Trader Intellectual Property

24 June 2015
The Market Owl

What happened

Last week, an argument erupted over intellectual property for one of the DARWINs we list.

A party approached us claiming that a Darwinex MT4 account holder was trading their signals – then listing a DARWIN on it. Since the terms and conditions of their signal service prohibit customers from reselling them, they demanded that we 1) revealed our customers identity and 2) de-listed the “copy-cat” DARWIN.

Who's the original?

So… what’s next?

Before explaining our stance on copy-cats, please join us for a relevant detour.

Why George Soros NEVER sold Trading Signals

If you own a trading strategy, but manage less capital than the strategy could profitably handle, you’re leaving money on the table.

How to not leave it (or at least leave less?)?

One way is to sell trading signals. For a set fee (e.g. 80 USD a month or 600 USD a year), you publish your trades. Signal customers to “harvest”, with their capital, the profits you can’t make on your own trading account for lack of personal capital. It’s a win-win, right? You make 600 USD a year per subscriber. If the signals really are any good, subscribers pore into the signal service. All great.

But… can you have too much of a good thing? What if a billionaire buys signals for USD 600, and makes 40% a year on his billion – e.g. makes 400 MM through your signals? Isn’t 600 USD per year too cheap a price for USD 400 MM of profit?

Which is the first reason why George Soros won’t sell signals: profits aren’t part of the investor contract, so there’s an arbitrage opportunity!

Don't give your IP away - seriously

Next.

What if a signal customer – re-sells the signals?

This is morally wrong, and against the signal contract’s T&Cs! But then again… how to monitor and stop this, once the trades are public?

This is signals / EAs second (and possibly worst) flaw: they’re vulnerable to intellectual property (IP) theft.

Why this de-tour? To highlight that signals 1) offer no share in investor profits AND 2) leak trader intellectual property.

Putting it more bluntly: earning signal fees and protecting strategy IP is incompatible. You either keep the signal fees and waive the investor profits, or you don’t sell the signals.

What you can’t do is have your cake and eat it (too).

Why DARWINs beat Trading Signals

Unlike signals, DARWINs protect trader IP. DARWIN investors replicate DARWIN underlying trades without knowing them, which means:

  1. The only way investors for investors to profit is to pay success for ALL their DARWIN profits
  2. Investors can’t re-sell because they don’t know the trades in the first place.

As a provider, selling DARWINs is similar to selling Coca-Cola’s. Customers enjoy Coke/ invest in DARWINs as much as they want, provided they pay Coca-Cola/YOU for ALL your joy/investor profits. In this regard, DARWINs are superior to trading signals: you know that no-one will compete with your strategy or erode your business.

This is why Coca-Cola NEVER disclosed their secret-formula. They knew fully well that anyone with access to it could brew Wiki-Cola, tasting just like Coca-Cola, and thus competing with and eroding Coca Cola’s business. As this post highlights, Coca Cola’s lesson was lost on trading signal providers.

Will Darwinex protect signal providers?

Now, back to the signal service that requests that we 1) reveal the copy-cats identity and 2) de-list his DARWIN.

We sympathise with the signal provider – protecting trader IP s what made us set up Darwinex in the first place. But then again, to sell signals and demand that Darwinex protect trader IP  is to ask something beyond:

  1. The signal provider’s authority: the fact that they reached out to us is the best proof that they can’t enforce their own contract
  2. Our authority: on what grounds outside our T&Cs do we de-list customer DARWINs?
  3. Our means: are we to set-up a detective unit to monitor all customers of their signal service – any customers of any signal service, for that matter?

In other words, they demand something impossible. It’s also to demand the unnecessary. Instead of selling signals, they, just like any other trader, could:

  1. Trade a live MT4 account with Darwinex
  2. List DARWINs, which we’ll
    • Sell to investors under our FCA regulatory permission
    • Purchase from the provider for a 20% investor success fee
  3. If traders don’t publish or disclose trades (by e.g. selling signals), they won’t leak investor profits because we NEVER publish or disclose trades.

Obviously, anyone is free to sell signals as they see fit. It’s their trade-off between signal revenues and investor success fees “leaked”.

But, whoever sells the signals can’t demand that we protect intellectual property. Once it’s public, it’s irretrievably damaged.

Will Darwinex protect investors?

So, what if everyone starts listing copy-cat DARWINs? Isn’t this fooling investors? Shouldn’t Darwinex intervene?

This is why we track correlation across DARWINs. We’ll make constant efforts to inform investors inadvertently backing copy-cats.

When it comes to Darwinia, out of all DARWINs with a correlation to each other too high for investor comfort, we ONLY reward the one with the highest score. All others are disqualified for the capital allocation.

Don’t rip-off, SCOUT!

Wonder what the unexpected twist to all this mess is? Trying to rip-off signal providers off is bad business.

In addition to morally questionable, it’s not smart: if you copy-cat someone else’s (good) strategy, be sure that other copy-cats will copy-cat him and you until there’s no pay-off.

Why not scout the signal provider to Darwinex instead? In addition to his gratitude, you’ll secure 20% of Darwinex’s lifetime revenues by ALL investors in ALL DARWINs by ALL scouted traders.

Which brings us to the free option here – knowing that plenty of good signal providers sell themselves short… why not SCOUT them for your, their and investor benefit?

It’s a moral win-win, and it pays too!