I'm not new to trading, but new to day-trading, especially with small cap stocks with relatively thin volume. Something just occured to me... Can your stock broker (such as Interactive brokers or E-trade) copy their successful client's trades? thus rendering a successful strategy useless? Your online brokers can screen for client's trading history to find the few with consistent successful trades over a period of time, then they start to copy your trades. They would fill their trades before filling your order, result is you end up with higher buying price, and lower selling prices, reducing the effectiveness of your previous successful strategy. This would work especially nice with day trader clients because high number of trades make statistically screening possible.
It is hard to imagine a broker as a company doing that, because it would be too easy to get caught. But a rogue employee could try it. I don't see what you can do about it, but fortunately reverse engineering your trading rules is very hard to do. And most people wouldn't be able to execute your trades for long even if you gave them the rules.
Does your broker prop trade? If yes, I see no reason why they wouldn't. Seriously, list the icons of honesty you can think of. SAC did sail close to the wind......
They don't need to reverse engineer, they just have to front run your trade. If your strategy has been 90% for 2 weeks, and showed up on their rador. Say next time you enter a buy order of 200 shares, they will put through their order 1000 shares buy first, then execute your order, so you will end up higher price. similarly with sell order. I can totally see IB scan their day-trading clients, and pick the top 5% winners, and follow their trades. After a while, those 5% starts to lose money, and thinks their strategy run out of luck.
I do, and it works on backtesting. and for the first two weeks of real trading, then last week, its performance diminished by 50%. I think if I change to another broker, the performance might return because my old broker can't follow my trades anymore.
I think your post is misleading. According to official records and declarations, IB does not engage in prop trading. See III. https://www.interactivebrokers.com/download/IBLLC_RiskDisclosure.pdf
I'm not saying definitive, but just a suspicion. I have no doubt their company policy does not allow front running. But what if some employee does this. How do we know this will not happen?
We don't. But given they claim they do not have a prop desk, I wonder how they would account for a rogue employee prop trading in an environment that does not support it. Where would they book the P&L? Presumably as a public listed company they are subject to audit. Of course they could all be corrupt, I'm supposing not.
Anyone who has access to client's trading history database can do this. They can copy it and do a screening / analysis offline. Then target those "good traders" next time they enter a trade. I am thinking the only way to know if someone is front running you is to measure your average "slippage". if it increases suddenly for no reason. Has anyone here noticed this after a period of good trades, then suddenly slippage starts to eat into your profit margin.