Are Trading Algos Proprietary?

Posted: Jun 19, 2012 12:01 AM

Electronic trading had a blank slate when it was first envisioned. Many just figured that they would take their pit trading skills and transfer them to the screen. However, innovation creates more innovation. Engineers automated a lot of those old pit skills and created algorithms to automatically trade. In the pit, we always knew pit location was a big deal. Little did we know that co-location was going to be an even bigger deal in the electronic age.

As electronic trading has developed, there have been lawsuits filed when engineers have switched firms. They are being sued over the trading codes they developed. Firms are suing former employees. Part of the reason they do this is to try and keep them in line. Once you figure out a good code that works, it’s pretty easy to go off on your own, raise some capital and let it rip.

But is trading code a patentable proprietary thing?

When we were in the trading pits, nothing was patentable. If I figured out a better way to leg a spread, or put a trade on, you could follow me. You were free to copy me and try to compete. The Crush spread, the Crack spread, and any other strategy was easily copied once you figured out how to execute it.

If I backed you as a trader, taught you how to execute the strategy, and then you left and began executing it on your own I had little recourse. I might be able to beat up your reputation a little, but I couldn’t stop you from trading with a lawsuit.

Is there a fine line between trading code and any other code that becomes patentable and proprietary? For example, Google($GOOG) has a search engine code. It’s defended by patents. There is case law that defends it. Yahoo($YHOO) sued Facebook($FB) earlier this year over patents. I intuitively understand how companies like that think they have some intellectual property that can be defended.

But I fail to see how a trading algorithm is intellectual property that can be defended in a court of law. What do you think?