Serious Software Issues Still Unresolved

By Louis Mendelsohn

While there has been considerable progress in the past few years in overcoming the serious weaknesses and limitations in futures trading software, broad issues affecting the direction of software development still need to be resolved in the industry.

It is critical that the futures industry take a hard look at adopting disclosure requirements and qualification standards for trading system developers and promoters.

Until recently, the prevailing “black box” software design forced traders to give up decision-making to the computer. The logic behind the signal generator was “locked in,” and the trader was expected to blindly follow the trading signals.

Black box proponents argued it protected the legitimate user by preventing unauthorized traders from understanding the system. The fallacy here is that the legitimate user also didn’t understand the software.

Black box software has since been eclipsed by a variation, aptly labeled “gray box” software. This compromise discloses some of the software’s logic. But the rest is “locked in” due to its so-called “proprietary” nature. While the trader is told generally what the technical concepts are behind the proprietary features, he is given the chance neither to verify the claims nor to understand fully what is generating the signals.

This is like our national defense. As the warning period prior to a nuclear attack shortens, reliance upon sophisticated computer modeling and analysis becomes increasingly necessary. Yet no one proposes that computers make the final decision about initiating a nuclear response.

Similarly, in the fast-paced futures trading arena, simple reliance on computer-generated trading signals, particularly those from a “black” or “gray” box, surely can’t produce the easy profits so often promised.

The responsibility rests on each trader’s shoulders to improve his own trading expertise in understanding market dynamics, order types and money management techniques. But setting disclosure standards for publicly promoted trading systems, outlining required qualifications for system developers and overcoming intentional software design limitations — which prevent it from being used effectively even by the astute trader — are concerns that so far have received little attention.

It seems inconsistent for the futures industry to impose such requirements on trading advisors and pool operators (who might actually be using system software as the basis for their managed accounts), while at the same time allowing direct public promotion of trading systems without regard for performance records, credentials or developer qualifications.

The far-reaching issues of disclosure, profitability claims, technical support and vendor credentials have not been addressed. If current advertising claims — that you can simply hit a couple of keystrokes on your new software program and automatically start making money — are ever to become a reality, these issues must be resolved.

No disclosure commitments
The disclosure requirement is perhaps the most significant of trading software issues. In past articles, I have called for eliminating unnecessary design restrictions — of no benefit to traders. Yet to date, system developers have made no broad commitment to this, nor have prominent industry spokesmen demanded it.

A second issue is the use of profitability claims in promotions. As more software packages include sophisticated historical simulators, traders will be able to tailor trading models to their own trading styles and financial objectives. Then unverifiable profitability claims would fall into disuse in promotional materials. Software selection would be based solely on evaluation of comparative features and capabilities.

Another concern is ongoing technical support. Sophisticated trading software requires the backing of a reliable software development firm committed to fix its clients’ programming bugs, offer ongoing software enhancements and provide other related services — like technical support and phone consultations.

Unfortunately, many developers merely sell a limited number of copies as quickly as possible on a one-time-only basis, with little (if any) mention of ongoing support. This undermines the effectiveness of such software, particularly for investors who are just getting familiar with futures trading and computers.

A final serious industry concern is the credentials and qualifications of individuals and firms that promote trading systems. The National Futures Association should adopt minimum qualifications and disclosure requirements for all who wish to commercially promote any system. This would eliminate unscrupulous and unqualified sellers from being able to promote their wares and would help traders immeasurably in their assessment of the products that become available.

The bottom line is this: Only when the overall caliber of trading software is raised — through full disclosure of its inner workings, inclusion of more sophisticated historical simulators that mirror real-time trading, better technical support and tighter developer qualifications — will traders be able to use computers as important trading weapons.

This, coupled with increased trading savvy on his part, will once again make the trader the decision-maker. In futures trading — not unlike national defense, where the stakes are high — the time slot for decisions is short, and the cost of misjudgment can be catastrophic. There should be no doubt as to who is in charge of pushing the button.

Louis Mendelsohn, developer of ProfitTaker software, is president of Market Technologies Corporation in Tampa, Fla.