Back

Community Spirit: Profit Shares for Quants and QC, New Income Streams

I am seeking feedback from admins and the community.

It would seem that prop firms, investment clubs, hedge funds, and non-quant traders are huge untapped resources for the QC community, as a whole, and that quants' work is way undervalued.

It also appears that the SEC has discriminated against poor class retail traders who have less than $25,000, by enforcing an unconstitutional "Pattern Day Trade Rule".

As a quant, I feel that if my algo cannot generate profit for a client, I deserve no payment, regardless of any agreement, and, that a client should not have to risk any fixed fee amount, gambling that my algo will perform for them, 

I also feel that if  a quant, with the help of QC, makes a significant amount of profit for a client, that the quant and QC deserve a fair share of those profits. 

I also feel that, where a quant is willing to risk their own money on a venture using their algos, the quant should have the opportunity to attract new funding sources to QC, and command a profit share.

That is all fair business practice, and congruent with the community spirit of QC, and would attract new profits for both the quants and QC.

In typical proprietary trading firms, new traders pay a security fee and the firm matches that money, 2 times, or more, and the trader trades that money for a share of the profits generated, usually, 60% to 85% of the profits go to the trader, and the firm keeps the rest.

The trader also pays a monthly desk fee of about $200, like the QC monthly premium account fee of $250, or $3000 yearly.

In Alpha Streams, traders , who are connected with institutional funds, are, apparently, paid an arbitrary licence fee for the use of thier algorithms.

It is reasonable to see that a quant, who offers a monthly license of $250 or $1000 for an algo that generates $10,000 or more, profit in a month, has significantly undervalued thier product, and has been underpaid for their merit.

In the QC user agreement, QC asks 30% of all profits generated from the use of QC services, in extracurricular business agreements.

It is unclear if QC derives a percentage of profits from the funding party's profits generated, using the traders' algos.

Alpha Streams' highest prize represents $8000 to the 1st place winner, but there is no mention of a share % in profits generated from the use of the winning algos, for the winners.

$8000 equates to 2.7 years' free premium QC account status, at $250 monthly.

For example, if a trader's algo is used to manage $1,000,000, and the trader's algo generates 25% profit, in a year, that equates to $250,000 profit.

If a trader's share is the propietary trading industry standard minimum of 60%, that equates to $150,000, to the trader, for one year's use of the trader's algo.

At the industry standard high end, 80% of profits, that equates to $200,000, for the trader.

If QC makes 30% of profits generated from all extracurricular business agreements , using QC services, that equates to $75,000, for QC, from the use of just that one algo.

If an arbitrary licesning fee of $1500 per month is paid to the trader, that equates to $18,000 per year, which is $‭3,720‬ less than the poverty level for a family of 3 , in the USA, in 2020..... minus $3000 for the QC yearly desk fee, that is $6,720 less than the poverty line.

In Alpha Streams, there is no apparent means for quants to be identified and contacted, for other opportunities, within, or without, QC, beyond licensing other algos from the same anonymous quant.

In Alpha Streams , it appears that only a very small number of algos are readily identifiable for licensing. 

There appears to be no means for quants to bring new firms and funding parties into the QC community and negotiate business with them, that includes profit shares.

Currently, QC must trust that quants are being forthcoming with commercial accounts, not readily identifiable to QC.

Currently, quants must trust that their algos are not being used to generate profits for others, not readily identifiable to the quants.

It is well proven that trustless, transparent, and mutually beneficial business models are the most sustainable and attractive.

Conficius said, "a merchant will grow grow more wealthy, more quickly, selling 100 people something for one coin, rather than selling one person something for 100 coins."

Poor class citizens , and society as a whole, would benefit greatly by being able to day trade and use algos, amnd they are the largest, most excluded class of citizens.

QC and quants could benefit greatly by giving quants true ,ultimate control over the quants' algos and business arrangements for the use of their algos, and expanding quants' ability to bring in new sources of fnding, that, otherwise, would not be participating with QC, or trading at all.

I designed a money management module that is specifically designed to manage money investment for any budget, and I apply it to high probability rules.
A poor class person puts in all their monthly expenses and incomes, and defines their risk tolerance and goals, and the algo allots accordingly.
Simple algo leasing cannot offer this level of tailoring, currently, as the quant would have to communicate with the client and enter the subjective variable data, for each client, prior to deployment.

For small accounts, a fixed licensing fee presents a mathmatical wall , higher risk, and disincentive, where a percent share of profits generated does not.

Because QC and the quants do not offer any investment clubs, or other means for non-quants and poor class citizens to participate, an entire class of traders is excluded from pattern day trading, and a significant recurring income stream class for QC ,the quants, and the commnity as a whole, is neglected.

Because QC does not allow quants to share in profits generated, quants remain underpaid for their merits, and there is very little incentive for quants to devote themselves to QC for the long run.

Just like treasure hunters enjoy thier work, and are looking to strike it rich, so are QC, the quants, and licensees.
Everyone wants to be paid very well for their work and contributions.
A "community spirit" wants others, especialy those who facilitate their success, to be paid very well for their work and contributions.
Anyone who says any different is not being truthful.

All this being said, I would like feedback from the community and QC admins ,regarding the following proposals:

1. I propose that QC create a protocol and system that allows quants to bring in new funding sources, like proprietary trading firms, hedge funds, individuals, and investment clubs, and negotiate , or present, pre-approved contracts, where profit shares for quants and QC are requisite, fair, and competitive in the market.

2. I propose that QC allow quants to command profit shares, of total profits generated, from licnsing the quants' algos, in which the quant and QC would share, and not limit quants and licensees only to licensing fees, for the use of algos. It is reasonable that QC and the quants share an equal percentage of the profit-share generated. Neither QC, nor the quants, can operate without eachother.

3. I propose that QC create a system that showcases each, and all, quants' algorithms ,that each quant wants to present for negotiation, where algos may be searched by quant's name, intended account size, backtest report metrics, investment horizon, risk tolerance, vehicle/market type, industry, sector, etc etc, and a means to communicate with the quants.

4. I propose that QC enforce a clause in all quants' fixed fee licensing agreements, where , once a defined percent profit of starting capital is exceeded, the current recurring fee is waived and the quant and QC are entitled to a royalty percent of profit gnerated there-after, which is competitive in the market, that serves both QC's and the quants' long term interests and well-being.

5. I propose that QC develop and offer an investment club system, to allow poor class citizens exposure to day and algo trading , and allow quants to form their own investment clubs, to meet the $25,000 minimum requirement, where QC and the quant share equally in the profit-share generated.

6. I propose that QC develop a "Tip Jar" routine for QC, the Quants, and the licensees, where any party may "tip" another party in appreciation, for their contributions. This could help QC pay for new features requested by quants, and foster good, lasting relations between all parties. Quants can also tip other quants and admins who help them with their algos.

Update Backtest







0

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


Hey Cary!

Firstly thank you for taking the time to post such a thoughtful post. I appreciate its spirit and goals. We started QuantConnect in 2012 with a plan very similar to your post above and ran headlong into reality as all start-ups do. Before I get to the issues, let's start with the things we can do from your post:

1. Referral System - Awesome yes we should have it and will build it in the next couple of months.
6. Tip Jar - Love it. Yes we'll build it in the next month or two so people can earn tips/contributions to their QC-Wallets. 

Now for 2,4,5: The USA does not permit any form of revenue share unless you are an institutional investor, or are registered as a financial advisor. Aiming to make revenue shares available (anyone <-> anyone) is unfortunately not legal at this time. There are some combinations that are allowed: (institutional investor -> anyone), (registered financial advisor -> anyone). We are a Delaware C Corporation and covered under US Laws. 

The next restriction is a practical one; revenue shares with institutional investors require the quant trust the institutional investor is only investing what they claim and limits the use of the algorithm to simple allocations. If you're using an algorithm as a factor, making a tiny contribution to a 1-million factor model your revenue share will be extremely small. QuantConnect elected to use a simpler subscription model which provides the same revenue potential with cleaner licensing. 

For 3: This is Alpha Streams. Due to US laws it's restricted to Institutional investors at this time. We'll try and lower the barrier here as far as the law will allow but likely that means an accredited investor ($1M net worth, $250k income). Practically we can't showcase all algorithms as there are fixed hosting costs that have to be paid.

We'll keep bucking and fighting to give the individuals in our community access to global funding, and world-class infrastructure. Thank you for supporting the community and being a great part of it!  

1

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


Jared,

Awesome!

Thank you.

I would like to respectfully bring to your atention some legal issues you may not be aware of.

Investment ckubs are not regulated by the SEC noe FINRA.

Please see: https://www.sec.gov/reportspubs/investor-publications/investorpubsinvclubhtm.html

1. Software programmers, system technicians, and network administrators do not make financial decisions for anyone. With regard to investment clubs, the members vote on execution triggers and allocation. Under  FINRA 1230.(a) Associated Persons Exempt from Registration, programmers, technicians, and network administrators are exempt from FINRA registration and regulation, especially if they are vested  members of an investment club.

2. Investment clubs vote on compensation for it's officers and employees, as well the finincial decisions of the club, and this activity is unregulated, as it is protected private activity, under the 1st and 4th Amendments.

3. All tax liabilities pass through to each member's individual taxes. 

4. At worst, some states require that investment clubs register as partnerships, which retain the same protections from unlawful regulation and taxation, and the club may register in any state ,any of it's officers are located in.5. Where registration is required, and yearly reports are requisite, those routines can also be automated.6. Where membership is free ,and the club does not offer it's own shares of stock for sale to the public,  the SEC has no jurisdiction, as free membership does not represent any security. See  Investment Company Act of 1940.

6. Following the Ethereum smartcontract model, all proceedings and binding obligatons can be attended in the code itself, and all meetings and communications done virtually, commencing under 15 U.S. Code § 7001. General rule of validity: Electronic Documents and Signatures. I can send you an example.

7. Where any startup seeks crowdfunding from the public, or it's own members, and does not issue shares of it's own, they are exempt under 15 U.S. Code § 77d.Exempted transactions. This was part of the crowdfunding acts.

8.  An investment club is a "person" in the legal sense, and may, itself, join other investment clubs. Thank George Bush senior for that one, not that I am a fan. See 29 US Code § 53 - “Person” or “persons” defined.

I will stop here, and simply say, that, investment clubs are a feasible alternative to financial advisory.

Itis only a matter of how one structures and executes transactions  and agreements and how decisions are made.

For example.....

A quant and QC want to offer a club.. They are the first 2 members of the club and are the first officers. They invite parties into the club and offer a beginning algo as the club's first execution system. The trade plan is submitted to all members ,who then agree to the signals and execution and allocation variables, and contribute whatever amount to the club's pool they wish, and the program manages the money and executes trades under rules approved by the members.  Members may submit issues for votes at any time. The members approve the officers' seats.  No party is obligated to remain a member if they do not agree with the decisions of the club members, and may be canvassed for membership in better suited clubs, relative to their goals and risk tolerance.

Writing an investment club algo entails the algo,  the smart contract and money management routines, as well the signup, interview, elections, meeting minutes, and yearly reporting roitines, as well seting up a forum for virtual meetings., using google groups . 

I will let you chew on this and message if you'd like me to send an example.

0

It is definitely interesting and I'll ask our lawyer next time we meet. From your link: "To qualify, an investment club: must not make, nor propose to make, a public offering of its securities; and must not have more than 100 members.". I'm pretty sure there's no hack around it and QuantConnect would need to register as a fund and meet all the compliance needs associated with that. We're chose to not do it as its a burden on our execution and focus to provide the best service to the community -- and second, it opens us to conflict of interest acquisitions from those worried we will appropriate their IP. That said there's nothing stopping you from making an investment club =).

0

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


Update Backtest





0

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


Loading...

This discussion is closed