New Alpha Market Structure by Stephen Hyer

Stephen Hyer INVESTOR

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I'm curious about some of the finer details of the new changes.

1. Is the licensing still on a per month basis?

2. At 100/100 allocation does the bid price start moving up to match the market demand? If so, in what increments?

3. If 2, then what happens to current licensees? Are they required to pay the new market price to keep their allocation? If they don't does their allocation go to the highest bidder at the start of the next month?

4. At the default price of $3.00 per allocation slot does this equate to $300/month for a full allocation?

5. Lets say I like a strategy. Can I subscribe? If so, do I link my trading account? If I'm already trading one of my own strategies, do I need to branch my account within my brokerage or do the licensed insights work simultaneously with my own live strategy?

I tried looking through Interesting and Newest but didnt' find a thread about this. If there's already an FAQ out there somewhere I would love to read it.

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Stephen Hyer

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Grant Forman

23.1k Pro ,

...Good questions...Seconded...I think a FAQ should be produced...

Jared Broad

Pro ,

Hi Stephen!

1) Yes licensing is by month/4-weeks, with the option to license up to 3 months in advance. We rounded it to the week so we could close the auction at market close Friday and safely stop alphas over the weekend.

Alphas can be licensed immediately when there is free capacity, but are auctioned/bid for when there is no space free.

2) The allocation is in "basis points". The reserve price of the alphas is set to $3 per $10,000 allocation. If your alpha can handle more than $1M you can host more assets at the reserve price. We think good alphas will be able to host $10-30M.

The alpha increments in $1.00USD steps. When the alpha allocation is constrained (more demand than supply) it will be priced according to the maximum bid through an auction process. This will help find the efficient market price of the alpha.

3) The current licensees will automatically pay more up to their maximum bid. If they do not win a seat in the auction they will be emailed a warning, and the licensed code is terminated. The allocation can then only be deployed by the winners of licenses.

4) For an alpha that can only handle $1M, a $3 reserve equates to $300/mo yes. Or $3,600/year = 0.36% AUM. Although it looks nice having a higher per allocation price; the best revenues for authors will probably be with deeply liquid alphas. If you can manage $200M capital = $60,000 per month, at the reserve price if fully subscribed. One of the alphas in this first week licensed for $23/lot * 12mo = 2.7% AUM; but it only had $30k capacity, so its revenues are capped at $90/mo.

5) You can also license someone else's strategy; you will need a sub-account on IB with capital allocated to the sub-account. IB does not permit two login sessions to the same brokerage account.

Stephen Hyer

9.8k Pro ,

Very cool! How do you determine how much liquidity a strategy can handle? Do you take like 5% of the daily volume for the asset with the lowest daily volume or something?

Jared Broad

Pro ,

We're publishing this shortly -- it is an algorithm that sums 20% of the minute-bar of volume after a trade and scales up and down according to the lowest volume asset in a portfolio and its fraction of trading.

We scale up according to L1 depth when appropriate, and scale down if the trading is fast such that the volumes can't be captured. We tested it across equity, fx, crypto, and futures strategies with a combination of different algorithm types and trading frequencies! It was a 2-week research project by Gerardo Salazar

It is more of an art than a science, and far from perfect. For now, though it's our best attempt to base it on something from the data rather than a guess.

Stephen Hyer INVESTOR

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