For all but totally automated strategies, firms can't gain too much from reverse engineering strategies... this is because most strategies have at least an element of discretion. Moreover, people manage their exits and control their risks in slightly ways, which are dynamically adapted to the individual trader's perception of the current reality... all of these less tangible aspects of a strategy can not be reverse engineered... Only people who have totally automated systems, based on computer models and which have no scope for discretion, should be concerned about their work being reverse engineered...
Lest we forget, didn't our friend from Spectre Level Sigma Ninety-nine declare that they unlocked the hidden secrets of market makers and were able to predict with in depth precision what all market makers were likely to do with their next breath.
Maybe I'm being very naive here, but how can a strategy be reverse engineered? Let's say TraderA makes about 5 roundturns a day & averages 20 points daily per contract on the EMini, and is a client of BrokerageB. Now TraderA uses a relatively simple mechanical system based on a 15 min chart using a combination of a 20 EMA, Stochastics(%K = 18, %D = 5, UBand, LBand = 70,30) and he looks for Island Reversals. What I want to know is how BrokerageB can establish that he trades from a 15min and not 5min chart. That he is using a Moving Average at all & that it is a 20EMA not a 13SMA. And then that he is also using Stochastics and not RSI, and all the parameters. Also, how will BrokerageB know that he is not using Bollinger Bands in his strategy? Now if BrokerageB can really do this, then I think there is every reason to be paranoid!
It doesn't concern us small traders, but I have read in an academic article (either from Harold Bradley "Views of an Informed Trader" (AIMR Conference Proceedings 2002, No 5), or Ritter, "review of IPO Activity", J of Finance 2002 - not sure though) that some investors (more likely to be hedge funds) pay 15 to 20 cents a share commissions in order to learn about the order flow; ie their broker will tell them when person XYZ, deemed to be very influential, makes a move in a stock. Oliver
1. If you're successful in a prop firm, other less profitable traders or wanton assholes will try to figure out what you're doing and will try to profit by it in one of two ways; a. ride you, b. squeeze you. Speaking from experience here. 2. If you're successful in a prop firm, leave and trade your own account. 3. If you are trading a pit-traded commodity, and you are successful and trade size, you will get front-run. Guaranteed. You're paying for alot more than just commissions in the pit. 4. If you are trading electronically and your broker submits your orders directly into the exchange's order-matching engine after a brief one or two-second credit check, then that's the best you'll do. 5. Try not to be so obvious about where you put your limit orders. 6. If you're doing size, you will have to be very patient about where you get into and out of the market, and you will have to wait for that big order to appear, and you will have to smack it AT THE MARKET. 'Nuff Said.
well, in my book every market property that can be used to predict its behaviour is called "market inefficiency", so that sentence would become an oxymoron. i also believe that there's NO strategy that cannot be diluted by front-running -- some just require more capital than others. - jaan
Very interesting topic. I know that the popular contrarian strategy stopped working as well. You could make decent profit by investing into companies in difficulties that Time magazine covered. i.e: A bottom would be "Can GM survive" You know there would be no more sellers left.
I was out last night, but a few responses. 1) I have no problems so far with IB. I'm trading well lately. 2) Someone mentioned that a number of top traders are leaving a well known firm because of them stealing strategies, can you elaborate? 3) I'm not talking about picking off flows for a nickle spread. I don't know/care if IB or any other firm is doing that to me or anyone else. 4) Lets assume that you have something very basic to copy. It is a strategy that you go flat by market close. The trade duration is a few hours on average. It has a high expectency, and would be very easy to figure out. What would stop a firm from figuring it out? I am concerned that they would as I don't want my bread/butter taken from me. 5) Lets assume that a trader has an uncanny ability to buy microcap stocks. He is looking to buy and hold for 5 years. He is looking for a 300%+ return. He often needs to buy 500k-1m worth of stock, so in a stock with 10m shares outstanding and a price of 3 a share, he is buying 3% +/- of the company in the open market. If over a 5 year period, he's averaged 100% returns, what's to stop a firm from seeing his success and trying to duplicate it by buying the stock also. Maybe they'll tell their best accounts of this stock also. Won't this harm the trader who needs to buy stock at a good price. Even if this firm only buys 25k shares, that's a huge detriment to the trader. Isn't this a concern. It's one thing to flip the stock out after a gain of 25%, but it's another thing to look to hold for a long time.
I don't think there are detailed consistent winning strategies that can be effectively replicated by others. In fact, I don't believe that DETAILED consistent winning strategies exist (at least not for the long term). There are only GENERAL winning strategies (like cutting losses quickly and letting profits run, blah blah blah). It's up to the trader to filter the universe of thousands of stocks and pull the trigger on a trade. Alot of this is based on talent and experience. Reggie Miller can teach me how to make free throws but I still won't be a 94% shooter. Talent cannot be taught and the best daytraders have this quality. I can try to copy a successful trader's trades but my timing will be off and I'll do poorly (both in entering and exiting). Even if I still make a profit, my trades will not affect the successful trader's profitability. Even worse, I won't develop as a trader if I try to copy things that I don't understand. The true trend of the stock will assert itself no matter who is involved. Additional players in a stock will just make it more choppy, that's all. Even if I threw $50MM of buying power at an inexpensive illiquid stock, I could make it spike but I would still get my ass kicked when the market makers and other daytraders realize that it was a bullshit move. There are just too many stocks and market participants for additional players who know a trading "secret" to make a difference. The only exception would be a unique arbitrage condition in an illiquid stock that is unknown to most market participants. But these phenomena are rare and very short-lived. Traders who think other firms that steal their "secrets" will make them less effective are just paranoid and a bit egocentric. If their strategies suddenly stop working after they joined another firm, it usually means that market conditions have changed and new strategies are required. They try to point the finger at others rather than accept that the strategy is no longer valid. One strategy is not applicable to all market conditions.