ETs, Do you think that a System can be reverse engineered just from viewing daily trades/account statements? For example, if you are a systematic trader and run for instance a manged account for a very market-savvy client, do you think they can review your historical trades and reverse engineer your system? Could your broker also do this? If so what steps can/should be taken to AVOID/ELIMINATE the possibility of a client (via a managed account) or even a broker reverse engineering your system? Thanks!
No. I really don't think so. It is possible to figure out what kind of character the system has, like trend-follow, counter-trend, or others, but not the details of the logic.
Thanks SmoothTraderFX. Your thoughts were my initial thoughts, that one could get a sense of the trading style, but not the actual logic. But after more thought, I do think it can be done, if you have system design expereince. Maybe I am just paranoid. Furthermore, i am aware that some major systematic CTAs/hedge funds actually split up their orders and use multiple brokers/clearing hosues so as to avoid this possibility of reverse engineering. Note that this use of multiple brokers/split orders is not done just to avoid front-running or for secrecy, but becuase in the case of one particular fund, they beleive that systems can be reverse-engineered. I look forward to more thoughts on this from you and others. Thanks again
If you are really worried, open two accounts with separate brokers. Every now and then - open your trade with one broker and close it out in the other brokerage account. YOU personally will be net flat, but the two accounts will still have live trades in them. Then at your convenience, offset the two open trades so your accounts will be net flat. This will cost you an extra commission (paranoia has its price). Anyone who tries to figure out your system will be highly confused.
the answer depends i think.. if your system depends on classic technical signals most technicians could plot your trades and get a good idea what you are doing.. if your system is based on lunar cycles, then only another lunatic would be able to make sense of it.. obviously, the more complicated the system or unusual the indicators used to derive trading signals, the more difficult it would be to figure it out.. and at some point it would become more probable for a would be hacker to win the lottery than to unravel your strategy.. -qwik
I've seen it attempted, but the party wasn't successful in reproducing the target's results. They figured out pretty well what was being done but there was an element of subjectivity that they couldn't crack. Long Term Capital had accounts and clearing arrangements all over the street to keep everyone in the dark as to what exactly they were doing.
I've thought about this quite a bit because I like to develop automated systems which would seem to be very vulnerable to this. Here are a few ways (for equities) to "encrypt" what you do: 1. Use a system that is dependent on other securities/trading instruments, i.e. RS/price patterns of certains indexes. This would be very difficult to reverse engineer. 2. Try to make your system dependent on fundamentals as well. If your universe of stocks is dependent on balance sheet values, their backtesting will results will be lousy and they will problably give up. 3. If you have one supercharged system, give up the idea of trading all your money with that sytem. Take most of your account and trade other very different, but good strategies. Then, if they reverse engineer, by looking at your successful trades only, they will have a mishmash. Greed will expose you. But you have to face the fact the fact that the only true way to really beat this problem is to have as many successful strategies as possible that are as highly variable as possible and then to thread them out through multiple accounts.
I mean it's impossible, not difficult. It's a matter of quantity of input and output in mathmatic sense. Ok, if it's simple, yes possible. However, a system can have multple input not only price series but also volume, marketbreadth etc. It may use another securities as external series. If a system has more than 3 input, 3 indicators, 3 rules, I would say it's extremely hard or impossible to reverse engeneer from the single output. Again, it's clear from mathmatical view.