Create an honest Forex
In modern man, the word “forex” is certainly associated with unflattering epithets, the most inoffensive of which is “casino”. According to the meaning, it is “casino” that best reflects the essence of the subject: Forex players bet on rising or falling quotes of financial instruments, giving part of their money in the form of a commission for operations. The rest of the negative comparisons are mostly caused by the incompetence and greediness of the participants in this segment of the entertainment industry, who are victims of numerous parasitizing businessmen.
Nevertheless, there is one fundamental property of retail forex - the conflict of interests of the player and the broker (which, by the way, is rarely seen in real life). Even if you find a so-called “honest” forex broker, bringing transactions to the market, the situation will be even worse: it will simply feed you to a larger player by adding overhead costs for operations and increasing risks.
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This article will talk about how to eliminate a conflict of interest in any single forex company. At first glance, this method looks even more vicious than the very kitchen forex, but in fact this is a real opportunity to solve the problem in principle and give the player a chance to win honestly.
If you are a player in forex, then in general, on the opposite side of the gaming table, another player is sitting who is fully in control of the situation, reserving the right, in particular, to take all your money without explaining the reasons. And all your money that lies in front of you on the gambling table, and not only those that are involved in the transaction at the moment. Starting a game in forex, you agree with this state of affairs by signing the Regulation, otherwise you will not be allowed to open an account with a broker.
In ancient times, forex brokers came up with such an injustice to fight small groups of fraudsters who used holes in broker infrastructure to make profits in non-trading ways, for example, using quotes delays in a broker platform. The funds of those suspected of fraud were instantly frozen and it was almost impossible to withdraw them.
As the broker deals with a large number of clients, he applies some automatic methods of indirectly filtering clients and blacklisting them. These technologies are constantly changing, but a few years ago one of the criteria was the systematic receipt of profits by the client and especially its withdrawal.
I have been able to get into such a black list with different brokers, after which the spread for me personally increased 2 times, and when it did not help, then 2 more times. That is, I was not caught by the hand (for I trade exclusively with pending orders, which does not allow using the infrastructure vulnerabilities of the broker), but the fact of repeated withdrawal of profits seemed to tell the broker: stable profitable trade is impossible, then this person is a crook.
Of course, if a broker sees that a certain client creates a risk for the net plan of the current month, even without using fraudulent methods, then the broker is tempted to realize his advantage and take part of the profit from the client under some pretext.
Now almost all brokers have implemented PAMM accounts in one form or another - public accounts in which anyone can participate by adding their amount to the amount of the account and receiving a portion of the profit proportional to their investments. Since the advent of PAMM accounts, there have been a lot of jokes that it would be nice to get the opportunity not only to buy a share in a PAMM account, but also to “short out” it - to rely on the fact that a PAMM account will lose some money.
On closer inspection, this cynical assumption does not look so evil when compared to how the vast majority of forex brokers are now working, applying internal risk management policies. Yes, yes, there are such policies (no matter who is authoritatively declared), and they determine the hedging procedure and the proportion of risk that the broker assumes for obtaining additional profit.
So, honest forex can be organized, if you allow some players to take risks that others will benefit, as forex brokers do now. This will put all players in the same conditions, which excludes the conflict of interests of the weak with the strong. In this case, any trader can find himself in the shoes of a broker and check how profitable it is to take such a risk.
The following describes one of the schemes for the implementation of fair forex, implying minimal intervention in the broker's infrastructure.
Hedging is the fulfillment of obligations for the formal purchase and sale of a financial instrument without performing real conversion operations.
PAMM - account, public or not, available for hedging.
A share is a part of a PAMM deposit that is a multiple of some value, for example, 100 units of account currency.
An investor is a participant in the process that guarantees the execution of PAMM's trade requests and reflects its financial result on its balance sheet, minus the traditional overhead costs (spread and commission).
The guarantee amount is the limit of the Investor’s financial responsibility for the non-fulfillment of the real PAMM trading operations.
Stop-out level - the minimum balance of the Guaranteed Amount, at which the hedging stops and PAMM is transferred to the mode of real trading.
Rollover - summing up intermediate trading results, conducted regularly, at the moment of which non-trading operations of PAMM are made (deposit and withdrawal of funds) and the Investors shares are recalculated.
Dealing Center (DC) is your intermediary in the foreign exchange market, which gives you the opportunity of margin trading (speculative operations with leverage).
The investor, hedging PAMM, actually makes mirror transactions, copying the PAMM trade “the opposite”. The psychology of traders and the availability of leverage imply the success of such behavior, however, some of the traders will inevitably (albeit temporarily) win large sums, which carries a certain financial risk for the Investor.
Of course, hedging does not guarantee Investor's income and is positioned only as an additional service, among other speculative opportunities provided by the industry. The DC’s interest here is the double commission of the hedged PAMM.
Orders are executed for the hedged account at indicative quotations of the instrument being traded, while applying a fixed spread and commission (hereinafter referred to as the Commission) established in the dealing center (DC) for this instrument.
The investor makes a bet in the amount of the Guarantee amount, that the earnings on the PAMM will not exceed the value of this amount. However, this takes into account only the probabilistic result of trade, without the influence of overhead costs - the DC Commission. The expenses of the DC Commission are paid by the Investor at the expense of the same Guarantee amount.
Due to their nature, swap accruals are not a DC commission. Swap accrual cannot be excluded (this will allow arbitrage on Swap), therefore its financial result in this case is considered the result of PAMM trading operations.
The figure shows a simple case: an investor plays against a trader, betting $ 300 in the hope of receiving almost $ 100 - a PAMM deposit.
From the graph it is clear that at some point the trader made a profit of 157%, and then almost lost everything - the case is quite typical (the loss is 95% of the deposit).
The investor as a result received $ 82 plus, in PAMM 5 dollars remained and 13 dollars went to DC in the form of commissions.
Also, the graph shows the Stop-out level for the Investor (here - 20%). If the share price reached this level, the Investor would lose more than 80% of its rate. The moment of the minimum safety margin of the Investor is indicated in the figure by red arrows.
Even on the chart you can see the amount of the commission on an accrual basis, according to it, the Investor can make a conclusion whether he was wrong with the choice and leave the game in time if the trader generates a huge commission and competently controls the risk.
The trader gained almost a whole lot (the volume is listed in lots of 0.01), which is quite a lot for a one hundred dollar deposit. The leverage was from 9 to 72, the average was 33. With a commission of 14 USD per lot (spread + commission per turnover), you can see what the effect of this commission is on Investor's earnings.
Here is the simplest case, only to popularly explain the general idea. An investor could not enter from the very beginning of PAMM, could not short the PAMM for the full amount, could average and partially withdraw investments; There could be several investors; additional amounts could also come to PAMM, funds withdrawals could occur and a lot more - how to calculate all this is written below in the hidden text.
When creating a PAMM, its deposit is conditionally divided into shares (100 deposit units each). The number of shares may be fractional: in PAMM with a deposit of 450 USD you will get 4.5 units.
The investor is offered to buy shares at their current value (the value of the share will vary according to the results of the work of PAMM).
The investor sees the number of units available for purchase, indicates the number of units purchased by him and the Guarantee Amount - this will be, respectively, the share of the deposit covered by him and the limitation of the total risk of this coverage. The minimum amount of investment is equal to the number of units purchased, multiplied by the value of the unit. The maximum amount of investment is not limited.
The guarantee amount for purchased units can be increased by an arbitrary value to the nearest rollover by purchasing a non-negative number of units. The guarantee amount is distributed on the purchased units in proportion to their value.
There may be several investors, and in this way they dismantle all of PAMM units or only a part of them, each receiving his share.
If there are no units available for sale, the Investor may leave a request for the purchase of the units as they become available, indicating the required number of units and the guarantee amount. Such applications are executed in the order they are received.
Additional shares appear on the PAMM in the following cases:
When selling PAMM shares, the Investor must indicate the number of shares sold; The guarantee amount will be reduced in proportion to the number of units sold. It is also possible to reduce the Guarantee Amount, with the minimum remaining amount of the Guarantee Amount equal to the number of units purchased multiplied by the value of the unit.
In the case when not all PAMM shares are bought by Investors, orders of such PAMM are executed partially on an external counterparty (liquidity provider, hereinafter LP), and partially - are hedged inside the DC covered by the Investor Guarantee Amount. This splitting is done in proportion to the share of the PAMM units sold, with the position round to the minimum lot towards internal execution.
Since the hedged position is calculated for each order and not for the total position, when working with the minimum lot in the examples above, all orders will be executed either by internal hedging only (first example) or only by LP (second example). The investor must understand and accept such conditions.
Finally, I would like you to think about why such a scheme is never used by brokers, even those who allegedly “put everything on the market” and do not have a conflict of interests?
It will be a fair game on currency quotes, and not the “Forex Game” attraction, which in current conditions leaves almost no chance for broker’s simple clients.
That is, the position of such a PAMM will not be introduced to the market as long as the amount of its earnings is covered by the “contribution” of the investor. Upon liquidation of the account (end of the trading interval), the investor will receive:
a) the entire loss of PAMM minus the costs of operations (spread, swap, commission)
b) minus 80–100% of the investment account, if the manager’s earnings at some point exceed the coverage provided
In the event of the threat of b), the investor can average out, bringing in funds, or give the next person in the queue the opportunity to get rich (when the Stop-out hits him).
Advantages of the proposed innovation:
+ To the manager: no slippage, trading strictly according to indicative quotes (except for gaps at the weekend);
+ To investor: a wide choice of PAMMs for investment (you can choose from thousands of accounts with any history, and not just from a dozen of the best, as now);
+ DC: a new direction in business and double-quadruple profits from turnover (the entire commission will be received by DC, not sharing with LP);
+ All: no conflict of interest with the DC; circulation of money within the company, without the need to feed liquidity providers.
I addressed this question to various brokers and nowhere did I get a clear answer, some excuses, like "all programmers are busy now." Meanwhile, this scheme allows you to get 2 times the commission from the turnover, which should be very interesting to brokers who position themselves as completely market-based. Right now, in front of our eyes, one of these brokers is forming and getting stronger, and perhaps we are lucky enough to see honest forex in it, who knows ...
Nevertheless, there is one fundamental property of retail forex - the conflict of interests of the player and the broker (which, by the way, is rarely seen in real life). Even if you find a so-called “honest” forex broker, bringing transactions to the market, the situation will be even worse: it will simply feed you to a larger player by adding overhead costs for operations and increasing risks.
')
This article will talk about how to eliminate a conflict of interest in any single forex company. At first glance, this method looks even more vicious than the very kitchen forex, but in fact this is a real opportunity to solve the problem in principle and give the player a chance to win honestly.
Conflict of interest
If you are a player in forex, then in general, on the opposite side of the gaming table, another player is sitting who is fully in control of the situation, reserving the right, in particular, to take all your money without explaining the reasons. And all your money that lies in front of you on the gambling table, and not only those that are involved in the transaction at the moment. Starting a game in forex, you agree with this state of affairs by signing the Regulation, otherwise you will not be allowed to open an account with a broker.
In ancient times, forex brokers came up with such an injustice to fight small groups of fraudsters who used holes in broker infrastructure to make profits in non-trading ways, for example, using quotes delays in a broker platform. The funds of those suspected of fraud were instantly frozen and it was almost impossible to withdraw them.
Even if you are a super trader who is able to earn money, and your broker is honest and takes everything to the liquidity provider, then your happiness will not last long - the mythical (usually unnamed) liquidity provider will deal with you much more cruelly than the “native” broker.
As the broker deals with a large number of clients, he applies some automatic methods of indirectly filtering clients and blacklisting them. These technologies are constantly changing, but a few years ago one of the criteria was the systematic receipt of profits by the client and especially its withdrawal.
I have been able to get into such a black list with different brokers, after which the spread for me personally increased 2 times, and when it did not help, then 2 more times. That is, I was not caught by the hand (for I trade exclusively with pending orders, which does not allow using the infrastructure vulnerabilities of the broker), but the fact of repeated withdrawal of profits seemed to tell the broker: stable profitable trade is impossible, then this person is a crook.
Of course, if a broker sees that a certain client creates a risk for the net plan of the current month, even without using fraudulent methods, then the broker is tempted to realize his advantage and take part of the profit from the client under some pretext.
Lyrical digression
If you allow, a small digression about forex as a business, that is, a means of making money. I have been able to lead a regular business, and in another business no less dirt and deception, not to mention the fact that it is simply impossible to earn something without commitment, patience and luck . After one FSUE put us out of the leased premises, covering our company, all the forex prokhindeas I met seemed to be innocent kids.
And forex is just a high-tech business, like any other technology-based businesses, where all methods of enrichment are good. Just with the image he was not lucky, but it can be fixed.
In our century, when everything is complete and people need at least something to take, forex is a good way to stretch the brain and learn a lot of new things, including from the sphere of various technologies.
And forex is just a high-tech business, like any other technology-based businesses, where all methods of enrichment are good. Just with the image he was not lucky, but it can be fixed.
In our century, when everything is complete and people need at least something to take, forex is a good way to stretch the brain and learn a lot of new things, including from the sphere of various technologies.
Prerequisites
Now almost all brokers have implemented PAMM accounts in one form or another - public accounts in which anyone can participate by adding their amount to the amount of the account and receiving a portion of the profit proportional to their investments. Since the advent of PAMM accounts, there have been a lot of jokes that it would be nice to get the opportunity not only to buy a share in a PAMM account, but also to “short out” it - to rely on the fact that a PAMM account will lose some money.
On closer inspection, this cynical assumption does not look so evil when compared to how the vast majority of forex brokers are now working, applying internal risk management policies. Yes, yes, there are such policies (no matter who is authoritatively declared), and they determine the hedging procedure and the proportion of risk that the broker assumes for obtaining additional profit.
In fact, if a novice threw $ 300 into the forex furnace, then most likely he will lose them in just a few transactions. What is the point of bothering with the conclusion of this trifle on liquidity providers, if you can just assume the risk that he will accidentally earn something there? Even if it works, the rest will have time to lose many times more during this time.
An example from life.
In January 2012, I started working with a public account of $ 315, and after a year and a half I managed $ 2.5 million in management, of which more than half a million were net income. This is extremely rare, and in such cases, no broker will not stand on ceremony if you want to leave the casino with a win. I wanted to leave, my broker did not stand on ceremony. There was a scandal. And yet, I work with him so far - worked together, get along.
So, honest forex can be organized, if you allow some players to take risks that others will benefit, as forex brokers do now. This will put all players in the same conditions, which excludes the conflict of interests of the weak with the strong. In this case, any trader can find himself in the shoes of a broker and check how profitable it is to take such a risk.
The following describes one of the schemes for the implementation of fair forex, implying minimal intervention in the broker's infrastructure.
Terms
Hedging is the fulfillment of obligations for the formal purchase and sale of a financial instrument without performing real conversion operations.
PAMM - account, public or not, available for hedging.
A share is a part of a PAMM deposit that is a multiple of some value, for example, 100 units of account currency.
An investor is a participant in the process that guarantees the execution of PAMM's trade requests and reflects its financial result on its balance sheet, minus the traditional overhead costs (spread and commission).
The guarantee amount is the limit of the Investor’s financial responsibility for the non-fulfillment of the real PAMM trading operations.
Stop-out level - the minimum balance of the Guaranteed Amount, at which the hedging stops and PAMM is transferred to the mode of real trading.
Rollover - summing up intermediate trading results, conducted regularly, at the moment of which non-trading operations of PAMM are made (deposit and withdrawal of funds) and the Investors shares are recalculated.
Dealing Center (DC) is your intermediary in the foreign exchange market, which gives you the opportunity of margin trading (speculative operations with leverage).
Idea
The investor, hedging PAMM, actually makes mirror transactions, copying the PAMM trade “the opposite”. The psychology of traders and the availability of leverage imply the success of such behavior, however, some of the traders will inevitably (albeit temporarily) win large sums, which carries a certain financial risk for the Investor.
According to the statistics of a large broker, in each randomly taken quarter, approximately 67% of traders lose more money than the trading commission pays. At the same time, their total net loss, without taking into account the commission, is one and a half times more than the net gain of the remaining 33%. In addition, it is known that only about 13% of traders generate commissions more than their net gain.
Of course, hedging does not guarantee Investor's income and is positioned only as an additional service, among other speculative opportunities provided by the industry. The DC’s interest here is the double commission of the hedged PAMM.
General provisions
Orders are executed for the hedged account at indicative quotations of the instrument being traded, while applying a fixed spread and commission (hereinafter referred to as the Commission) established in the dealing center (DC) for this instrument.
The investor makes a bet in the amount of the Guarantee amount, that the earnings on the PAMM will not exceed the value of this amount. However, this takes into account only the probabilistic result of trade, without the influence of overhead costs - the DC Commission. The expenses of the DC Commission are paid by the Investor at the expense of the same Guarantee amount.
Due to their nature, swap accruals are not a DC commission. Swap accrual cannot be excluded (this will allow arbitrage on Swap), therefore its financial result in this case is considered the result of PAMM trading operations.
Work example
The figure shows a simple case: an investor plays against a trader, betting $ 300 in the hope of receiving almost $ 100 - a PAMM deposit.
From the graph it is clear that at some point the trader made a profit of 157%, and then almost lost everything - the case is quite typical (the loss is 95% of the deposit).
The investor as a result received $ 82 plus, in PAMM 5 dollars remained and 13 dollars went to DC in the form of commissions.
Also, the graph shows the Stop-out level for the Investor (here - 20%). If the share price reached this level, the Investor would lose more than 80% of its rate. The moment of the minimum safety margin of the Investor is indicated in the figure by red arrows.
Even on the chart you can see the amount of the commission on an accrual basis, according to it, the Investor can make a conclusion whether he was wrong with the choice and leave the game in time if the trader generates a huge commission and competently controls the risk.
The trader gained almost a whole lot (the volume is listed in lots of 0.01), which is quite a lot for a one hundred dollar deposit. The leverage was from 9 to 72, the average was 33. With a commission of 14 USD per lot (spread + commission per turnover), you can see what the effect of this commission is on Investor's earnings.
Here is the simplest case, only to popularly explain the general idea. An investor could not enter from the very beginning of PAMM, could not short the PAMM for the full amount, could average and partially withdraw investments; There could be several investors; additional amounts could also come to PAMM, funds withdrawals could occur and a lot more - how to calculate all this is written below in the hidden text.
The distribution of shares, the purchase and sale of shares
When creating a PAMM, its deposit is conditionally divided into shares (100 deposit units each). The number of shares may be fractional: in PAMM with a deposit of 450 USD you will get 4.5 units.
The investor is offered to buy shares at their current value (the value of the share will vary according to the results of the work of PAMM).
The investor sees the number of units available for purchase, indicates the number of units purchased by him and the Guarantee Amount - this will be, respectively, the share of the deposit covered by him and the limitation of the total risk of this coverage. The minimum amount of investment is equal to the number of units purchased, multiplied by the value of the unit. The maximum amount of investment is not limited.
The guarantee amount for purchased units can be increased by an arbitrary value to the nearest rollover by purchasing a non-negative number of units. The guarantee amount is distributed on the purchased units in proportion to their value.
There may be several investors, and in this way they dismantle all of PAMM units or only a part of them, each receiving his share.
If there are no units available for sale, the Investor may leave a request for the purchase of the units as they become available, indicating the required number of units and the guarantee amount. Such applications are executed in the order they are received.
Additional shares appear on the PAMM in the following cases:
- replenishment of PAMM by external means;
- sale of previously purchased shares by another Investor;
- Investor’s exit after the exhaustion of its guarantee amount (Stop-out).
When selling PAMM shares, the Investor must indicate the number of shares sold; The guarantee amount will be reduced in proportion to the number of units sold. It is also possible to reduce the Guarantee Amount, with the minimum remaining amount of the Guarantee Amount equal to the number of units purchased multiplied by the value of the unit.
Partial hedging positions
In the case when not all PAMM shares are bought by Investors, orders of such PAMM are executed partially on an external counterparty (liquidity provider, hereinafter LP), and partially - are hedged inside the DC covered by the Investor Guarantee Amount. This splitting is done in proportion to the share of the PAMM units sold, with the position round to the minimum lot towards internal execution.
For example, if PAMM is divided into 2 shares, and at the same time the Investor has bought only one share, then the order with the minimum allowable lot will be all hedged by the Investor’s funds.
Another example: if PAMM is divided into 3 shares, and at the same time, the Investor has bought only one share, then the order with the minimum lot will be completely executed on LP.
Since the hedged position is calculated for each order and not for the total position, when working with the minimum lot in the examples above, all orders will be executed either by internal hedging only (first example) or only by LP (second example). The investor must understand and accept such conditions.
Organization of accounts and settlements
Physically, a hedging scheme can be organized using additional accounts to which orders with volumes proportional to the hedged and unhedged share of the PAMM will be copied.
The options for implementing hedging are many, but the configuration below is chosen to minimize interference with the existing platform and reduce overall development efforts. You can program this happiness for a couple of person-months of work.
All additional accounts, for ease of observation, should be hidden from Investors and the PAMM manager. In total, three types of additional accounts will be needed:
Trading orders of the main PAMM will receive execution at average prices from two different sources: the actual execution price of LP on the Real account and the ideal price at indicative quotes on the Virtual account.
The mirror account serves to simulate the Investors vs. PAMM game, which also gives an automatic account of the influence of commissions on the investment result (Investors' investments are reduced by the amount of commissions, regardless of whether PAMM has earned or lost).
The feature of the Mirror account is that it is necessary to adjust Swap charges on it, taking them equal to the Swap charges of the Virtual account, but with the opposite sign. Thus, the Investor will earn on Swap, as if providing a loan to the PAMM manager (in fact, the way it is).
Attention! Given the logic of partial hedging, in some situations, the Investor may use more leverage than the available hedging PAMM.
In the case when Investors bought all PAMM shares, trading is conducted only on two accounts - Virtual (PAMM replica) and Mirror. It turns out a kind of academic forex, working with a perfect performance within a continuous trading session.
Based on the rollover results, it may be necessary to adjust the size of the hedged position in proportion to the proportion of units purchased by the Investors. All open orders are sequentially adjusted (new orders are opened or existing ones are partially closed) according to the rules for calculating partial hedging.
First, the order for the Virtual account is adjusted at the indicative price, then the Real account order is at the LP price, and then the Mirror account order is adjusted at the LP price with a spread difference.
Thus, the operations on the purchase or sale of unhedged shares cost Investors in the spread and possible losses when performing on LP, but these actions are completely transparent to the main PAMM.
Rollover is carried out at the end of the I / O operations of the main PAMM. In the course of the rollover calculation, the operations of replenishment and withdrawal on the accounts of Investors, recalculation of their shares in PAMM, as well as the calculation of the nearest Stop-out levels are made.
Baseline data for the calculation:
Registers for accounting of Investors in the context of each PAMM:
Where i = 1..n, n is the number of Investors of this PAMM.
When selling shares and decreasing the Guarantee amount, it can be either S '[i] <0, which means selling the shares, or B' [i] <0, which means reducing the Guarantee amount.
1. Recalculating Investor Accounts
For each i: B [i] = B [i] + (Z - Z ') / ΣS [1..n] * S [i] (we select the Investor's share of the profit).
2. Saving the balance value of the current rollover
Z '= Z.
3. Processing Investor Applications for the Sale of Units
For each i:
B '' [i] = B [i] (remember the Investor’s balance in the temporary register);
if S '[i] <0 (sale of shares), then
B [i] = B [i] / S [i] * (S [i] + S '[i]) (in proportion to the reduced value of the Guarantee amount);
S [i] = S [i] + S '[i] (new number of units purchased);
S '[i] = 0 (deletion of the executed order).
if B '[i] <0 (decrease of the Guarantee amount), then
B [i] = Max (B [i] + B '[i], Min (S [i] * Share, B [i])) (the minimum allowable guarantee amount is S [i] * Share, and this condition is not must be broken as a result of the operation);
B '[i] = 0 (deletion of the executed order, regardless of the actual amount of the withdrawal).
4. Calculate the number of units available (FreeShares)
FreeShares = Shares - ΣS [1..n] (total number of PAMM units minus sold units).
5. Processing of applications of Investors for the purchase of shares (in order of filing)
For each i: if S '[i]> 0 or B' [i]> 0, then
S '[i] = Max (S' [i], B '[i] / Share) (check whether there is enough to purchase the specified coverage)
S [i] = S [i] + Min (FreeShares, S '[i]) (total number of units purchased by the Investor);
B [i] = B [i] + B '[i] / S' [i] * Min (FreeShares, S '[i]) (new Guarantee amount);
B '[i] = B' [i] / S '[i] * Max (0, S' [i] - FreeShares) (balance of the Guaranteed Amount of the application);
S '[i] = Max (0, S' [i] - FreeShares) (unfulfilled balance of the application);
FreeShares = Shares - ΣS [1..n] (recalculation of the remaining available shares).
6. Calculation of amounts for withdrawal to personal accounts of Investors
For each i: B '' [i] = B [i] - B '' [i] (negative value - conclusion, positive - completion).
7. Checking the need to adjust the position on the results of the purchase and sale of units; If the position has been adjusted, then points 1 and 2 should be repeated.
8. Withdrawing amounts B ’’ [i] to Investors ’personal accounts with a corresponding decrease in B [i]
For each i: B [i] = B [i] + B '' [i] (the sum of B '' [i] with the opposite sign is credited to the personal account).
9. Calculation of Stop-out Levels for Investors: the balance of the Guarantee Amount for each purchased share must exceed a certain percentage of the share value (for example, 20%)
For each i: O [i] = (Share + B [i] / S [i]) / 100 * (100 - StopOut) (StopOut - Stop-out level, in%).
When the price of the share reaches the Stop-out level for any of the Investors, an immediate forced sale of all shares purchased by this Investor in this PAMM occurs. The sale and redeployment of the shares is carried out according to the rules of Rollover calculations, but is carried out outside the schedule of rollovers.
In the proposed implementation, when calculating Stop-out levels, the leverage value for each Investor is not used, but the standard Stop-out mechanism is triggered for the entire Mirror Account. The investor must accept the associated risks.
An investor who has bought a certain number of shares and contributed funds to cover the PAMM winnings should see the following data in the monitoring of this PAMM:
The values 1 and 2 are the same in the general monitoring for all Investors, the values 3 and 4 are displayed individually in the personal account of each Investor.
Organization of trading accounts and execution of orders
Physically, a hedging scheme can be organized using additional accounts to which orders with volumes proportional to the hedged and unhedged share of the PAMM will be copied.
The options for implementing hedging are many, but the configuration below is chosen to minimize interference with the existing platform and reduce overall development efforts. You can program this happiness for a couple of person-months of work.
All additional accounts, for ease of observation, should be hidden from Investors and the PAMM manager. In total, three types of additional accounts will be needed:
- Real account for execution on LP of unhedged share of positions;
- Virtual account for execution of hedged positions at indicative quotes;
- Mirror virtual account for reverse hedged positions (Investors account).
Trading orders of the main PAMM will receive execution at average prices from two different sources: the actual execution price of LP on the Real account and the ideal price at indicative quotes on the Virtual account.
The mirror account serves to simulate the Investors vs. PAMM game, which also gives an automatic account of the influence of commissions on the investment result (Investors' investments are reduced by the amount of commissions, regardless of whether PAMM has earned or lost).
Example:
PAMM with a deposit of 10,000 USD is divided into 100 shares, of which 30 are bought up by Investors.
A pending order BUYSTOP 0.77 lots of EURUSD at a price of 1.37550 will be copied to the Live account as BUYSTOP 0.53 (0.77 / 100 * 70 = 0.539), to the Virtual account as BUYSTOP 0.24 and to the Mirror as SELLSTOP 0.24 .
Further, for example, the price of the performance of LP turned out to be 1,37557. According to indicative quotes, the execution price will be 1.37550. In this case, the average execution price on the main PAMM will be (1.37557 * 70 + 1.37550 * 30) / 100 = 1.375549 = 1.37555.
The feature of the Mirror account is that it is necessary to adjust Swap charges on it, taking them equal to the Swap charges of the Virtual account, but with the opposite sign. Thus, the Investor will earn on Swap, as if providing a loan to the PAMM manager (in fact, the way it is).
Attention! Given the logic of partial hedging, in some situations, the Investor may use more leverage than the available hedging PAMM.
In the case when Investors bought all PAMM shares, trading is conducted only on two accounts - Virtual (PAMM replica) and Mirror. It turns out a kind of academic forex, working with a perfect performance within a continuous trading session.
Adjustment of a hedged position
Based on the rollover results, it may be necessary to adjust the size of the hedged position in proportion to the proportion of units purchased by the Investors. All open orders are sequentially adjusted (new orders are opened or existing ones are partially closed) according to the rules for calculating partial hedging.
First, the order for the Virtual account is adjusted at the indicative price, then the Real account order is at the LP price, and then the Mirror account order is adjusted at the LP price with a spread difference.
Example (for a fixed spread of indicative quotes 0.00005):
Initially, Investors bought 60 shares out of 100. The PAMM transaction BUY 1.00 EURUSD is divided as BUY 0.40 on the Live account, BUY 0.60 on the Virtual account and SELL 0.60 on the Mirror account.
Further, Investors sold 10 shares, and now hedge should be 50% of the volume of orders. Therefore, another BUY 0.10 on the Live Account will be opened and BUY 0.10 on the Virtual Account and SELL 0.10 on the Mirror Account will be partially closed. Suppose the BUY 0.10 execution price on a Live Account is Ask 1.37810 with an indicative Bid price of 1.37795, then a partial BUY 0.10 order closure on the Virtual Account will occur at a Bid price of 1.37795 and the SELL 0.10 order will be closed A mirror account will be executed at a price of 1.37815.
Thus, the operations on the purchase or sale of unhedged shares cost Investors in the spread and possible losses when performing on LP, but these actions are completely transparent to the main PAMM.
Rollover
Rollover is carried out at the end of the I / O operations of the main PAMM. In the course of the rollover calculation, the operations of replenishment and withdrawal on the accounts of Investors, recalculation of their shares in PAMM, as well as the calculation of the nearest Stop-out levels are made.
Baseline data for the calculation:
- Balance of the Mirror Account, Z;
- Cost of 1 share of PAMM, Share;
- Number of shares Shares.
Registers for accounting of Investors in the context of each PAMM:
- The balance of the mirror account from the past rollover, Z ';
- Number of units purchased, S [i];
- The balance of the Guarantee amount, B [i];
- Investors 'bids for the purchase and sale of units, S' [i];
- The guarantee amounts in support of applications for the purchase of units, B '[i];
- PAMM share price level to trigger Stop-out, O [i]
- A temporary register for the convenience of regulating the hedged share, B '' [i].
Where i = 1..n, n is the number of Investors of this PAMM.
When selling shares and decreasing the Guarantee amount, it can be either S '[i] <0, which means selling the shares, or B' [i] <0, which means reducing the Guarantee amount.
Payment procedure:
1. Recalculating Investor Accounts
For each i: B [i] = B [i] + (Z - Z ') / ΣS [1..n] * S [i] (we select the Investor's share of the profit).
2. Saving the balance value of the current rollover
Z '= Z.
3. Processing Investor Applications for the Sale of Units
For each i:
B '' [i] = B [i] (remember the Investor’s balance in the temporary register);
if S '[i] <0 (sale of shares), then
B [i] = B [i] / S [i] * (S [i] + S '[i]) (in proportion to the reduced value of the Guarantee amount);
S [i] = S [i] + S '[i] (new number of units purchased);
S '[i] = 0 (deletion of the executed order).
if B '[i] <0 (decrease of the Guarantee amount), then
B [i] = Max (B [i] + B '[i], Min (S [i] * Share, B [i])) (the minimum allowable guarantee amount is S [i] * Share, and this condition is not must be broken as a result of the operation);
B '[i] = 0 (deletion of the executed order, regardless of the actual amount of the withdrawal).
4. Calculate the number of units available (FreeShares)
FreeShares = Shares - ΣS [1..n] (total number of PAMM units minus sold units).
5. Processing of applications of Investors for the purchase of shares (in order of filing)
For each i: if S '[i]> 0 or B' [i]> 0, then
S '[i] = Max (S' [i], B '[i] / Share) (check whether there is enough to purchase the specified coverage)
S [i] = S [i] + Min (FreeShares, S '[i]) (total number of units purchased by the Investor);
B [i] = B [i] + B '[i] / S' [i] * Min (FreeShares, S '[i]) (new Guarantee amount);
B '[i] = B' [i] / S '[i] * Max (0, S' [i] - FreeShares) (balance of the Guaranteed Amount of the application);
S '[i] = Max (0, S' [i] - FreeShares) (unfulfilled balance of the application);
FreeShares = Shares - ΣS [1..n] (recalculation of the remaining available shares).
6. Calculation of amounts for withdrawal to personal accounts of Investors
For each i: B '' [i] = B [i] - B '' [i] (negative value - conclusion, positive - completion).
7. Checking the need to adjust the position on the results of the purchase and sale of units; If the position has been adjusted, then points 1 and 2 should be repeated.
8. Withdrawing amounts B ’’ [i] to Investors ’personal accounts with a corresponding decrease in B [i]
For each i: B [i] = B [i] + B '' [i] (the sum of B '' [i] with the opposite sign is credited to the personal account).
9. Calculation of Stop-out Levels for Investors: the balance of the Guarantee Amount for each purchased share must exceed a certain percentage of the share value (for example, 20%)
For each i: O [i] = (Share + B [i] / S [i]) / 100 * (100 - StopOut) (StopOut - Stop-out level, in%).
Stop out
When the price of the share reaches the Stop-out level for any of the Investors, an immediate forced sale of all shares purchased by this Investor in this PAMM occurs. The sale and redeployment of the shares is carried out according to the rules of Rollover calculations, but is carried out outside the schedule of rollovers.
In the proposed implementation, when calculating Stop-out levels, the leverage value for each Investor is not used, but the standard Stop-out mechanism is triggered for the entire Mirror Account. The investor must accept the associated risks.
Monitoring
An investor who has bought a certain number of shares and contributed funds to cover the PAMM winnings should see the following data in the monitoring of this PAMM:
- share price;
- Total DC Commission (cumulative total for the entire time of PAMM operation);
- the current value of the balance of the Guarantee Amount (balance of the Mirror Account);
- Stop-out level (unit price) for your investment.
The values 1 and 2 are the same in the general monitoring for all Investors, the values 3 and 4 are displayed individually in the personal account of each Investor.
Finally, I would like you to think about why such a scheme is never used by brokers, even those who allegedly “put everything on the market” and do not have a conflict of interests?
It will be a fair game on currency quotes, and not the “Forex Game” attraction, which in current conditions leaves almost no chance for broker’s simple clients.
That is, the position of such a PAMM will not be introduced to the market as long as the amount of its earnings is covered by the “contribution” of the investor. Upon liquidation of the account (end of the trading interval), the investor will receive:
a) the entire loss of PAMM minus the costs of operations (spread, swap, commission)
b) minus 80–100% of the investment account, if the manager’s earnings at some point exceed the coverage provided
In the event of the threat of b), the investor can average out, bringing in funds, or give the next person in the queue the opportunity to get rich (when the Stop-out hits him).
Advantages of the proposed innovation:
+ To the manager: no slippage, trading strictly according to indicative quotes (except for gaps at the weekend);
+ To investor: a wide choice of PAMMs for investment (you can choose from thousands of accounts with any history, and not just from a dozen of the best, as now);
+ DC: a new direction in business and double-quadruple profits from turnover (the entire commission will be received by DC, not sharing with LP);
+ All: no conflict of interest with the DC; circulation of money within the company, without the need to feed liquidity providers.
I addressed this question to various brokers and nowhere did I get a clear answer, some excuses, like "all programmers are busy now." Meanwhile, this scheme allows you to get 2 times the commission from the turnover, which should be very interesting to brokers who position themselves as completely market-based. Right now, in front of our eyes, one of these brokers is forming and getting stronger, and perhaps we are lucky enough to see honest forex in it, who knows ...
Source: https://habr.com/ru/post/319076/
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