Signal discovery by other participants

In the same way that we are continuously in the process of optimizing existing trading signal parameters as well as searching for new trading signals, all market participants are also searching for new trading signals. Often other market participants also discover the same trading signals that our trading strategies are using to be profitable. This can cause the market participants to react in a couple of different ways, one way would be to change their trading strategy's order flow to disguise their intent and make the trading signal no longer profitable for us.

Another reaction can be that these participants start using the same trading signal to run trading strategies very similar to our own, thus crowding the market with the same trading strategy and reducing our ability to scale up the trading strategy, leading to reduced profitability. It is also possible for the market participant to leverage better infrastructure or be better capitalized, and we can lose our trading edge completely and get squeezed out of the market. While there is no real way to ban other participants from discovering the same trading signals that are being used in our algorithmic trading strategies, the industry practices have evolved over time to reflect the extremely secretive nature of the business, where firms typically make it difficult for employees to go work for a competitor. This is done through non-disclosure agreements (NDAs), non-compete agreements (NCAs), and strictly monitoring the development and use of proprietary trading source code.

The other factor is the complexity of the trading signals. Typically, the simpler a trading signal is, the more likely it is to be discovered by multiple market participants. More complex trading signals are less likely to be discovered by competing market participants but also require a lot of research and effort to discover, implement, deploy, monetize, and maintain. To summarize this section, losing the trading edge when other participants discover the same signals that are working for us is a normal part of the business, but there is no direct solution to this problem, other than trying our best to keep discovering new trading signals ourselves to stay profitable.

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