I've developed systems for years, and have been trading one successfully for a while now on the eminis. My question is: if you are making good money consistently, using a systematic method that could be reproduced via looking at the trade history, is there a risk that a broker (who trades their own accounts), could capitalize on this information? I currently only trade 5 contracts or less, and go through a cheap and popular direct access broker mentioned on these boards. I manually enter the signals (not automated), and follow a system that would show a pattern after a few days of trading. Hold time is 3 minutes to a couple hours per trade, with 5-10 trades per day. My small size now probably doesn't appear on the radar, but I'm thinking of the future. I don't want to jeapordize a good thing any sooner than I have to. Any opinions from someone who is paranoid like myself, or from someone who knows more about this?
My question is: if you are making good money consistently, using a systematic method that could be reproduced via looking at the trade history, is there a risk that a broker (who trades their own accounts), could capitalize on this information? It is unlikely that a broker could reverse-engineer your trades based on just your tade history. As an example I have developed an e-mini system based on 5-minuite intervals and the decision rules are complex. I doubt if you could figure out my trading logic baded on arrows on a screen showing where I made my trades. I manually enter the signals (not automated), and follow a system that would show a pattern after a few days of trading. The patermn is readily apparent to you as you are the one who made up the rules! To me it might just look like random entries on the screen. My small size now probably doesn't appear on the radar, but I'm thinking of the future. This is assuming of course there is a "radar" snoping for "hot" accounts so that the brokerage firm could mirror their trades. This is simmilar to the many mutual fund investors looking for last years "hot" funds. It also implies that the brokerage firm makes the assumption "This account is doing well today.. it should do well tomorrow". This is not always the case. I don't want to jeapordize a good thing any sooner than I have to. Any opinions from someone who is paranoid like myself, or from someone who knows more about this? I don't think you will be jeopordizing anything at all. In fact you may just be on a lucky streak. I don't know, you don't know an neither does anyone else. But lets take a leap-of faith for a minute and assume you have discovered the holy grail and that your broker is immediately aware of this. Also assume that the broker does not know your decision logic. In this case the broker will immediately put in buy orders right after you buy and put in selll orders right after you sell. This can only help your cause. If the broker did manage to reverse-engineer your holy grail system you and the broker would be putting in simultaneous orders and you may suffer some slippage as a result. How much this would affect your long-term results would be dependany on the time-frame and number of trades as slippage could become significant. Bottom line I think you are paranoid and your system may be experienceing a hot streak. Mine is performing extreemly well running at an anual rate of over 600 percent. I believe that my system cannot sustain this pace.
Do you really think your broker would do something like that? When I was a stockbroker, I had a customer who used to say to me, after I said something particularly naieve, 'People kill for money.' Another tidbit of Yiddish wisdom that is right on the mark.
Brokers are in the business to service customers. Their bread-n-butter are commissions. Systems come and go, but commissions are a constant. If you give your system to a broker to trade, just have a non-disclosure agreement signed prior to giving them the code. If you use tradestation, simply give them a token-only (protected els or eld) file coded to only work on their particular copy of tradestation (code to their customerID). Cheers!
The broker could step in front of you if he follows your trades. If you place a buy order at 1000, his buy order could be at 1003. I think your broker's trading activity is monitored by the brokerage firm he works for. The firm should prohibit front running; Otherwise they may lose clients. Just my guess, I' d like to see more input on this issue.
Interesting points, but I'm more concerned about a well known direct access brokerage which also trades its own account, not a human broker employee who might piggy back, etc. Most brokerages do survive off commissions, but this one also trades its own accounts as well as makes markets (diversified). So my concern is an institutional size firm could reverse engineer my system (if possible?) and trade large size in front of me, destroying my entry and exit points. I could switch brokers, or maybe go straight to a Globex terminal, but I'm not interested in higher commissions or fixed costs yet if doing this would be unnecessary. Thanks for the input so far.
I'd be surprised if a retail broker would do this, because of the sheer volume of trades. They would probably have to appoint someone to look for the patterns of their most profitable traders. But if they trade their own account as well, I guess you can't discount it. I have however heard of it happening at professional firms. In fact I know of one trader who had developed a detailed system that was giving him very good money and he actually left the firm he was at because he was worried it would be figured out and then taught at the firm's training course. Apperently it was not unheard of for the systems of their top traders to end up as course content.
How to connect to Globex directly? The ideal situation would be no one else can see your orders unless you request assistance.
If your not willing to pay fixed costs for a globex terminal for your system that you developed, I don't think you have to worry about brokers reverse engineering your trades.