achilles --- OK, sorry. Heres an example. See if it fits your thinking. Suppose one customer comes along who has an incredible balance sheet and decides to trade in size. I mean real volume. They start layering in trades - about US$750 million per layer. Do it a few times, then buy it back as market crumbles. Now they see their ideas work. Next operation is to layer in a trade 7 times. But as market begins to slide, they come in and pound the market, knowing every dealer, bank and trader is long. Slowly buy it back as market crumbles. Would you trade against this guy? OK, house decides the guy wont do it again. They trade against him knowing he cant keep going and try to push the market against him. Through his market sources, eg, other banks, customer realizes the game. Goes to another trading desk in the same company and does the same thing. But this time, he simply calls in and asks for a FX qoute in $1.0 billion. Deals on their qoute, asks for fresh qoute on US$ 1.0 billion, deals again. FX is in a panic, as this guy can keep going, they are tossing out his volume by simply hitting bids, no idea what their P&L is. At the end of the day, their loss is significant, even by Tier 1 standards. Customer calls back and asks for another $1.0 billion qoute. FX is in a panic as they know how tired the market is, how tired they are and decide to "read" him, hoping to make something back but they're wrong. Customer buys back his short. FX is crushed - calls start being made to senior management saying what happened. Jobs get lost, careers sidelined. Customer calls senior management to thank them for their trading desks help. Says FX deals were to punish the firm for what their other desk did. This one customer created enough distrust in this firm for 6 months and enough political back-fighting that long standing employees had to be let go to stop the fighting. Big customers keep big firms honest and most of that honesty works its way down to small fish, because sometimes the little guy goes to work for a monster and no biggie wants a repeat of the story I told you. People have very long memories when they feel poorly treated.
yo dude, u finished reading 'mkt wizards' #1 yet? listen i got good news 4 u, there is an addition, only its been published a few years ago, so maybe they're out of print now.... honestly your one pretty big larf tomcole! and thats the same guy who's telling us we can do big size on CME eFX contracts.......... wharrrrrrrffffffff... u got me there dude, for a second i thot u wuz real, bad trade on me, but worth the larf tho'! ))) 1) u realize yr story is totally irrelevant to achilles' concern right? and your ignoring rufus 4000 and taboni's v.valuable inputs (people don't 'make up' such stories) 2) when u get a chance to work on a non-imaginary desk - not in this lifetime i guess - u'll also realize that what u describe is just another day at work at a normal investment bk and this includes sallies and the whole rest of 'em - yr story is taking place at institutional size+ level remember?, these guys did nothing 'wrong' they just lost one game, if we really 'must' we 'sack' them with a usually pretty nice paycheck and they get a similar job at another desk in no time, and join us again a few years later if we want them back, we may even in some extreme cases go as far as dispatching our top corporate brass guys to polish yr kn*b if u happen to be more than just good mates w jrobertson, and then we just continue to ride yr coattails happily ever after.... one last thing, the 'small fish' as you say, u realize thats just how he just gets whipsawed faster everyday (these things happen just about all the time dude...) and you've made any 'decent' bucket shop op. that much richer quicker in the process right? or maybe u don't but who cares... anyway, just being fair, IOU a laugh, here's yr chance dude: http://us.imdb.com/title/tt0291341/ just ask yr tier1 deala' am sure he'll be glad to ship u a copy ;-)
tomcole, By FX I'm assuming you mean foreign exchange. If so, I don't think this is a realistic scenario. The desk would just pass on the exposure to other banks. It's unlikely that one customer would be enough to panic the whole system and offset any other customer orders coming in against his. The market is too deep for one customer to run through. -CMT
My point is that large volumes arent always profitable, that large customers will punish traders financially for unethical behaviour and if you think losing money or pissing off big customers is allowed by senior management, you're very wrong. 2cents- I doubt you ever worked in anything but fantasy land and your posts show your lack of meaningful experience. cmt- There are significantly large customers in the market who scare large trading banks due to the customers ability to take on sufficient exposure at various banks, which in aggregate is a larger position risk than the trading banks take tehmselves. A juniuor trader may make all the bravado noises about ability to handle risk/trade etc, but the reality is that some customers have the ability to swamp any market they choose to enter.
I never claimed unethical trading was allowed by management. I'm just pointing out the fact that the scenario is not only unlikely but logically inconsistant. Unlikely - 1) The customer moves enough volume to panic a desk (definatly possible, but not likely) 2) He puts through so much volume that, not only does he take all that desks bids, he takes the whole banking system out. Every bank moves off of the bid and he takes any remaining customer the banks left. Logically inconsistant - He just moved enough volume to move every bank off the bid and then turns around and buys back that exposure from the 2nd desk without anyone blinking. In the first round of selling he precipitated desk panic and moved the banking system, but when he wants to buy back the single 2nd desk is able to accomodate his order. Maybe I'm missing something here. If you add a large seller to a static equilibrium of course you'll see a price decline, but when you add him back when be becomes a buyer the market clearing prices moves back to its original level. So in order to have him able to buy back his exposure it must be a dynamic setting. But in a dynamic setting the addition of a large seller can be just as likely offset by the addition of another large buyer or a sum of many small buyers, which doesn't guarantee that he can move the market at whim and may take a loss in trying to do so. So maybe he is joined by other sellers, well, this is the nature of the environment any desk operates in. I'm not saying that no desk is ever F'd by getting hit by large exposure, I just don't see one market participant being able to precipitate said F'ing at will. Under some conditions it may be possible. Lets say he can move the system off the bid, maybe he can trigger some large volume stops. But then again, maybe the desk is already carrying a many billion dollar short position by someone trying to game them the other way and he just saved their careers. Let's try not to turn this into a peeing contest by taking stabs at each others experience. -CMT
"Whats Stopping Retail Dealers or Banks From Brute Forcing a Clients Profitable Stgy? " This is not an issue at all. For every 1 successful trader, there are always 99 that fail There are so many exchange traded instruments, the result still the same.
If anyone reversed engineered my strategy they would find a system that can be found in countless books (although modifed slighly to suit my personality). The real money comes from money management and discipline. Look at the turtle system its a channel breakout stragegy. Also if i had a rule about when i wasnt going to trade, this would be almost impossible to reverse engineer anyway.
It is exactly for that reason that a new class of Quants, "execution strategy quants" are currently in very high demand right now. "slippage", aka, the market's reaction (for instance, pure scalping) to a large trade is becoming incredibly important, as each unit profit rapidly drops. For instance, a couple of old-war-stories, in the early 90s, a certain computerized trading system would often hedge by buying / selling 500-1000 lots of big S&P futures. Of course the floor trader would trade against it throughout the trade, making a good profit on the flow. So, the computerized trading system need to slice up the trade, time each individual slices, "bait-and-switch" the market, or find other correlated hedging instrument. Of course now that the Pits are all electronic, it becomes trivial for institutions to go directly, rather than go through a broker. Which is why you see the institutions buying up electronic memberships (CBOE, CME, etc, etc). Of course, now a days people would laugh at 2,500 lot of mini S&P, it is big, but not that big that people could sit and trade against it for some period of time. Most of the "sell-side" blackboxes do not play a single market for profit, rather, a lot of them would focus on the "execution strategy" and internal flow, to reduce the firm's flow impact on the market. Another story is Tudor Investments' 96-97 (?) $650M short of the S&P basket, it was considered "Humongous" at that time, and Tudor got fined by the SEC for "naked shorts". However, again, in today's electronic market, $650M basket short is not considered that big of a deal, since it won't be done as one-trade, rather, as thousands of smaller trades. For instance, NYSE average trade size was around 600-700 shares in '98. Last time I looked up, the average trade size is now 250-300 shares. You might think it is because more retail customers, but from the fact that NYSE volume is 50%+ done by "program trading", almost everybody is employing some type of "slicing" algorithm these days. Rufus
Assuming the whole positions are known, coming up with a set of positions that correlate extremely highly to your positions would be trivial to duplicate the characteristics with a high degree of correlation. It would take a decent statistician with no trading knowledge one day to do. If you are worried about a single position from a trader who thinks he may be at risk from an institution from understanding it's mechanism, unless you are George Soros, no large institution gives a shit. nitro
The central theme here seems to be a) yes it is possible to crack some strategies and it is done however b) it is quite costly, so it is generally done just for very large sized trading. That said, I'm curious if employees at retail brokers are able to look at which retail traders are making money and try to reverse engineer those trades.. does that happen at all? I'm talking about not with the companies' permission, but say a tech who illegally uses their information access (a DBA, Database Administrator, for example) and says they are "debugging" a possible bug, and in the meantime dumps a profitable retail traders' trades to their own laptop for some evening analysis. That said, I agree your average tech working at a retail broker does not have the resources as a tier 1 quant with a 30-server farm and the software to break the codes, etc. But what if the strategy was extremely obvious even just on a chart, given just 20 executions or so? On a related topic to this thread, I read another post a while ago saying some Prime Brokers go so far as to not only monitor who the best traders are, but even approach them to see if they want funding to create a hedge fund. The poster was pissed off since he thought his trades were somewhat private and moved his account to another Prime Broker. Anyhow.. a fascinating subject, thanks for the contributions everyone. -Taric