Margin Exhaustion Behavior
Author: DartboardTrader
Creation Date: 2/27/2013 10:57 AM
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DartboardTrader

#1
Please describe the rules for opening orders when the margin is maxed out in the WS Trading system account. Do the remaining limit orders cancel upon potential execution? Do all potential 'opening' orders cancel? Do the remaining limit orders go 'dormant' until account equity becomes available, at which time all limit orders become 'active' again?

These behaviors are critical to more accurate backtesting.

It also opens the conversation about what happens when a set of limit orders or simultaneous market open orders all compete for the account equity, and some may transact, potentially overextending the account. While the position priority may help in backtesting, what would occur intraday, since system developers cannot initiate signals during the market day.
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Cone

#2
WealthSignals like Wealth-Lab uses a simplified margin model. Unlike a broker, WealthSignals will not currently issue a margin call or close out positions automatically (but we're looking at this aspect).

QUOTE:
Please describe the rules for opening orders when the margin is maxed out in the WS Trading system account.

WealthSignals sweeps market orders first and then limit/stop orders. Wealth-Lab does this too, however, a W-L backtest will always process market exits first to make cash available for entries on the same day. Unlike Wealth-Lab, WealthSignals processes orders in near real time using time-of-sales reports. Assuming maxed out buying power (includes margin) and buying a $5000 position in Stock A and selling a $5000 position in Stock B. If Stock A ticks first, you'll be able to purchase Stock B. However, if Stock B ticks first, the market buy order will fail, even though the Stock A sale will take place, maybe even 1 msec later.


QUOTE:
Do the remaining limit orders cancel upon potential execution? Do all potential 'opening' orders cancel? Do the remaining limit orders go 'dormant' until account equity becomes available, at which time all limit orders become 'active' again?

Stop and Limit continue to remain active until they're marketable. If buying power is not available at the time they trigger, then the order(s) will fail.


QUOTE:
It also opens the conversation about what happens when a set of limit orders or simultaneous market open orders all compete for the account equity, and some may transact, potentially overextending the account.

An account cannot be overextended. Orders will fail when buying power is not available.


QUOTE:
While the position priority may help in backtesting, what would occur intraday, since system developers cannot initiate signals during the market day.

In the WealthSignals Publisher's menu bar, you see the amount of buying power available. This number changes based on an estimate using the basis price for each order you select to publish. For market order systems, you should select orders in order of priority, which implies that your trading system should be using Position.Priority. When the sum of orders exhaust buying power, do not select to publish additional orders.

Now, this is pretty straightforward if you have only entry orders. However, due to the TOS processing, some entries may fail before exits occur (as explained above). Currently the only way to work around this is through the use of margin. For example, your system uses 1.25:1 margin. To ensure all entries and exits occur, you may need to increase this factor.