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Archive for January 2010

Zulutrade shortfalls are know, but are they intentional?

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I´ve posted a number of times, that Zulutrade has critical shortfalls and its performance rank table is virtually useless.

Conceptually, Zulutrade is great (so is Collective2 and Covestor), but … so far it´s hardly designed to identify good trading systems and make money for customers. Worst of all, it may be intentionally so.

The key shortfalls are:

– Performance tables are logged on trade close-price basis rather on tick-by-tick basis.
This shouldn´t be a problem as long as reasonable stoploss levels are obserserved consistenly. Unfortunately, this defect allows to, effectively, fake performance data and by far most top-ranked systems´ performance looks good only due to this shortfall. This defect obscures real drawdown levels.

As an example. A system vendor opens a position, keeps it open for 3 weeks and closes with 10 pip profit. On the performance chart it is logged as clean 10-pip-profit trade and looks great. What is NOT logged that this trade at some point was in MINUS 700 pips. The performance chart doesn´t display the drawdown of 700 pips.

– No adjustment for leverage
Performance stats display only average pips for trade. The data in such form is about as informative as “average temperature in hospital”. It´s a huge difference if, say 30, pips per trade is achieved by trading 1 lot at a time or 10, 20 or even 100 lots at a time. The data would become usable and informative, if presented in ¨average pips per each lot traded¨.

Alternatively, there may be 10-20-30 or more positions open at the same time. Often in the same direction. If it works, the pip count goes up nicely. However, the problem is that it is unlikely that any end-user of such service would allow so many trades from any single system vendor. He may capture only a small fraction, say 10%, of the action and performance would look much different in comparision with performance posted on zulutrade.

Others write about the problem here and here.

Worst of all are not the above mentioned shortfalls per se, but it´s the fact that any system vendor who wishes to reach the top of the performance ranks HAS TO EXPLOIT THE SHORTFALLS, in fact defects, of the system at the expense of trading system quality.

Since the aforementioned defects are technically easy to fix (a bit more computing power to log performance on tick-by-tick basis and a minor change in reporting algorithms is all it takes), I suspect that Zulutrade intentionally keeps the reporting system the way it is since it is more profitable for them rather than have clean, efficient performance representation. Why? First of all, it generates a lot of nice-looking performance curves to attract new customers looking for easy, outsized profits. Secondly, the smooth operators who use the loopholes left for them to exploit, are usually very high frequency traders.

Profitable system which trades infrequently and finds trades with great risk-to-reward ratio is what customer needs. However, it´s not necessary what zulutrade needs. For zulutrade, a break-even or high-risk-low-profit-lots-of-trades system is much better since zulutrade receives it´s income from markups and amount of such income is a direct function of trade volume. There is a clear conflict of interest between the customer on one side and intermediary (zulutrade) and system vendor on other side. I´ve seen zulutrade business plan, it may well be that it states that they are in entertainment business (the same as casino) or that they should encourage churning as a business model … or may be it´s just lack of management vision, or funding or whatever …

The bottom line is that it´s ok to use zulutrade as an interface for routing trades from system vendors to customers´ brokerage accounts, but performance stats (and ranking, in particular) is nothing one can trust. As the shortfalls become common knowledge, at some point it´d be profitable for them to sort out the mess …

Written by A.S.

January 24, 2010 at 1:41 pm

FXCM exceeds expectations

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Around New Year within about a week I had several occasions where, due to errors of service providers, I incurred extra costs. It´s something what happens not too often to me and several episodes within a matter of days is something extraordinary. One was a cancelled Ryanair flight which I´ve booked for my family to visit me on New Year holidays. I had to book another flight with a different company and my total cost was more than €1´000 of which Ryanair reimbursed less than €100. For both my wife and the two little kids it was first ever experience with Ryanair and the kids are very eloquent that they never ever will fly with Ryanair again. Particularly, because they were very satisfied with the service from the other airline. I´ve sent a compensation claim to Ryanair, but estimate my odds of receiveing any compensation as very slim … I look at this as the true cost of flying at about 1/3rd of cost, if compared to other airlines … works most of the time well, but be ready to pay when it fails — they won´t take care of you and kick you out in cold and dark to save on costs, including fair compensation budget.

A few days later there was a similar episode. Broker missed a predetermined stop-loss. Market was relatively calm, execution was delayed by about 2 hours and 45 minutes and the fill was about 28 pips or about $900 worse than it should be at a predetermined stop-loss level. I knew that there is some problem with the system — it funtioned strange, didn´t accept new trades … In a short online communication they admitted that there have been a system outage. I sent a short description of the problem with all the details to FXCM. I estimated my chances for compensation as slim since in the account documentation there is small print that most of us never read, but we know that it transferrs all possible risks to customers. As well, I started to consider moving the account to another broker. Nevertherless, the amount has been credited back to the account, as well as I´ve received highly detailed and professional summary about the incident and consider the issue fairly resolved.

Written by A.S.

January 24, 2010 at 11:51 am

Posted in FXCM

Week 52: up 1.19%

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Total test result for the last 2 months is about minus 0.9%. Hectic trading volume and markups are beneficial to intermediaries, but so far there´s little evidence that the service produces positive investment returns. In other words, where are the customers´yachts

During the last week ditched one system which seemed like another 1 pip system, i.e. the kind of which sits through massive drawdowns waiting for the market to come back. It´s really a source of discomfort to watch as system vendor takes, effectively, unlimited risk to gain very limited profit for the customer. Somewhat disappointingly, I´ve found that by far too many systems on the 1st page of zulutrade performance rank are such 1 pip systems.

Written by A.S.

January 6, 2010 at 7:24 am