If the broker traded in the same direction before, during, or after when you would enter a trade, wouldn't that just give momentum to the trade you would already make and or just make price move faster in that direction?
Well that raises some different quesitions. If the brokers want to frontrun your trade then I am thinking they might frontrun your exit aswell and the market turns on you before you reach take profit. But that takes into account that the broker has the power to move that market, and that must depend on what type of market it is? But my thoughts on this is on a longer timescale. By that I mean firstly it might only be the broker who use the information, but then it leaks out of the house and more people get to know about it. At that stage more people starts trading the concept and the edge shrinks. In my thinking an edge is a loophole in the market that will loose its value if to many people finds out about it. Then the market reach equilibrium once again and closes the loophole.
Nobody is "alone" in the market. Any given strategy always works just within the market, in context with what all the other participants (brokers or not) do.
So, as long as one (or a few) participants do something that nobody else does, the particular trading style may get good results - but if everybody (or the majority) goes along the same path, it'll stop working.
This is like what happens if you tell everybody about the shortcut route that you found to go from A to B during rush-hour: your shortcut will become crowded and you will have to find a different route.
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I'd assume this happens a lot more on specific stocks than futures indices or commodities, but I could be wrong. I believe it's a different story when exploiting patterns in technical analysis as opposed to fundamental correlations between instruments. I see the same technical patterns in the chartgame.com charts going back into the 90's. Maybe there is a whole list of loop holes that were exploited, and then lost popularity, and then exploited again due to lack of use. This is probably an ongoing cycle. I wouldn't be surprised if there is a whole group of quants working underground in dim lit offices tracking the frequency of loop holes used and abused. If no one is doing it, Someone has got to be doing it.
Last edited by Itchymoku; November 16th, 2012 at 07:36 AM.
I guess they probably could. But why would they? The broker makes money on both sides of every trade. Commission is a commodity business. Imagine the work it would take to first even find a customer strategy that works? How would the broker even know that strategic parameters are being applied in an objective systematic way?
Don't take this personally, but my experience has shown me over the years that the guys who are concerned with what others are doing are not making any money themselves. On the point of intellectual method bleed rendering a method...very highly unlikely. In the past I've given guys complete access to methods that bank...the first thing they say is will it work on the 5 min, or how does it do on CL. The next time I see their chart it is totally different from what was given to them.
Trade your method man and count your money.
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Safety net 1: No broker is interested in the details of your strategy, because their business is several magnitudes more profitable than any buy-side trading will ever be, and they try not to tell you that. What can go wrong? Generally, only if you trade with some retail FX or esoteric product (binary options?) dealer. Because a dealer, by definition, trades for its own account. They can see the entire order book and gun your stops. (How Forex Brokers Work) This is perfectly legal and fair for them, and still many times more profitable than deciphering and stealing your strategies, by the way.
I'll estimate there is only the exception of 50~70 investment management firms out there who have strategies or positions that are worthy of a heist or a frontrun. If you aren't one of them, it is really silly for an account manager to go rogue and steal your account statements to decipher your strategy - because this is obviously illegal, but more because it is a crime of the same level as a McDonalds staff stealing ketchup from the counter. However, if you are trading for one of these 50~70 firms, and deleveraging a $100 billion portfolio in a day, don't expect the secret to stay with your broker. (See safety net 3.) But odds are that there are already measures in place to conceal your positions, i.e. you clear your own trades and/or have various sources of liquidities - multiple brokers, ECNs, OTC counterparties, dark pools.
Safety net 2: Even if you are one from of those 50~70 firms or manage to produce some magically consistent track record, it is still better for them to approach you to become a CTA (see @mattz's post) or the likes.
Safety net 3: This is least protective filter, but anyway, it is a violation of the Securities Act of 1933 for a brokerage to share information with a proprietary trading desk even if they are in the same entity and office, so they must be separated by a "Chinese wall". This is a grey area that securities firms often get away with. If I recall correctly, in the case of LTCM blowing up in 1998, I think it was the corporate finance division of Goldman that was proposing to refinance LTCM, and the LTCM guys, getting desperate, agreed to transfer their entire ledger for review. Later the very same day, the prop desk of Goldman was hammering the exact positions that LTCM was stuck in and selling the living daylights out. Not supposed to happen if there was a Chinese wall...
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