Traders’ Due Diligence Questionnaires Aren’t Just Useful, They’re a Must Have

Separating out professional traders for your business requires a methodical approach. Due Diligence Questionnaires (DDQ) provide the necessary structure to this interview process.

For the few that manage to survive that first year, even fewer find a path to consistent profitability.

Sheer probabilities dictate that selecting any trader at random won’t yield a professional one. Even if you’re lucky to find a profitable one, chances are they won’t be able to manage money for others.

So, what are we left with?

Using an organized process brings the top traders to the forefront, letting you decide not just among who can do the job, but who’s best.

In this article, we’ll discuss:

• The ins and outs of a DDQ, including what they are
• Key elements
• How to use them
• Red flags
• Getting the most out of the process.

What is a DDQ

Due Diligence Questionnaires (DDQ) contain a set of questions for potential traders or money managers to answer. They aim to weed out any unqualified applicants, leaving you with candidates that best fit your needs.

Especially for smaller firms, DDQs are essential to finding a person that meshes well with your organization. The last thing you want is to pick the person with the best record only to have them drive away every last one of your customers.

Key elements

DDQs ask the essential questions to what you want out of a trader or fund. Most of them cover the following areas:

• Track record – Understanding not just the profitability but the consistency under various market conditions.
• Risk management – Any good trader or fund doesn’t leave their risk open-ended. Clients certainly like profits, but they also want a sense of security. Risk management is the criteria most likely to weed out someone from the interview process.
• Performance under pressure – Not everything goes according to plan. Those of us that maintain a level head and adhere to their strategies often come out on top. It’s great to have a trader that can handle 99% of the market. But if they can’t manage through extraneous events, which do happen, then it leaves your clients open to substantial risk.
• Goals and aspirations – It’s always worth asking what the trader wants to get out of the relationship. Oftentimes, younger traders are still in a process of transition, so it’s important to make sure the person sticks around as long as you need them.
• Style and strategy – This is where you get into the technical details. It can also be quite lengthy. While you don’t need the trader to give up all their secrets, you should distinguish between someone who’s rules-based versus intuitive, as well as if they rely on algorithms or other computer models.
• Strengths and weaknesses – Part of trading is growing and adapting over time. Anyone in the business long enough tends to carve out a niche. They develop skills to exploit their advantage in that area. However, they typically also know where they shouldn’t play.

How to use a DDQ

The best DDQs don’t just ask the basic yes or no questions. They create open-ended answers for the person to fill in. You want them to explain not just their ideas and concepts, but try to speak about practical experiences where this applied in the past.

For example, a trader who managed through the Swiss Franc crisis in 2015 should be able to relate that experience to the relevant questions, such as how they managed risk and delivered under pressure.

Red flags

As you work through the questionnaire with applicants, you need to be wary of red flags. Individually, these may not be issues but should warrant follow-up explanations. 

• Excessive win-rates – It’s entirely possible to achieve a high win-rate in trading. But getting up into the 80th and certainly, 90th win-rate percentile should coincide with a risk/reward that favors lower payouts. Plus, the trader should be able to substantiate this with backup.
• Lack of professionalism – Just because a trader lacks professionalism doesn’t mean they’re a fraud. But, if you needed someone to manage your money, wouldn’t you want them to take it seriously? In this case, the why is irrelevant. A lack of professionalism, whether in terms of timeliness, communication or adherence to ethics protocols shouldn’t be ignored.
• Limited or no references – This one isn’t necessarily a requirement for everyone. Quite often, traders will work and study by themselves. However, the majority of them will have worked or studied with other traders at some point. It’s worth talking to a couple of their references to validate what you can about their information.
• Strategy isn’t clear – It’s one thing not to give up your trading secrets. It’s another entirely to not be able to explain the relevant concepts behind it. If someone comes to you with an entirely new way of trading that you’ve never heard of before, be cautious. While it could be true, you want to find candidates that align with your business needs. Does a brand new strategy fit that criterion?

Getting the most out of the process

At some point, you do want to meet the candidate in person, through a video chat, or conference call. For as much as you can pick up from a questionnaire, people communicate a significant amount of information non-verbally. There isn’t a set time limit, but you should at least meet with the person for 30 minutes to get a cadence in the discussion.

Final thoughts

For as much as a formal process helps, don’t try to cram everything into structured steps. Some of the best interviews occur organically as a natural part of the conversation. Also, realize that ‘gut feelings’ or ‘intuition’ are often based on personal experiences that we just can’t verbalize. While they shouldn’t be relied on entirely, they can’t be ignored either.