I’d like to copy the suggestion from flamed thread, because I found it valuable, not because I said it ;), but because it makes sense and my words are based on observation others systems and examples that were provided by other people.
"If we want to reduce unpredictable system vendor behavior you’re correct.
First point is: Limitation of position size, by declared rules. (System vendor prohibited from opening of position more than declared by him/herself size)
Second point is: Max DD per trading capital. (If a system went over declared DD C2 will issue close orders as with margin call right now)
It might be call “system with known risk” Of course subscribers will be notified about any changes in the parameters as it’s already done with subscription fees)
In the case probable loss per system is known by subscriber in advance and it’s forced by C2. "
Of course no one system vendor is forced to use it. But any constructive points of view are appreciated. Major idea is to reduce a risk of a subscriber from unpredictable actions of a system vendor.
Eu
That’s an interesting idea. I need to think about it a bit. Alas, it may actually increase legal liability. I’m worried that it could seem that C2 were effectively endorsing a class of systems. And if C2 “endorses” a system… and then it fails… we could have problems. That sort of thing. I’ll run it past the lawyers.
Theoretically until C2 offers equal opportunity for any system vendor it’s hard to call “endorsement”. A system vendor takes the risk to prohibit his/her own declared limitations. C2 will be only an engine that controls a vendor promises. Nothing more. But I agree lawyers might think in different way 
Eu
I agree with that idea.
Great idea, and I’m sure MK knows how to express exactly what’s involved to his legal advisers or the sight would have never gotten off the ground.
"Second point is: Max DD per trading capital."
The question is: What is supposed to happen after C2 has closed the positions in case the drawdown on equity limit was exceeded?
Will the vendor be allowed to continue trading the system? If so, the drawdown might increase further. How will the new drawdown limit be calculated in that case?
I can imagine that if C2 promisses to enforce certain restrictions, and then fails to do so (e.g. because of software malfunction), that some undesired liability would exist. Perhaps it would help to phrase it such that C2 has the “right” but not the “obligation” to interfere. But I’m not a lawyer either, as you know.
C2 can’t and won’t issue signals. That’s an impossibility.
Given that framework, what do you see?
I don’t see much that can be done.
There are already options (unless I’m mistaken) available that limit positions to subscriber’s preferences. Perhaps there should be more limits?
For C2, the only available limiting factor has to be in denying or limiting entry signals (according to account-holder specifications) C2 can’t be responsible to flatten positions.
Now, if there were a program that ran on YOUR computer, that did what you want (ie, it sent your requests to C2 as signals), that might work. Of course, that opens up a whole level of new problems.
Limiting positions to subscribers preferences is a good idea too. I also suggested that as an alternative in the other thread.
But I would still prefer something like the original suggestion. If C2 can limit according to subscribers specifications, why can it not do the same according to the vendors specifications? The vendor can already specify certain limitations (e.g. stocks only). Restricted position size can be viewed as a similar voluntary limitation. Remember that we are not talking to limitations on all systems, only to those systems where the vendor wants it and choses that in advance. It is a kind of ‘facility’ to stick to his own plan.
Flattening the positions might be a different matter, I agree. Although I don’t see much difference with a stop loss. This would be a kind of generalized stop loss that the vendor can chose, but that he cannot cancel (at least not without prior notice).
So it is also a matter of wording. Therefore it will ultimately be the lawyers who determine whether this is legally possible.
The reason that I prefer the original suggestion, rather than private limitations of the subscriber, is that it is more likely to make people think about the matter and that it tells you something about the plans of the vendor. E.g. if a vendor did not chose for these restrictions, is he planning to add 512 contracts of one position?
Another possibility is that C2 would send an e-mail or text message (or the ITM would ring an alarm) in case some drawdown limit (either set by the vendor or subscriber) would be hit. This is less convenient than having C2 close positions automatically, on the other hand it might be easier to implement in the short term.
2Science Trader
What is supposed to happen after C2 has closed the positions in case the drawdown on equity limit was exceeded?
Nothing 
As Julies said it’s generalized stop-loss. Actually, there is nothing new.
Will the vendor be allowed to continue trading the system?
Sure. it’s not margin call, but subscribers might be assure that stop-loss will be executed independently from a system vendor.
If so, the drawdown might increase further. How will the new drawdown limit be calculated in that case?
Good point. I meant DD by opened positions.
2Jason Coop
C2 can’t and won’t issue signals. That’s an impossibility.
C2 already does it in case of margin call. What’s wrong if you say C2 that your margin call isn’t 100%, but only 20% from trading capital?
e.g. If you’re over 20% DD there is some problem with a system.
Eu
P.S. I understand that the approach is more close to systematic trading and not any style may fit it.
From other side a system vendor suppose to willingly limit him/her self if he/she wants to use C2 as additional stop from money loosing
C2 already does it in case of margin call. What’s wrong if you say C2 that your margin call isn’t 100%, but only 20% from trading capital?
e.g. If you’re over 20% DD there is some problem with a system.
I was not aware of this, are you certain? I was under the impression C2 would block entry signals if there was not enough buying power/margin in the account, and that was the extent of it.
Brokers will certainly close your position if you have a margin call, but that isn’t C2.
I can’t imagine the liability C2 would have if it starts generating it’s own signals.
I do like the idea of limiting what a system vendor can do (and the vendor agrees to this beforehand in the system parameters), and this doesn’t fall into the area of C2 generating signals.
Eu, You’ll have to give me an example of that.
C2 is expressly NOT in the trading advisory business, and is not permitted to issue trading advice (ie, generate signals of its own).
It’s permitted function is to pass along along advise from trading advisers to clients.
I was not aware of this, are you certain?
No. It’s only my observation of C2
I was under the impression C2 would block entry signals if there was not enough buying power/margin in the account, and that was the extent of it.
It’s logical to make full simulation including margin call.
Eu, You’ll have to give me an example of that.
Well, instead of starting fingering out to examples I would recommend you to contact MK directly and privately if you have any doubts about legality of any C2’s actions. I don’t have any affiliation with C2 and everything that I say is based on my best knowledge
C2 is expressly NOT in the trading advisory business, and is not permitted to issue trading advice
I know that.
Eu
I’m not sure about the margin calls either, but in the case of the generalized stop loss one could argue that the signal is not generated by C2 but by the vendor. The vendor gives C2 an instruction like “IF account value < 70% of previous high THEN close all open positions”. What C2 does is
(1) Acknowledge on the systems page that the vendor has given this instruction and that he won’t be able to cancel it without prior notice.
(2) Execute the instruction, which is
a. Evaluate whether the condition is satisfied in the C2 database.
b. Transmit the conclusion if the condition is satisfied.
It is not obvious to me that this would create a liability problem.
I believe we must let this be decided by MK and his lawyers. All we have to do is to say whether we appreciate such an option, or not. If the lawyers conclude that it is impossible to do without increasing the liability, then I’m sure that all posters of this thread will understand it.
In that case I would still appreciate the other parts of the suggestion, like the voluntary restrictions on positions size. I believe that these are more essential. A draw down of 30% will normally not happen within one day if the system has reasonable position sizes.
One of the things I mentioned in my method description is this: Model Positions are created at a size representing a typical portfolio% risked which is adjusted by the dollar volatility of the instrument traded. Larger versions of similar positions may involve market impact costs or other costs that we do not take into account.
It is impossible for C2 to implement this even if I reveal what that % of the portfolio is, because of the unpredictable factor involved in it, namely, the dollar volatility of the instrument traded. So, it is not practical to implement it. What is not practical to implement is also not moral. In other words, the immoral is the impractical.
So, the obstacle to this peculiar or should I say quaint scheme is not the lawyers, but reality itself.
>If you’re over 20% DD there is some problem with a system.
I disagree. DD by itself is not a problem. The problem arises when there are no hedging mechanisms like options or other similarly leveraged instruments as at C2 which typically occurs for a longer-term trend following system. The subscriber needs patience to sit through drawdowns.
Consider the postage stamp, my son. It secures success through its ability to stick to one thing till it gets there - Josh Billings.
