it?

    Anyway, my good deed for the day is done. If you read this and buy a system, you truly deserve what you get.
  9. Aspen


    I have been reading the ET board for quite some time now, and wanted to comment on the idea of selling trading systems vs. "just trading larger size" in your own account. Here are a few points that I want to make:

    1. The thought that it is easier to "trade larger size" with a profitable system that works sounds good at first, but it still comes down to the emotion involved in placing a larger trade. If a trader has good sense, they don't go from trading 1 lots to 20 lots overnight. A losing trade at $250 that now looks like $5,000 can be a hard thing to handle and the "profitable system" that you are using quickly gets changed due to the fear in losing large amounts of money. Changing the system to suit your risk parameters does just that - it changes the system, which is not what anyone should do - you've got to stick with the original methodology to stay true to the system.

    2. Just because one trader thinks that one should "trade bigger size" does not mean that the developer does. If someone told a stock scalper to trade gold credit spreads, does that mean that they should? It's all about personal preference and trading style that makes this industry so unique. ES scalpers can be successful, as too can equity swing traders - it's just a matter of finding what's right for you. Some system traders find that they want to expand their trading business (as entrepreneurs) so offering their ideas to others is a logical step. Don't fault them for it.

    3. Since trading is a career just like any other, you need to be satisfied with your accomplishments and feel like you can contribute something. Just trading your own profitable systems is good, but some of us come from the background where we enjoy helping others to succeed. Do you think that a good basketball player who goes into coaching a youth league does it for the money? Why don't they just "play more basketball" and that will be good enough? There is a something to be said about positive feedback and the confirmation of someone saying "thanks, I'm glad that you were able to show me how to improve my trading".

    4. True, there are many system vendors that are selling BS systems. There are people like this in any business. But those who have taken the time to develop systems, trade them for themselves and then decide to offer them to others should not be criticized for doing so. I think that the main problem with the posts on ET that deal with this issue is that people think that these "sellers" are only making a few hundred dollars here and there for all the "hassle" that they go through. There is no hassle in dealing with clients if you know how to treat people right and manage your time properly. If you do this the right way, there is a lot more than a few hundred bucks to be made...

    As you can see, there is no mention of my company, website or e-mail address, so this is not spam. Just the thoughts of someone in the systems business trying to provide a little insight from those who do it right.
  10. CalTrader

    CalTrader Guest

    Time tested trading techniques coupled with experienced traders equal money. Its rather like a software system: the components themselves have limited value but a fully functioning tested system has high value and produces above average returns.

    If you have a good approach it does scale somewhat: just add good quality traders as employees and use your capital.

    Granted, scaling that is dependent upon adding an extra person is not really what people mean when they talk about ideal business scaling, but it still can bring in decent money - read above average returns.

    If you are shooting for the next hit in financial software business then you will need deep pockets: In the training business you can probably start with less but this of course hits the person-related scaling issue. In any case your product had better be legitimate and unique.
    #10     Jun 26, 2003