Update on Tradable Model Account policy

C2
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  1. I’ve adjusted how “rescaling” works: now, when you rescale a strategy’s Model Account downward, the historical subscription fees / autotrading cost are also rescaled downward, along with the Model Account size. This solves the problem pointed out by AlgoTeam and others - that, eventually, with continual rescaling, subscription fees would incorrectly be calculated to become a larger and larger drag on historical performance! So, at least this issue is solved. When you rescale, your relative performance doesn’t change due to subscription fee cost calculations.

  2. For now, strategies with active BrokerTransmit connections (i.e. strategies that are driven by real-life brokerage accounts) are exempted from the Tradable Model Account policy.

I’ve received (via the help desk at help@collective2.com) several requests from strategy developers who have asked for exemptions from the Tradable Model Account policy. Some of these requests were granted. (Some are still being reviewed.) The general policy is: if you can explain why you absolutely need more than $125,000 in a Model Account to trade according to your style, we won’t ask you to change your style. On the other hand, if you’re trading onesies, twosies in a huge Model Account account, and leaving large amounts of Model Account capital unused, that is exactly the scenario we’re trying to avoid. The challenge is there is a large gray area between these two extremes. So please try your best to work within the new policy if you can do so without significantly changing your trading style.

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Good

Point number 1 is it applicable from today ? Or it will be applied to who rescaled in the past , like recently?

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It is retroactively applied to the past.

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Hi Matthew. Maybe you can help us to understand where our strategy stands with this new Account model policy. Right now we have on 1 Crude oil contract and 2 Mico-mini NQ. But, your algo for Account Model size that pops up on our C2 page, says that the current Account model is $130K. So, say if we were to trade a full NQ contract and 1 crude oil, and 1 soybean at the same time, would we be at say, $250K Account model? If the Account Model adjust to our trading position size, then there is no way we can trade our system on this platform under $125K. How does the formula work? How do we measure what we can trade vs what determines the Account Model size. Your example that some strategies are trading to small vs Account size is confusing to us. Our model Account size seems to prevent folks from subscribing to our strategy, who what to trade with a larger account size…but can’t or we will go over the $125K line. As you can see, we are totally lost on this.

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I think you are misunderstanding what “Model Account” refers to. It’s the amount of imaginary cash or value you have in your C2 Strategy. Your Model Account size doesn’t go up or down when you open new positions.You write:

Right now we have on 1 Crude oil contract and 2 Mico-mini NQ. But, your algo for Account Model size that pops up on our C2 page, says that the current Account model is $130K. So, say if we were to trade a full NQ contract and 1 crude oil, and 1 soybean at the same time, would we be at say, $250K Account model?

This statement makes no sense. The value of your Model Account is based on the amount of cash you started with, and then the profits and losses you made while trading. At the instant you open a new position (to use your examples: at the instant you open “a full NQ contract and 1 crude oil, and 1 soybean at the same time”) the Model Account value doesn’t change one bit.

Think of it like this.

Imagine you start out your day with $100 dollars of cash. It’s in your pocket. Call it your “Model Account.” Now you buy a Pokemon card for $25 and put it in your pocket. You still have $100 worth of stuff in your pocket ($75 cash, $25 in cards).

If Pokemon card goes up in value over the next few weeks, then, yes, your “Model Account” will grow in value (i.e. the stuff in your pocket).

The Model Account is the limiting factor in how much you can buy. To return to our example, if you have $100 of cash in your pocket and then walk into a Ferrari car dealer and say, “I want to buy that car with what’s in my pocket,” you will not be able to.

This entire discussion is talking about how we’d like to make sure that strategies have a reasonable amount of money in their Model Account … specifically not too much.

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Hey Matthew. So, why is our strategy showing a model account of $130K? Where did that come from?

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check messages please!

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You chose to start your strategy with $25,000, and the rest is the result of trading profit / loss minus subscription costs.

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I’m sorry Matthew but this is still all Greek to me. I’ve talked to some traders in the industry and they have never heard of something like this. So, I guess we will just continue doing what we have been doing. If it dosen’t work for us, then we will cross that bridge when we get to it. Not trying to be a stuck in the mud, but I won’t pretend that I understand this policy or the explanation of it. It just seems like the rules are being changed in the midde of the game. Thanks for your time and trying to explain why the policy is necessary.

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Hello QuickTrader:

Just a quick question: What do you mean by “they have never heard of something like this”?

You start with say $10k on C2 and after 3 months your strategy is so profitable that you earn $10 billions, while your risk per trade is still the same, 2% of trading capital for instance.’

Do you still think that the Suggested Minimum Capital should be $25K, or some other equally small amount, when a 2% move against your position now creates a $200 Million loss?

Good luck with your TradeDetector system in any case.

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Thank you for your input. But, I feel pretty dense here. …I’m just not getting the explainations about this. Sorry about that. I’ll try again to explain my thoughts.

I"m not trading position sizes that represents $200M in risk. My trading position size is still based on the original required minimum amount to trade the strategy. Any new subcribers are assumed to be trading at that beginning minimum capital requirement. It’s up to the subscriber to determine how much money (thus size of positions) they actually trade. I have no control over that, right? So, I still don’t understand the need for this Tradeable Model Account policy. Technically, to me this makes no sense vs what a strategy manager is required to do for each “new” subscriber…trade the Strategy, with position sizes, that represent the original minimum capital required to trade it. If a subscriber wants to trade bigger, that’s their call not mine. But, I’m guessing that what I just discribed has nothing to do as to why C2 is instituting this new policy. Anyway…

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I can certainly understand that point of view (you seem to be from the “old school of trading”, just like me) but technically and as far as your C2 trading record is concerned, it does not work this way.

You see, the minimum capital requirement fluctuates constantly, and if your system is very profitable then the capital required to trade your system will get bigger and bigger, regardless of your starting capital.

If you think about it, it makes sense.

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Yeah… old school is a good guess😁. However, if true that the new policy is based on the success of the strategy. Then do you have to match trading size with the growth of the account? Which seems like a terrible forced risk management obligation. Also, this sounds like the Model Account Policy will continue to fluctuate. So, is $125K just another line drawn in the sand? And if the strategy continues to be successful, will the Model Account need to be continually adjusted?

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Well, your system generated a very impressive 378.0% profit in less than a year.

With that kind of return you can start your own fund, make tons of money for your customers (not to mention yourself) and never worry about some $125 K limit, don’t you think?

Just my 2 cents.

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I’ve thought about that. Not sure I want the hassle of doing a fund. Maybe I will give it some serious thought later on. Thanks for your comments. Really appreciate it.

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I see that when my strategy profits increase, so does my Tradeable Model Account number. If the Strategy loses profitability, the Tradeable Model Account number goes down below $125K. So, this would seem to indicate that you have to increase or leverage more trades against the size of the account, if the Tradeable Model Account increases, so that the number will go down below $125K. If this is true, then the Tradeable Model Account suggests taking on more risk. This could force a strategy manager to potentially change his risk managment rules.

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You are misunderstanding the term “tradable model account.” There is no “thing” on C2 called a “tradable model account.” No one says: “Please show me your ‘tradable model account.’”

What there is… is just a thing called a “Model Account.”

When you start a strategy on C2, you create a “Model Account.” This is an imaginary brokerage account that provides quantity context to your trade signals that you publish.

For example, let’s say your strategy thinks AAPL stock will rise. So it issues a signal to “BUY AAPL.”

Okay… but how how many shares should you buy?

The size of the trades – and money-management in general – is just as important as the directional bets you make.

So, does your strategy recommend that you BUY 10 AAPL? Or maybe 10,000 AAPL?

Well, obviously that depends on how much capital your strategy has to put to work. That is the “Model Account.”

So in the example here, imagine you start your strategy with a $100,000 Model Account.

Now, when I say to you: “How many shares of AAPL do you want to buy?” you have some context for an answer. Maybe your strategy is ALL-IN on AAPL and knows it is an extraordinary stock. So it wants to risk 50% of its Model Account buying AAPL. That means your trade signal should say something like: “Buy 310 shares AAPL.”

Why? Because AAPL is $161, and 310 shares x $161 is about $50,000 “worth of stock.”

So… this is how the term “Model Account” is used on C2.

Now, let’s say your AAPL position increases tremendously, and your strategy makes a profit of $75,000 overnight!

Now, your “Model Account” at C2 is $175,000. In other words, your next trade recommendation should factor in the information that now you have more capital you need to put to work.

This is what the “Model Account” is.

You also seem to be confusing this term (“Model Account”) with the “Suggested Minimum Capital.” The suggested minimum capital tells people who are thinking about following/autotrading your strategy: “What is the minimum amount of capital that can to be used to follow this strategy if a subscriber ‘scales down’ the trades to the lowest possible level?”

Here is an example: Let’s say a person follows your strategy. Your strategy has a model account size of $100,000. But what if the person in question decides to follow your strategy, but make the trades only 10% of what you publish? Well, that suggests the person could possibly trade the strategy with $10,000, and not $100,000.

I hope this clarifies the terminology somewhat.

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Thank you for doing you best to try to explain this. I guess I don’t see stocks trading as the same as Futures trading. Money invested in stocks is not the same thing as money trading Futures. Profit/loss is much more fluid in futures trading…big ups and big downs. So, risk is managed totally differently between the two. That’s why I believe this new policy can’t be applied to futures trading strategies. It’s to ridged. I just don’t understand how changing to 125K will make a difference for futures traders.

I apologize if I sound blunt or combative here. Not trying to be. Just trying to be specific in conveying my thoughts. Plus I don’t want this to be long. Thanks.

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I agree 100%. This rule breaks two types of futures systems:

  1. Those that trade a diversified basket of contacts with multiple positions at once
  2. Those that scale the position sizes based on their algorithm and/or market conditions

For case #1, it forces the system to trade with a very high level of leverage. For case #2, it forces the system to round up or down the desired leverage. For example, with a $250K account the system could take on an NQ position at a leverage of 1x, 2x, 3x, 4x, etc. With a $100K account the leverage options are 2.5x, 5.0x, 7.5x, 10x, etc. I know that micro contacts could be used in this example, but that is not always the case.

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Hi, Gary - As I’ve mentioned before, if your strategy falls into the category #1 you describe ( “futures systems… that trade a diversified basket of contacts with multiple positions at once”) then just reach out to me via the help desk, and ask for an exemption to the policy. I’m happy to oblige if the request seems reasonable.

Regarding your second category of strategies that you suggest cannot abide by the policy (“strategies… that scale the position sizes based on their algorithm and/or market conditions”) … here I am less convinced, mainly because I do not understand what this means concretely. But in any case, if a strategy developer can articulate a case as to why his or her strategy should be able to keep a huge reserve of unused capital in the strategy Model Account, I am open to learning about it. Just write to me and we’ll work something out.

I want to say again: the purpose of this policy is not to be arbitrary and capricious, or to make things difficult for Strategy Managers. Really! Ultimately the policy, looked at on a large scale, makes AutoTrading setup and configuration easier for investors (there is less mystery about how to allocate capital across multiple strategies.) This helps strategy managers generally, by increasing uptake of strategies. And also – not a minor consideration – this policy reduces liability for C2, because it decreases the likelihood of people mis-configuring autotrading and being “surprised” by the fact that capital that was lying dormant in a strategy is suddenly used.