Predatory Trading : The Illegal Way to Profit from Someone’s Edge

The largest worry of large financial institutions who trade using algorithmic technologies is the fact the logic they use to trade could fall into the hands of their competitors (other traders). Contrary to popular belief, the reason why they fear this is not because others might use this information to profit in the same way but because information about trading systems which handle large amounts of money can lead to predatory trading techniques. On today’s post I will talk a little bit about what predatory trading is about, why it is illegal and what can be done to avoid the usage of this type of techniques against your trading strategies.

Whenever you have a trading strategy which has a mechanical nature it becomes given that all your future positions will be determined by a set of strict rules (which can be as simple or as complex as you want). This means that whenever someone knows the nature of your system they will be able to determine when you will enter and exit the market, giving them the possibility to use this information to profit from your interaction with the market. If the volume you put into the market using your system is low (less than a billion dollars) then your influence will be minuscule and no inefficiency will arise from knowing how you trade but if your system trades large amounts of money when and why you enter and exit the market will give rise to possible predatory opportunities.

When a trading strategy is developed so that its edge depends on the way in which a specific competitor enter or exits the market the strategy is said to be “predatory” because it “hunts” the trading technique used by someone else. Predatory techniques can be very efficient ways of profiting from the market, especially if you gain insights into the trading algorithms of a large market participant. However, although predatory trading might sound good, it is illegal in most countries because it is a type of market participation which contradicts the fundamental reason why participants may want to enter the market.

As a matter of fact, predatory trading is considered as a type of “insider trading” within the market as you possess some information which overall market participants ignore which gives you an unfair advantage in the play-field. You’re also getting your money from an activity that is neither speculative nor practical in nature and by definition you’re doing something with the market which lies outside the market’s purpose. Predatory trading is a very efficient and illegal trading tactic which can get you jail time in both the United States and the European Union.

You may be thinking that this is “unfair” since predatory trading simply relies on information which you obtained that you could have obtained by means of analyzing the market. What would happen if you analyzed price action and arrived at a way to exploit an inefficiency which is predatory in nature but whose very predatory nature you are unaware of ? The fact here is that the probability of this happening is almost zero since enormous amounts of analysis of clear order books would be needed in order for you to realize that an inefficiency is in place due to the trading of some specific party. In the end predatory trading is illegal because it targets a specific trading entity rather than the “market as a whole” it is not illegal to profit from normal inefficiencies because they arise as a consequence of overall market behavior but predatory trading is illegal because you’re profiting from what a specific bank or institution is doing with insider knowledge.

Several people have been in fact convicted due to the use of predatory trading in the markets, ranging from stocks to futures and spot forex trading. Usually the people who are convicted had been working for a large institution and then used the information they had gained inside to profit through their own trading. If you know that certain market behavior triggers a scaled in buy order on the EUR/USD for 1 billion dollars from a US bank, then it becomes very easy to get into this trade in the beginning and make a small fortune merely from the filling of these orders. This gives you a precise unfair advantage over the market participant which you’re “hunting”.

Obviously predatory trading only becomes ¬†a problem in forex once you reach “huge” volumes and therefore the actual effect of this type of exploitation of small scale techniques is simply minimal. In order for predatory trading to have a significant impact on your strategy you would need to trade huge amounts of money and -even then – your strategy would need to be extremely clear for the person attempting to “hunt you”. In the end predatory trading is an irrational fear for most forex trading strategies with the probability of someone profiting from them being minimal. Some of you may think that people can eventually “hunt” forex expert advisors if they reach a large amount of users but even this is extremely unlikely due to the fact that broker feed differences cause triggers of positions to vary between forex brokers. Even if an EA achieved a huge amount of users predatory trading would probably become very difficult due to the scattering caused by the different feeds of the hundreds of potential brokers being used.

If you would like to learn more about mechanical trading and how you too can develop your own reliable trading systems based on sound strategies with realistic profit and draw down targets please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)

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