Protecting your strategies

Discussion in 'Automated Trading' started by gmst, Jun 25, 2012.

  1. gmst


    It takes years of development work to finally develop a suite of uncorrelated strategies that will deliver alpha out of market year in and year out. If the strategies are scalable (e.g. on futures markets and large cap stocks), and can theoretically make 3-5mm+ a year, then a lot of folks would be interested in getting unauthorized access to your work if they feel risk of being caught is very small. If the PnL potential is say 10-20 million or more, then even your clearing firm would like to analyze your trades to see if they can reverse-engineer the logic. Maybe they will fail, but 10 million a year - common guys, its a lot of money. If they think they can somehow figure out your logic and modify it and trade it using their own capital, they will do it, especially if risk of being caught is very low. There is no way you will know this, if your clearing firm is analyzing your trades.

    This topic has been discussed on ET in following threads and it has been confirmed that this stealing of strategies does happen frequently enough in the prop trading world.

    1) Broker Could Steal Your Strategy???

    2) Firms stealing strategies....

    My aim to start this thread is to foster a much deeper discussion on this important topic. To identify who all can steal your strategies and what counter-measures can you use to safeguard your strategies.
  2. gmst


    I will start by listing out who all can steal your strategies. All the below is in the context that you run a portfolio of well-defined strategies. No discretionary trading.

    1. your clearing firm:
    If you trade futures systematically directly without a broker and make say only 500k a year but you are extremely consistent and are trading bonds,equity indices etc. (very scalable futures), your clearing firm would be very interested in analyzing your trades.

    2. your broker:
    To make your broker interested, again PnL potential needs to be in excess of 10 million. In today's world of automatic report generation and auto-trade analysis, it will be a piece of cake for a broker's automatic systems to identify top traders (both in terms of consistency and they will immediately know all the guys who are using API to execute orders).

    Both 1) and 2) above are big threats to your future profitability since these guys might start trading size on your futures contract and thus either front-run you or change the underlying market dynamics because of their actions that cause your trading strategy to be profitable in the first place.

    3. your IT guy:
    Will be interested even if PnL potential is just a million. Say, you pay reasonable salary (100k or so) to your IT guy and run a 3-4 member trading operation, that IT guy has the incentive to take the source code and set up operations on his own even if his upside is only a million a year. That is a 10x jump from his current salary.

    4. some rogue employee working for your broker:
    If your strategy makes couple of millions a year, this guy would be interested.

    Both 3 and 4 above are not a big threat since even if he gets access to your strategies or reverse-engineers them, his small size might not have any effect on the underlying market dynamics that cause your strategy to be profitable in the markets. So, that guy might make some money, but you will also continue to make money. So not a very bad situation, imo.

    5. your strategy development software:
    Now this is interesting. I never thought about it before, but I was doing some work on multicharts yesterday and it crashed and wanted to send an error-report. When I checked the files it was sending, the dump contained all my strategy files. Is it possible that developers of multicharts or any other trading software for example have encoded deep inside the trading software to upload the strategies files to multicharts servers, whenever they find say any trading strategy on ES with over 200 trades over 5 years with a PF > 2, verified by out of sample testing? I am purely hypothesizing here but why can't the developers do this. This way, the software will just send the developers the top strategies of their best traders. If something like this can happen, what counter-measures if any can a trader take?

    I invite everyone to write their views.
  3. It might be against some law for your broker firm to do this, but what's to stop some aspiring trader in the broker's IT department from trying to figure out your strategy? If he's got access for his job, the answer is pretty much nothing. You've just got to hope every back office drone is too stupid to figure out a trade, but it only takes one smart one.

    Seems like you have no choice but to use multiple brokers, with all the headaches and inefficiency that brings. I do it, and I think it's worth it.
  4. Pekelo


    If you use one strategy with 5 brokers, your gain is still going to be the same in %, but 1/5th in relative dollars.

    In plain you prevented nothing, your strategy is still vulnerable to theft...
  5. mm19


    add discretionary decisions at couple of stages in your trade. Or random generator. One cant distinguish these by analysing.

    assume you are under radar permanently and use this in your advantage.

    not easy but, yes, you do need decent IQ to make extraordinary gains.
  6. jcl


    As long as a strategy is a little more complex that just a moving average crossing, I think it is very difficult, if not impossible for a broker to reverse engineer your code. He could only use your entry and exit points. This is normally not enough data to determine the code of a strategy. The only thing a broker could really do is duplicating your trades.

    Of course this is different when your trade platform directly sends your code to its manufacturer. It's interesting that multichart does that. Maybe that's the reason why multichart crashes so often.
  7. "Are these really top 10 largest CTAs?"

    My understanding is: All CTAs are using individually/ separately managed accounts for their clients, and All successful CTAs, while managing many billions of dollars for many years, apparently do not worry much about how to protect or hide their trades by any special means.

    Others can easily duplicate or analyse their trades without any problems.

    I'm just curious what protection is for these CTAs?
  8. themickey


    I totally disagree with this theory.
    It would be very easy to reverse engineer, I have done it. However not illegally. It can be done without too many smarts.
    The solution as one poster mentioned is dropping in some illogical discretionary trades to throw off the scent, but I'd assume this will cost a little in wasted trades, probably small change though.
  9. mm19


    if discretionary, copier will have no confidence.

    so, the best thing is to follow the trade which benefits trader.

    if automatic, entries are replkicable and you may miss entries for 0.01c.
  10. Pekelo


    In plain English, throw in a couple of losing trades... :)
    #10     Jun 25, 2012