A 'Hypothetical' Conundrum

[Interceptor]

I wonder if anybody with a deeper, more extensive knowledge of the vagaries of spread betting would be able to throw some light on a puzzle for me.
The hypotheses is as follows;
Let's say that a person discovers their 'edge', trading on the indices. Positions usually taken for a length of between 30 minutes and 7 hours. No scalping, news trading, or arbing.
They backtest it to oblivion, and then trade it real-time for over six months, using small stakes, and the results are as hoped for. Whilst certainly not a 'holy grail', the methodology does seem to produce consistent profits, across varying market trends and conditions.
At this point in time, a serious foray into the market place is the obvious next step.
But, here comes the 'problems';
-If anybody wished to trade large figures with an s/b, is there effectively a virtual glass ceiling in operation across the industry? ie, if you win too much, you ain't wanted.
-do the s/b's share customer info with each other? Or, give each other 'heads-ups' about certain clients?
-what sort of size could you trade up to before, shall we say, entering and exiting a position becomes riven with difficulties?
-are there any alternatives?
-is there software available to trade multiple accounts,at multiple s/b's, to keep you 'under the radar'?

Thanks in advance for any advice and assistance, with this purely hypothetical situation.

 

[smarks999]

Since no one will reply to this I will just tell you what I know.
Considering you have an edge and you are able to trade fair size for a year and manage a decent return.......what do you consider to be large figures.
If your AUM grows above £1.5m then you are wasting your time with s/b. The cost by then would be astronomical and you will be haemorrhaging cash into these companies' pockets. Just close your account and go knock on Fortis Bank's door. Or ring up a prop firm tell them you want to trade your own cash remotely and I am pretty sure the big ones will let you do it.

If s/b start loosing too much money on one trader (from reliable sources) some do actually have a monitoring board for these traders and they tend to hedge large positions against these traders in order not to loose too much money. I don't actually know if or what the ceiling is. But when you start looking at your statements and your cost total 50K-100K you know it is time to try somewhere else and I don't mean another s/b.

To the best of my knowledge they do not share any info with each other. It is part of the data protection act and I am pretty sure it is illegal........well unless you are been suspected of money laundering or anything related to a white collar crime. Behind close doors I suppose they might do though, but you would actually have to make serious waves to be noticed.

With regards to size.....in s/b the size doesn't really matter because you are betting. So there is not actually a buyer for every seller as in the cash or derivative market. I suppose you can go up to any size you want as long as you can afford the margin. The alternative is find an IB to be your broker. In this case sure you can actually move the market once you get to a certain size. However in all honesty that is the least of your worries, because you need serious size to move the market.....unless its a less liquid product like oil in which case 5 to 10 lots @ market could probably move the market. Considering you are talking about $50 to $100 a tick you need to know what you are doing or you will just become another statistic as an inexperienced underfunded punter. If you really get to a stage where you are concerned about the size you are trading, study and analyse the volumes of the products over a certain period in the time frame you are trading. That way you can see what the normal size is, traded over that period and it will give you a good idea of normal conditions and what your limitations are. Obviously you want to consider the worst case scenario and consider what the volume was the last time the market spiked or gapped.

I have no idea whether there is software to allow you to trade on multiple s/b accounts. Once you start trading with a IB as your broker you can trade multiple accounts under one umbrella account or use excel to develop your own program. However to put it this way. The min cash req. for starting with an IB is about £250K and believe me they will hate you for wasting their time. Only a few will alow it either. Less than £1m and you might as well remain with a s/b or look at joining a prop firm.

Hope this helps.

 

[Vrothdar]

I'd suggest trying something other than indicies. I started off by looking at them but the inability to really trade them made them uninviting to me. SBing them is such a grey area and if you really do work out a great system you'd be very annoyed if you couldn't continue to trade it because of problems with SB firms.

Perhaps look at the index futures rather than cash instead as you could SB them and move into the actual futures market if you desired.

By looking at the cash only you're shutting some doors on yourself.

 

[Interceptor]

Thank you for your responses.
A couple of questions in return, if you don't mind.
What is AUM?
smarks999 mentions the 'cost' of using an s/b-what is this? I thought an s/b's edge was the spread?
Can you give me some examples of well established IB's?
If an s/b starts to hedge your trades, does this imply a lot of time delay, possibly resulting in constant price slippage?
Vrothdar mentioned futures. This, I confess, is something I hadn't considered.
Are there any disadvantages involved in trading index futures, rather than the cash market(other than tax implications)?
Thanks again.

 

[BSD]

AUM = Assets under Management = the money you are running.

I'd move on to a real broker executing your orders in a real marketplace, eg futures exchanges like EUREX / GLOBEX etc as soon as you can, with eg www.interactivebrokers.com that have a good reputation if a clunky platform.

 

[Vrothdar]

Vrothdar mentioned futures. This, I confess, is something I hadn't considered.Are there any disadvantages involved in trading index futures, rather than the cash market(other than tax implications)?
Thanks again.

If you wanted to invest in the cash price of index "x" at £6000 it would cost you £6000 to have one "share" in the index. If it moves to £6100 you'd have a £100 return on a £6000 investment.

Index futures operate on margin so you don't need to put up so much capital per trade and because you're trading one vehicle (rather than all the shares that make up the index) it's more practical too.

Futures - Traderpedia
E-Mini - Traderpedia
Index - Traderpedia

Those traderpedia links are probably of interest to you.

 

[Interceptor]

Thanks again.
Do the cash indexes and the futures mirror each others movements? ie, roughly same degree of volatility, OHLC's etc?

 

[Vrothdar]

I believe that index futures tend to react more to news events etc. than the cash values but I'm not certain. I don't have any experience trading index futures myself so my understanding of their day to day behaviour is very limited.

I'm sure you could find some useful information in the futures or indices forums somewhere.

 

[new_trader]

Thanks again.
Do the cash indexes and the futures mirror each others movements? ie, roughly same degree of volatility, OHLC's etc?

I would say 'roughly', but what you must be aware of are the minimum increments or tick size.

Eg/ The cash S&P500 index moves in increments(tick size) of 0.01 whereas the big S&P500 futures tick size is 0.10 so there are 10 ticks/point and the E-mini S&P500 futures tick size is 0.25 so there are 4 ticks/point. This makes a minor difference in OHLC but if you are conducting automated back tests, 1 tick can make the difference between a profit and a loss. N.B: Some S/B use tick sizes of 0.1 for their S&P500 cash & Futures(CMC) and some use 0.25 tick size (IG Index).

 

[smarks999]

Well established IB's. Easy just google top investment banks.
The cost with s/b it basically the spread price you pay them. Thus if the difference in GBPUSD (cash) is usually 1-2 ticks... the s/b will quoted between 3 and 6 ticks. so instead of (cash) 01-02 the quote for the s/b will be 99-03 or something like that. In the cash market that is just the quote and you get charged per trade you do. EG. 1000000 GBPUSD will cost you about 25-30 dollars per round trip. If you were trading the same size with a S/B they will not charge you per round trip the will charge you you difference between the BID/ASK. Thus $1m in cash at a bid of 99 and ask at 03; equals $100 a tick. If you get in and out immediately you would loose $400 which would go into their pocket. Say you continue the trade that spread still sticks and whether you win or loose they have just been paid $400 for you to trade. Now $1m in FX is pennies when you get to large "fund sizes" Can you imagine what the cost would be on a 100M. Obviously if you win theoretically you make money and the s/b loose money, but according to their accounts you still paid for that trade buy entering and exiting and you made less profit than you would have done with an IB. I hope this makes sense, it is one of those things which makes sense in accounting terms more than anything else. However you trade $100m with a s/b and $100m with an IB and do the exact same trades. At the end of the day there will be a significant difference in the balances. You would have gained a an average of 1-ticks with the IB and the trading costs would have been marginal. At $1000 dollars a tick it makes a serious difference.

Also them hedging doesn't necessarily mean that you are in any way at a disadvantage. It just means they will have your name up on a board and whenever you enter a trade they will actually do the opposite in the live market to cover their own exposure. Price slippage is something you will have to deal with in any case, but you are exposed to possible manipulation with s/b as they actually quote the prices based on the real market rather than a direct feed form the market. Usually the only sign you might see of any kind of manipulation is during extreme volatile periods like non-farms. In those periods extreme spikes are obviously not uncommon and it can almost be justified.

Futures are like the more established version of s/b in terms of being a derivative product. It is much more highly regulated and there is only one price feed which means price manipulation is pretty much out of the question. The size traded in futures are colossal and depending on the product the liquidity will allow you to trade substantial size without moving the market.
The cash market is largely OTC and the barriers to entry are way above any individual or most small institutions. The majority of OTC products requires you to have a banking license, which means you need in excess of 300m in cash just to be considered. If you can get exposure to the cash market through a broker you will incur significant charges and your scope will be limited to trading small size. Usually you are obliged to trade in blocks of 5M+. In some markets the smallest is 25M.

 

[Interceptor]

Many thanks for your answers.

 

[smarks999]

My apologies, I got the hedging strategy wrong. It is a little more complex than just taking the opposite position in the live market. Once you enter a trade, to hedge the s/b can use a number of ways including options to minimise their own exposure. However the exact way they go about this I am not too sure on.