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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 …

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Written by A.S.

January 24, 2010 at 1:41 pm

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