I'm constantly referring to real-world models as inspiration for designing CASTrader II. For instance, there is a bank that will pay/charge interest on deposits/loans (interest was something I identified as a key problem in CASTrader I). So, each trading algorithm has a cash account from which it can write "checks" to buy securities. Also, there is a module that provides novation to ensure transactions between traders are reliable and trustworthy. When it comes time to fund the various traders in the transition to real trading, I will have to decide how much I trust their backtests and capitalize them accordingly. The problem becomes: how do I decide how to fund a trader, and once I do, how do I get money back out to fund new traders, computers or simply my own needs?
Whose money is it anyway? One solution to the money out problem is to simply liquidate the trader's positions and kill it off a little or completely. Another is through taxes (discussed later) that provide a constant stream of money back. I've decided on what I feel is a much better way: each trader will itself have shares traded on the internal dark market. Suddenly, not only can traders (and I) invest in real-world securities, they can also invest in themselves. To the extent they are any good at it, they should allocate capital a lot more efficiently among trading algorithms than I could ever dream of. To bootstrap the system, I will own 100% of the shares in each trader intially funded. I will have the option of either liquidating the assets underlying the shares, or selling the shares, and a trader can also issue and sell more shares if it wants. It's interesting to note that to the degree CASTrader is a better trader than I am, it could eventually develop an independent pool of cash/investments that it "owns" and I can't touch (on paper anyway).
IPOs. The above system can also help solve my problem of how to allocate cash to a given trading algorithm based on backtests. I can just sell new trading algorithms at an IPO, and let the traders decide how much they are worth based on backtest data. With any luck, CASTrader will become a good handicapper, and I'll receive a stark assessment as to the value of my skills as a trading algorithm programmer. If I disagree, I'm always free to invest my own cash in the new traders. The genetic traders that mate can themselves produce IPOs of their own offspring - pairs that produce good offspring will thus have monetary incentive to mate, as well as a source of income that isn't trading.
Taxes. After my rant about taxes, I've decided taxes are one real-world system I am not porting to CASTrader, or at least to the dark market traders. Unfortunately, the arbitrageurs that connect the dark market to the real world will be assessed real-world taxes on each trade. Thus for arbitrage to occur, the friction of taxes and commissions must be overcome, yet trading on the dark market will be commission and tax free. This contrast will further serve to increase the diversity ratio, which is a good thing, at least at first. With any luck, the system as a whole will adapt to real-world taxes and try to minimize them with respect to profits.
Order for Free. The thing about Complex Adaptive Systems is that with luck, a lot of the above will come without significant effort on my part, because of what Stuart Kauffman called "order for free." The traders will adapt, with a little guidance and help, into assessing the value of not only real-world securities, but also themselves and new algorithms. I relegate myself to a position of just another trader from micromanager of capital allocation. In a sense, I compete with CASTrader itself. Where I see real value, I can capture it with discretionary trades, making the whole system smarter in the process. Eventually, I hope CASTrader will cross a threshold and become the one to school me in the art of trading.
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