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Interesting idea, Yuki.
Can someone verify if it is a common practice for brokers to investigate the performance of its clients ( of courese internally and act in low profile ) and then try to figure out the methodology of the successful clients ?
If it is the truth, then is it advisable to split the trading operation among accounts in different brokers ?
Huanyan
--- In amibroker@xxxxxxxxxxxxxxx, Yuki Taga <yukitaga@xxx> wrote:
>
> KM> Why would it be discovered?
>
> I would be inclined to believe that any system that is employed for
> any reasonably lengthy period of time will be discovered. I think
> this is particularly true now in the data processing age. Human
> beings are, after all, human beings. And behind all the machines,
> there are human beings. You can't trade without exposing yourself to
> the machines (which "remember" all your trades forever) and, very
> importantly, to the people who have access to the machines, or who
> control the people with access.
>
> I don't know where this might be illegal or legal, and I'm sure it is
> in some places and maybe isn't in others, but if I was a ranking
> officer in a brokerage firm, you can be absolutely sure that I would
> know exactly who my most profitable clients were over time -- using a
> basket of metrics to look for outstanding performance that fell
> within allowable risk parameters. And you can also be sure that I
> would spend no small amount of time and effort trying to ascertain
> how any sustained profitability that was in the bounds of my metrics
> was being generated. I'd be running the data periodically. Need I
> say more?
>
> If you are siphoning money out of the market on a consistent basis,
> and doing it better than almost anyone else (basis simple RoR, better
> risk-adjusted numbers, some the combination of the two, or whatever
> measures you happen to be looking for), it is going to be noticed.
> There is almost no way to get around this. Your identity can be
> cloaked without too much trouble, but cloaking your play is much more
> difficult -- because you have to play. Conceivably, you could break
> your play up among several sets of machines, but if you are
> successful enough I think your play is going to be detected.
>
> If you are small potatoes, you have less of a problem I'm sure.
> Almost no problem. But if you have a system good enough to interest
> someone else, you aren't going to remain small potatoes very long.
> And in the meantime, you are going to be putting up some trade
> statistics that should attract someone's attention. Let me change
> that to *will* attract someone's attention.
>
> It's called the smell of money. And one of humanity's most powerful
> olfactory capabilities is detecting that odor.
>
> Yuki
>
> Saturday, June 6, 2009, 10:32:32 AM, you wrote:
>
> KM> The statement, "they will be discovered and traded", contains two
> KM> assumptions, which I find difficult to accept.
>
> KM> First, addressed by Brian below, it will be discovered only if it is
> KM> used to an extreme extent. The system may, for example, just trade
> KM> relatively small lots in large and universally held equities. One could
> KM> possibly make millions from futures and forex without effecting the
> KM> markets one iota. Why would it be discovered?
>
> KM> Second, even if it were discovered and even became widely publicized, it
> KM> still might not be traded sufficiently by others to have any effect on
> KM> its success. The system might, for example, require considerable
> KM> patience by the trader, so much so that only a very small number of
> KM> traders would be willing to use it. Or it could be based on some theory
> KM> that all but a few would reject, despite its effectiveness.
>
> KM> It's believed by many, including yours truly, the the most effective,
> KM> low risk/reward, way to make money from the stock markets, is to write
> KM> books and give lectures about how to make money in the stock market.
> KM> This system has been going on for years, is well known, and so far
> KM> appears to be quite profitable. I doubt that it will ever stop working.
>
> KM> -- Keith
>
>
> KM> brian_z111 wrote:
> >>
> >>
> >> <snip> I find the statement that all trading systems stop working
> >> eventually to be too vague.<snip>
> >>
> >> Howard has provided supportive arguments, to this theory, at various
> >> times, and we can not accuse Howard of being vague or equivocating
> >> when it comes to trading (I thank him for that).
> >>
> >> As I recall the basis of his view is:
> >>
> >> - all systems will fail eventually
> >> - they will be discovered and traded
> >> - trading the edge erodes the edge
> >>
> >> By 'erodes the edge' Howard means that if, for example, I am trading a
> >> system and buy, at the entry signal of 100.00,, and sell on the exit
> >> signal of 103.00, I have made a profit of 3%.
> >>
> >> If a lot of people start trading the same system (same market/
> >> timeframe etc) then the second person in will have to buy at, say
> >> 100.01 and sell at 102.99 (because my action in buying/selling before
> >> them moved the bid/ask (theoretically trader 2 ends up with a profit
> >> of 2.98% , calculated on a commission free basis and so on, down the
> >> food chain).
> >>
> >> According to this theory, the efficiency of the trade has been
> >> diminished i.e. what was a 3% trade has been reduced to a <3% trade(on
> >> average) due to other traders piling in to the trade.
> >>
> >> My critique of that argument is:
> >>
> >> - the reason why any trade (tick) is made (appears on the tape) is
> >> unknown to us (except for our own trade)
> >> - all ticks, other than those that are trading our system, are noise
> >> (to us) and therefore random
> >> - ticks associated with our trade, that are not placed by us, will be
> >> dispersed in time, (due to the various trading time delays experienced
> >> by individual traders).... so they will be interposed by random ticks
> >> - in a pure market (no commissions and no manipulation of the trades
> >> by insiders) there is a 50/50 chance that my tick (if I take the
> >> market price) will be less than the midprice of the bid/ask when the
> >> signal was generated at the exchange.
> >> - my price could move away from the original midprice substantially,
> >> in a fast market, but no one can know the reason for the fast trading
> >> or attribute it to our system (my system only produces a buy signal
> >> once every 2-3 days on average - fast markets happen all of the time,
> >> when I am not trading my system, and presumably slippage is still
> >> occurring, in other transactions, so the evidence is against the fact
> >> that my system is the cause of slippage and fast markets).
> >>
> >> The exception to that is if a 'player' with a big account, relative to
> >> the liquidity of the instrument, is also playing the same system, at
> >> the same time, in the same market/instrument/timeframe.
> >>
> >> So the question is:
> >>
> >> - to what extent are 'big players' trading a system, in a highly
> >> liquid instrument, with enough clout to move the market?
> >>
> >> - IF big players are system trading what type of system would they be
> >> likely to play and what% of the total funds they are controlling are
> >> they likely to risk on any single system?
> >>
> >> - are they likely to play with large enough sums of money to erode the
> >> efficiency of the system they are trading?
> >>
> >> - IF they are playing a system, with large amounts of money, is it
> >> likely that their system would involve entering all of that money at
> >> the same time i.e. they would trade in such a way that they would make
> >> an intraday splash OR are they more likely to trade systematically
> >> over longer timeframes (that might be a reason that intraday sytems
> >> don't get eroded as often as EOD systems ... if that claim, made by
> >> some, is true).
> >> - IF big players do trade in such a way that they are 'moving the
> >> market' do you think they would be so naive that they are unaware of
> >> this and haven't factored that in to their strategy..... if 'moving
> >> the market' is negative to their strategy would they do that ...if
> >> 'moving the market' is positive to their strategy are they more likely
> >> to implement that strategy in illiquid instruments/small timeframes OR
> >> the reverse?
> >>
> >> But all of that is just a nice theory.
> >>
> >> The best argument against any theory is evidence.
> >>
> >> Some forum members have listed some example trading systems that have
> >> been published for decades AND they are still going strong AND their
> >> performance has not 'faded in and out'.
> >>
> >> Anyone who wants to defend the 'trading the edge erodes the edge'
> >> argument now needs to prove that these systems were never published
> >> AND that after they were published they ceased to work.
> >>
> >> That won't be an easy task because Samantha's unequivocal example (a
> >> 10 bar SMA on monthly data) is based on a trading idea (MA crossovers)
> >> that has been around forever (Tomasz even ships AB with a example code
> >> in his formula folder and the manual) and there are published studies
> >> on the net (rigorous studies at that) that are relatively current.
> >>
> >> However, the more imporanat question seems to be, if these systems did
> >> not fail, due to being published and/or traded, why didn't they?
> >>
> >>
> >> --- In amibroker@xxxxxxxxxxxxxxx <mailto:amibroker%40yahoogroups.com>,
> >> "Leading Edge Systems" <rdcpa@> wrote:
> >> >
> >> > I am new to Amibroker and I have been using Howard's which I find to
> >> be excellent, as a guide to learing AB.
> >> >
> >> > I find the statement that all trading systems stop working
> >> eventually to be too vague. First "stop working" is a relative term
> >> and would have a different meaning for each of us. Also I think
> >> inefficiencies can come and go in cycles based on the popularity of a
> >> particular type of trading. Once an inefficiency has been traded away
> >> due to over-popularity, it probably will go out of fashion and then
> >> become an inefficiency again some time in the future. All this depends
> >> on the specifics of what we mean by "stop working" and "a system".
> >> >
> >> > Rich
> >> >
> >> >
> >> >
> >> > --- In amibroker@xxxxxxxxxxxxxxx
> >> <mailto:amibroker%40yahoogroups.com>, "samu_trading" <samu_trading@>
> >> wrote:
> >> > >
> >> > > All,
> >> > >
> >> > > In his really good book Quantitative Trading Systems, Howard
> >> states that all trading systems will stop working forever at some
> >> point (because the inefficiency in the market they exploit will be
> >> killed by everybody jumping on board).
> >> > >
> >> > > On the other hand you have momentum / ROC based systems working
> >> forever now, same for trend following MA crossover systems like The
> >> one propagated by Mebane Faber. Momentum and MA rossover
> >> trendfollowing does seem to work "forever".
> >> > >
> >> > > Any comments from the gurus here?
> >> > >
> >> > > Thanks, Samantha
> >> > >
> >> >
> >>
> >>
>
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