The recent discussion on HFT raised some questions for me -
If you guys who are operating brokerages business don't mind answering could you let me know do you guys monitor and track the trades of individual customers especially those individuals who are consistently profitable?
Broker/Data: Multiple broker + Multiple feed (for access to specific exchanges)
Favorite Futures: European Indices, Precious Metals, Energy
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I don't know if you're going to get an answer on this, they must do some overall monitoring but on a low level they may have the access but I don't suppose they really have the interest in doing it, at a guess.
I'm not operating a brokerage business although my answer may be useful.
All of your counterparties can see your positions. This exists whether you're executing OTC over phone or electronically in a centrally-cleared market. You're executing either directly through your broker's platform or through a software provider that has worked to provide market access in the name of that brokerage. In the former case, yes obviously they need to know your positions at any point in time to manage their counterparty risks. In the latter case, the brokerage still needs to know your positions at any point in time, the software provider has to write a risk module that allows the brokerage to access all your positions remotely and kill them at any one point in time. The software provider is usually required to do a demo and prove it to the brokerage that their solution works. That's a bare minimum requirement with all the legitimate brokerage firms that I know of.
I guess your question is implicitly asking if your broker can steal your strategy. My brokers can see all of my positions all the time, both in real-time and historically. It hasn't been a problem for us outside of FX markets. A few examples should be assuring. Part of the purpose of the CFO in a trading firm is solely to sit down on the phone daily (I prefer not to) with a rep from your broker and to ensure that they processed every single trade correctly and that they match internally with your records. Obviously to do this, the broker has to have access to your trade records all the time. If you're carrying out a strategy that is 'consistently profitable' (in your words), then chances are, your strategy is sensitive to your commissions. The fastest way to get a low rate on day 1 as you move over from 1 broker to another is to show them a couple of days' statements from your existing broker. I haven't had a problem doing this either.
Simply, there's too much noise from trade reports to reverse engineer your strategies.
This, however, is a huge problem in the FX markets with counterparty banks. Several banks are notoriously vulnerable, and are especially cautious if you are a liquidity taker. So if they see that you're consistently profitable, you actually get called in to have a conference call with their quants to explain what you're doing and how you're just hedging this and that in a broader strategy.
Both a firm that I used to work with and my current firm have reputations for being, quote, unquote, 'extremely toxic'. We used to argue that if they knew we were going to be profitable most of the time, they should just double down on our trades, but we realized they couldn't do that either because of their own portfolio rules. There's one bank that my firm traded with and they lost significant amounts on day 1 and so we were deemed toxic and shut out. We had to settle on prices for those trades and it was extremely time-consuming. Now we just focus on providing liquidity.
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I can only speak for our operation. We monitor risk and exposure, not methods and track records.
Further, whether a trader is profitable or not, we do anything technologically and customer service to assist him/her further if such help is required.
Over the years we have been approached with the same question a number of times, and my answer has always been the same: it is best if you spend your time on your methods, most retail brokers would be only happy to receive and accommodate long term profitable traders.
PM with any questions about optimusfutures (800) 771-6748 (561) 367 8686. THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES TRADING.
Last edited by mattz; May 9th, 2014 at 09:18 AM.
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Thanks, this is really helpful. I'm mainly trading FX these days; both spot and futures. I'm looking into moving more trading into the currencies futures instead but for now I still need to trade the spot.