Firms stealing strategies....

I have wondered a little about this too. I know that in 1997 I was trading with a small broker in LA that cleared through Penson. I spent a little time in their office before I started trading remotely, and became friendly with some of the management. One of them was kind enough to print out all of one of their better trader's (seven figures) trades for the day and give it to me. I don't think anyone was trying to steal any strategies, but I can see how it could happen. On the other hand, this trader was trying to teach his brother in law how to trade, and the guy couldn't get the hang of it even with direct help. I suppose the more mechanical your system is the greater the risk of having it stolen is.

 

……not are you paranoid, but are you paranoid enough?

The answer is – I wouldn’t be paranoid if everyone wasn’t out to get me! :eek:


FWIW, here is a quote from S&P pit trader Lewis Borsellino’s book “The Day Trader”

“Among my customers in the S&P pit was a major commodity-trading firm, O’Connor Partners. When I filled orders for O’Connor clients, I always paid special attention to trades handled for one of its biggest customers: Jim Pierce. Jim was one of the best off-the-floor traders I had ever seen. He had an instinct for the market that was uncanny, and I decided to do whatever he did. So when he would give me an order, such as to buy 500 S&P contracts at the market, I’d execute his order and then I’d buy 20 lots for myself. The market would go straight up. When Jim got out of the market, I sold his contracts and then I sold mine.”

I’m sure it was always done in that order – Jim first and then Lewis.

Anyhow, you would have to be a big trader with a long-term profitable track record for someone to want to copy your strategy.

In that case the best way to get them off your coat-tails is, as I posted earlier in this thread – to open up two accounts with separate brokerages, and to occasionally open a trade in one account and close it in another. Then reverse the trades at a decent interval.

If they are really piggybacking you, you may get a call “hey you're really underwater on your last trade” – to which you reply – “No way man, I’m a lucky guy! It’s got to come back. Damn it where is my bong?”

 

note that you don't necessarily need to understand the strategies. just take your best traders, and front-run their orders...

i've seen so many strategies - especially in high(er) volume stocks, where the monetary potential is greatest - diluted over time, that p2's doubt has definitely crossed my mind. on the other hand, changing market conditions and the dumb money being weeded out are probably enough to explain the dilution of strategies.

- jaan

 

P2-
If they aren't front running your order, it could be nice. You buy a big position, they see it and and buy a bunch, pushing it up, other people see the volume and price movement and jump on, giving you liquidity to get out...

Of course, this assumes you can get most of your position on before they start, and they aren't jumping AHEAD of your orders, in which you are screwed.

 

Why dont u call me and teach me a little abut the approach your using.

 

DANG IT..!!

I KNEW that was what was happening all along.

They have been stealing my stratagies. No wonder I can't make a dime in the market....!!

 

There are a couple different issues here. First, whether a firm/broker/individual with access would try to reverse engineer your strategies. This probably depends on individual scenario more than anything else.

The second issue is whether general or specific knowledge of said strategies could affect the markets. Is the strategy exploiting a specific market inefficiency or following some more general trading principles. Also what markets are being traded?

I know two prop traders at two different firms who made 7 figures last year and are on pace this year for 7 figures. One has had no problems discussing his strategies without revealing specific details because the overall strategies are based on fundamental concepts. He identifies trend days and pyramids. How he identifies the trend day early enough, and when he enters and pyramids, he does not reveal specifically. The other trader is highly guarded because he trades in thin issues and doesn't want the dynamics of his strategies in those issues to change. Even if someone else comes in and trades a different strategy, that could fundamentally change the way in which that issue behaves. He constantly scans thin issues for the specific exploitable behavior that he trades with size. I have no clue what the strategy is.

 

I've heard from what I'd call a reliable source that several of one of the more well known prop firm's top traders were leaving because all their strategies were ending up as subject matter in the firm's training seminars.

 

If you were not spending all of your time being paranoid you could spend it having a program written that would allow a broker to scan "realtime" all of its customers orders and P/L. The program could then place instant piggy back orders on profitable traders orders.

But, being that most traders lose money you could have the program fade the crapiest customers and you would make more money

As a broker you could always get more crappy customers


You could sell your program for $50,000 to the 1000's of brokers out there

 

Bung:

Here is your reassuring NO.

Others:

Does IB monitor trades: Compliance does check for certain patterns, manipulation, etc. However, this is completely and totally separate from our prop side. Red flags have been raised in the past that have led to the dropping of accounts to the notification and prosecution via the authorities.

Why we wouldn't /couldn't do it:
First: it would be unethical and most likely illegal. (Whether you believe it or not, decisions at all levels at IB are made with ethics in mind).

Second: There is the proverbial "chinese wall" between the prop and brokerage sides.

Third: IB's prop side is one of the few firms that actually post live continuous updating prices on electronic exchanges and takes pride in that we actually honor our prices. i.e. What you see is what you get. SSF's for example - who do you think is making the tightest and best spreads? For the most part, we are price makers not takers. It's hard to front run when you're showing your hand.

Fourth: TMBR routing, we are taking the other side of your trade - thus we aren't sharing a strategy. However, like any trader, if you notice that you are consistently getting beat on stock X or Y, we'll make an adjustments (peek into the black box and tweak a few things). However, in situations like this, the prop side would not be able to see the counterparty nor would they know if the counterparty was one or multiple traders.

Fifth: The prop side doesn't have any information about client flow. (other firms do take advantage of flow but IB doesn't). If anything client orders get a peak at TMBR's side of things.

Sixth: We are too big. It would be readily apparent.

The list could go on much longer.

With that said, I've seen the other side of the business and not all brokers can be trusted. Not necessarily the firms but the brokers/sales traders. The HK futures pit for example was unreal. One of the largest banks in the world actually pulled their floor staff when it became apparent that the locals on the floor where in cahoots with other brokers (e.g. You've got 100 futures to buy. You hand signal your pal to by 20 futures. You run into the pit and push the market up and miraculously buy the last 20 from your pal.)

If a firm or group of people at a firm wanted to do it, they could. It comes down to trust. Actions speak louder than words, and whether you like us or not, I believe we've proven that we're honest.