Step 1 - Develop a Black Box Algorithm

We are looking for Black Box strategies – algorithms that create trading signals without any real-time human involvement other than initial setup and monitoring. Don’t worry about error handling, trading condition exceptions, etc., we will handle all of that during implementation.

A simple example of a Black Box algorithm is one that generates trade signals based on the points where a stock price crosses its moving average. As illustrated in Figure 1, this algorithm generates a buy signal when the price comes up through the moving average, and sell signals when the price passes below the moving average.

Your algorithm must meet the following requirements:

• Can only trade equities or indices listed on the NYSE, Amex, or NASDAQ
• Must trade solely on technical indicators, such as price, volume etc.
• Must show a positive absolute return over the most recent trailing 12 months, assuming per-share, per-trade fees and commissions of $0.03 (the algorithm must run / trade over the entire date range, unless predetermined reasons can be described)
• Must be a Black Box - trading signals and order entry must be algorithmically determined with no human interaction beyond initial setup
• There are no restrictions on price data intervals, though our strong preference is for shorter ones (e.g., tick-level data)
• There are no restrictions on holding periods but shorter periods are preferable (holding positions overnight will be considered, but those that do not will receive favorable consideration in judging)
• May trade one or multiple securities / indices simultaneously
• Must be profitable trading lot sizes between 1,000 and 10,000 shares
• Any security meeting the preceding requirements may be used, but our preference is for securities ranging in price from $20 - $50 and trading more than one million shares per day

Testing and Modeling

We assume the algorithms will be complex enough that they require at least some scripting for backtesting. We use MATLAB and R, an open-source alternative to MATLAB, (information available at www.r-project.org) for our testing and modeling, so we are asking for submissions in one of those two languages. If your algorithm is simple enough that it can be clearly communicated and fully tested in Excel, we will also accept that.

Data

Due to licensing issues, we cannot provide any price data for you to use in your algorithm development and testing. Daily close data are freely available from sites such as Google Finance and Yahoo Finance. More granular (i.e., tick data) can be acquired from paid sources such as Bloomberg, NYSE TAQ, or IQFeed, and free sources such as OpenTick.com.

It is important to reiterate that your algorithm must run over a full year’s worth of data and show a profitable return. If there are time periods in which the algorithm is not trading, it must be due to pre-defined decisions made by the algorithm and your strategy (i.e., you cannot use the benefit of hindsight and simply "turn off" the algorithm during periods in which it loses money).  Remember, the algorithm will be used in a live market where there is no such thing as hindsight.

Step 2 - Register & Submit

Submission are due by 11:59 EST on May 31, 2009 and must follow the Submission Guide, which can be downloaded using the “Download and Sign Up” button at the top of this page. The legal documents should also be reviewed and signed by each team member. Finally, in order for us to provide participant-specific information throughout the Challenge, please email the team captain’s name and email address to:

challenge[at]bluestoneinvestment[dot]com

We will evaluate submissions based on the promise they show for trading in a live market. This is an admittedly subjective criterion, but the market is a subjective beast.

We will base our decision on your testing results, our ability to produce profitable testing results with the introduction of live market variables, the complexity and scalability of implementing the algorithm, and our overall interest in trading with the algorithm.

Step 3 - Profit

If we select your algorithm, we will work with you to refine, implement, and trade it with exclusive rights for one year using up to $500,000 in our capital. At the end of the year, we will share the net trading profits from the algorithm with you based on the progressive scale shown below.

Profit Sharing Scale

After one year, we will retain the non-exclusive right to trade with the algorithm into perpetuity, but unlimited usage and licensing rights will revert back to you.

We are also using this competition as a vehicle for discovering new talent, so while we do not guarantee it, another potential outcome of a submission may be an offer of part-time or full-time employment with BlueStone Investments.

Application Procedure and Eligibility Requirements

Application Procedure

1. INDIVIDUALS OR TEAMS
   1. Bluestone Investments, LLC (“BlueStone Investments”) accepts submissions for the Alpha 2.0 Challenge (the “Challenge”) from any person or persons who meet all the eligibility requirements. Applicants may find teammates resourceful in designing a winning strategy, but will not be penalized for solo submissions.
   2. A team may have an unlimited number of persons.
   3. Teams are responsible for the eligibility of all the members. Should one or more teammate(s) be ineligible, the entire team is ineligible.
   4. Each team must select and identify a Team Name, which should appear on all individual and collective submission documents as outlined in Section C below.
   5. Each team must select and identify a Team Captain who will be the lead contact with BlueStone Investments.
   6. Multiple submissions by a team may be accepted, but only if every member of that team is party to all team submissions and with valid written consent from a representative of BlueStone Investments.
2. SUBMISSION DEADLINE
   1. APPLICATIONS MUST BE RECEIVED BY MAY 31, 2009 AT 11:59 PM EST.
3. SUBMISSIONS
   1. Applications may only be submitted electronically using the following procedure: by attaching a PDF file containing the entire application submission documents in an email addressed to: submissions[at]bluestoneinvestment[dot]com
4. APPLICATIONS WILL ONLY BE CONSIDERED IF THEY ARE COMPLETE AND ACCURATE. APPLICATIONS MUST BE WRITTEN CLEARLY AND LEGIBLY OR TYPED. COMPLETE APPLICATION SUBMISSIONS MUST CONSIST OF THE FOLLOWING SUBMISSION PACKAGE:
   1. Completed Application Forms (including signed and dated Application Agreement and Release at the end of the Application Form), one per person in the team, submitted together.
   2. Current Applicant Resume, one per person in the team, submitted together.
   3. Signed and dated Intellectual Property Assignment Agreement, one per person in the team.
   4. Written Summary of Strategy and Trading Algorithm as outlined in the Submission Guide PowerPoint downloaded from www.bluestoneinvestment.com
5. SELECTION CRITERIA
   1. BlueStone Investments seeks submissions that have the most promise and/or potential. As a basis for our selection, BlueStone Investments will use the criteria outlined in the Submission Guide PowerPoint downloaded from www.bluestoneinvestment.com. BlueStone Investments reserves the right to select winning strategies on additional factors decided at its sole discretion.
6. SELECTION PROCESS
   1. After the Submission Deadline, BlueStone Investments, to the extent that it determines in its sole discretion a winning strategy exists, may select one or more winning strategies.
   2. The winning applicant(s) will be notified within ninety (90) calendar days following the Submission Deadline, defined in Section B above, by telephone or email. If a team’s strategy is selected, the Team Captain will be contacted.
   3. The identification of a strategy as a winner signifies that BlueStone Investments sees promise in that strategy, or a part of that strategy, and wishes to work with the applicant(s) to prepare for optimal implementation. This may or may not involve working with other applicants and their strategies, or part of other applicants’ strategies.
   4. Due to the nature of the Challenge, it is BlueStone Investments’ sole discretion whether to implement a strategy if it is selected as a winner.
   5. The Intellectual Property Assignment Agreement terms and conditions control in the event that a winning strategy is implemented and profitable.

Eligibility Requirements

Please note that the following Eligibility Requirements must be met in order to proceed with the application process. Each team member must meet all of the requirements as set forth below.

1. Each applicant may participate in the Challenge individually or as part of a team. For purposes of the Challenge, “Team” is defined as submissions collaborated by two or more persons. Each team member must individually submit an Application Form, a signed and dated Application Agreement and Release, a signed and dated Intellectual Property Assignment Agreement and a current Resume, but each team must collectively submit all application materials together. All required application materials are defined in Section D, under Header I, above.
2. No applicant, individually or as part of a team, may currently be employed by, and/or under a legally enforceable employment contract with, a company whose main business is involved in trading or investing, defined generally. Further, persons who work for a specific division of a company and that division primarily trades or invests, defined generally, are ineligible from participating in the Challenge, regardless of that company’s main business. Additionally, no applicant, individually or as part of a team, may be engaged in a legally valid and enforceable non-compete agreement, the terms of which directly relating to the nature of the Challenge and/or its terms and requirements.
3. All applicants, individually or as part of a team must be at least 18 years of age as of the Submission Deadline, defined in Section B, under Header 1 above.
4. All applicants and winners must abide by all applicable United States of America laws during the application process and, if selected as a winner, any applicable United States of America laws during any period under contractual agreement with BlueStone Investments.

Intellectual Property Assignment Agreement

THIS AGREEMENT is [between you] (hereinafter “Assignor”) and Bluestone Investments LLC, a Texas Corporation, having its principal business office at 5489 Blair Road, Suite 450, Dallas, Texas 75231 (hereinafter “Assignee”).

WHEREAS

1. Assignor is the owner, licensee or otherwise has an interest in the Intellectual Property assets and Intellectual Property rights relating thereto, described in section 1.1 of this Agreement.
2. Assignor is desirous of assigning and transferring his Intellectual Property rights to Assignee, and Assignee is desirous of acquiring such rights of Assignor, in, to and under said Intellectual Property.
3. Assignor is an applicant to Alpha 2.0 Challenge and as such has read, signed and dated all application procedures, forms, agreements and releases required by Alpha 2.0 Challenge.
4. In terms of the conditions contained in the Alpha 2.0 Challenge Application Procedures, Eligibility Requirements and the Application Agreement, Assignor agrees to assign certain Intellectual Property Rights as defined as Intellectual Property in section 1.1 of this Agreement.
5. Therefore, the Parties hereto are now entering into this Intellectual Property Assignment Agreement whereby Assignor has agreed to assign the Intellectual Properties to the Assignee.

NOW IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES AS FOLLOWS:

1. Definitions and Interpretations.
   1. Definitions. In this Agreement, the terms listed below shall, unless the context requires otherwise, have the meanings attached to them. These terms may be identified by the capitalization of the first letter of each principal word thereof:
      1. “Agreement” shall mean this Intellectual Property Assignment Agreement.
      2. “Party” means either of Assignor and/or Assignee and “Parties” shall refer to both of them collectively.
      3. “Intellectual Property” shall mean all strategy process developed by Assignor for his Alpha 2.0 Challenge submission, as well as work done by the Assignor and the technical know how either belonging to or owned by the Assignor relating to his Alpha 2.0 Challenge submission, to the extent Assignor has an unconditional right to use or assign the same.
      4. “Alpha 2.0 Challenge” shall mean the strategy competition conducted by Assignor from December 1, 2008 through May 31, 2009. “Alpha 2.0 Challenge” as used in this Agreement, shall also mean any and all Application Procedures, Application Forms, Eligibility Requirements, Releases and Waivers associated with the competition.
      5. “Future Profits” shall mean all positive monetary gains, if any, derived solely and exclusively from the assigned Intellectual Property as used in the Infrastructure.
      6. "Infrastructure" shall mean any system, application, or software, including but not limited to, computer program(s), application software, bundled software, computing clouds, courseware, file management system(s), freeware, groupware, operating system(s), presentation software, productivity software, program(s), shareware, systems software, trading software, vaporware, or a any combination of same, used by Assignee to conduct business operations.
      7. “Assignment Period” shall mean the time that this Agreement is valid and begins on the date Assignee is announced as a winner of the Alpha 2.0 Challenge at 12:00AM EST and terminates on the last day of the Profit Period at 11:59PM EST (as defined in 1.1.8.) The Assignment Period may be amended or modified by the Parties’ mutual written agreement.
      8. “Profit Period” shall be calculated as exactly one calendar year from the date of opening the first live complete trade at 12:00AM EST to the last day in said calendar year at 11:59PM EST using the assigned Intellectual Property. In the event that no live complete trade occur before May, 30, 2010 at 11:59PM EST, the last day of the Profit Period shall be interpreted to be May 30, 2010 at 11:59PM EST.
      9.  “Net Income” shall be equal to Future Profit (as defined in 1.1.5) minus fees, commissions, and other fixed or variable costs directly related to the trading activity (including Infrastructure costs).
      10. “Average Capital at Risk” shall be equal to the total dollar amount capitalized during all trades divided by number of complete trades (both opening and closing a position equals one complete trade).
      11. “Annual Return Rate” shall be calculated as Net Income (as defined in 1.1.8) divided by Average Capital at Risk (as defined in 1.1.9). The time period for this calculation shall be the Profit Time Period, as defined in 1.1.8.
   2. Interpretation. In this Agreement, except to the extent that context otherwise requires:
      1. References to any document or agreement, including this Agreement, shall be determined to include any references to such documents or agreements as amended, supplemented or replaced from time to time in accordance with its terms and (where applicable) subject to compliance with the requirements set forth therein.
      2. Unless the context requires otherwise, words importing the singular include the plural and vice versa and words importing a gender include every gender.
      3. Unless the context requires otherwise any words or items which are not specifically defined in this Agreement shall have the same meaning assigned to it in the Alpha 2.0 Challenge Application Procedures, Application Forms, Eligibility Requirements, Release and Waiver.
2. Assignment of Intellectual Properties.
   1. In consideration of Assignor’s application to Alpha 2.0 Challenge and the opportunity to have his Intellectual Property implemented in Assignee’s Infrastructure, Assignor unconditionally, absolutely, and irrevocably transfers and assigns to Assignee all rights, title, and interest in and to his Intellectual Property, as defined in Section 1.1.3, for the entire Assignment Period, as defined in Section 1.1.7.
   2. In further consideration, if Intellectual Property produces Future Profits, Assignor will receive one cash payment at the conclusion of the Profit Period (as defined in 1.1.8). Further, the cash payment to Assignor will be calculated as a percentage of the Future Profits derived solely and exclusively from the assigned Intellectual Property as used in the Infrastructure, less any and all trading costs, fees and other expenses related to the implementation of the Intellectual Property. The percentage of Future Profits shall be determined based on the Intellectual Property’s Annual Return Rate, as defined in Section 1.1.10. The percentage of Future Profits to be paid to Assignor shall be determined by the following scale:
      1. An Annual return rate of less than or equal to twenty (20) percent will receive twenty (20) percent of Future Profits.
      2. An Annual Return Rate of more than twenty (20) percent but less than fifty (50) percent will receive the percentage equivalent of Future Profits. E.g., Thirty-five percent annual return will receive thirty-five percent of Future Profits.
      3.  An Annual Return Rate greater than or equal to fifty (50) percent will receive fifty (50) percent of Future Profits.
   3. In the event that Assignor’s Intellectual Property is combined and/or shared with third party Intellectual Property (or more than one third party Intellectual Property) in order to maximize Net Profits, the Future Profits calculation as outlined in Section 2.2 above shall be the same, but equally divided between all parties contributing Intellectual Property. E.g., If the Assignor and two third parties contribute Intellectual Properties that provides an Annual Return Rate of thirty (30%) percent, all Intellectual Property contributors, the Assignor and two third parties, will each receive ten (10) percent of Future Profits (totaling thirty (30) percent of Future Profits).
   4. Assignor hereby declares and confirms that during the Assignment Period he has no right, title, interest, or benefit whatsoever, into, over or upon the said Intellectual Property hereby assigned by Assignor to Assignee.
   5. Assignor further declares and confirms that he shall not at any time hereafter during the Assignment Period claim or purport to claim directly or indirectly in any manner whatsoever any right, title, interest, into, over or upon the said Intellectual Properties and Assignor hereby declares and confirms that during the Assignment Period the Assignee shall be the sole, absolute and rightful owner of the Intellectual Property.
   6. The Parties hereby undertake to do and perform, sign, swear, and execute all such further and other acts, deeds, documents, matters, or things as may be required by the Assignee or considered necessary, desirable, or proper to give effect to the transfer and assignment of the said Intellectual Property rights.
3. Reversion of Assigned Intellectual Properties.
   1. The expiration of the Assignment Period, as defined in Section 1.1.7 is the only event that triggers an automatic reversion of the Intellectual Property rights from the Assignee back to the Assignor.
   2. Assignee hereby declares and confirms that on the expiration of the Assignment Period he has no right, title, interest, or benefit whatsoever, into, over or upon the Intellectual Property and all assigned right, title, interest, and/or benefit reverts to the Assignor in full.
   3. Assignee further declares and confirms that he shall not at any time hereafter after the expiration of the Assignment Period claim or purport to claim directly or indirectly in any manner whatsoever any right, title, interest, into, over or upon the said Intellectual Properties and Assignee hereby declares and confirms that after the expiration of the Assignment Period the Assignor shall be the sole, absolute and rightful owner of the Intellectual Property.
   4. The Parties hereby undertake to do and perform, sign, swear, and execute all such further and other acts, deeds, documents, matters, or things as may be required by the Assignor or considered necessary, desirable, or proper to give effect to the transfer and assignment of the said Intellectual Property rights.
4. Representation and Warranty. Assignor represents and warrants that: (i) the Intellectual Property rights assigned hereunder are the Assignor’s original work and Assignor has the power and authority to assign its Intellectual Property rights to Assignee in accordance with this Agreement; (ii) Assignor has the right, power and authority to enter into this Agreement; (iii) no third party consents, assignments or licenses are necessary to perform under this Agreement; (iv) Assignor has no obligations to any employer (whether by law or by contract) that could in any way prohibit Assignor from assigning the Intellectual Property to Assignee.
5. No Agency. The Parties agree that the relationship between Assignor and Assignee under this Agreement is that of principal to principal and no agency shall be established as a result of this Agreement.
6. Waivers. The failure, with or without intent, of any Party to insist upon the performance (in strict conformity with the literal requirements) by the other Party of any term or stipulation of this Agreement, shall not be treated or deemed to constitute a modification of any terms or stipulations of this Agreement. Nor shall such failure or election be deemed to constitute a waiver of the right of such Party at ay time whatsoever thereafter to insist upon performance by the other party strictly in accordance with any terms of provisions hereof. All terms, conditions, and obligations under this Agreement shall remain in full force and effect at all times during the subsistence of this Agreement except where otherwise amended or modified by them by mutual written agreement.
7. Modification. No amendment, modification, or addition to this Agreement shall be effective or binding on either of the Parties unless set forth in writing and executed by Assignor and Assignee.
8. Severability. Should any part of this Agreement be declared illegal or unenforceable, the Parties will cooperate in all ways open to them to obtain substantially the same result or as much thereof as may be possible, including appropriate steps to amend, modify, or alter this Agreement. If any term or provision of this Agreement shall be hereafter declared by a final adjudication of any tribunal or court of competent jurisdiction to be illegal, such adjudication shall not alter the validity or enforceability of any other term or provision unless the terms and provisions declared shall be one expressly defined as a condition precedent or as of the essence of this Agreement, or comprising an integral part of, or inseparable from the remainder of this Agreement.
9. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas.