Automated Trader Magazine Issue 06 July 2007
Exchanges have always played a fundamental role in the growth of algorithmic and automated trading. Now, the ability of exchanges to facilitate programme-based trading is critical to their own growth. So it’s no surprise to find exchanges taking a prominent role in this issue of Automated Trader.
In a new regular feature, Alphability (page 56), Andy Webb has compiled metrics and statistics from a number of major exchanges with the aim of helping model builders quickly identify the market/time frame characteristics most suited to their model types.
Also with an eye on optimising model performance, on page 18, Thom Hartle of CQG explores the use of order book data by automated trading systems, while Jorin Daleanes and Steffen Gemuenden of RTS Realtime Systems Group (page 24) assert the importance of backtesting in bringing effective models to market at short notice. Speed is at the heart of Usman Malik’s dissection of the causes of latency (page 30) as well as this issue’s Tech Forum, in which leading solutions providers debate application latency (page 60).
In this issue’s features, ‘A global round trip’ (page 50) looks at how exchanges around the world are investing to attract greater algo and auto volumes. Exchanges play a growing part in risk management in the futures market as auto traders switch to DMA, in ‘Catch me if you can’ on page 34. And leading US options exchanges report the impact of the SEC’s plans for decimalisation in ‘Pennies from heaven’ (page 42).
Two exchanges give their perspectives on how algo and auto traders are shaping their future plans. In this issue’s leader, CME’s Neal Brady explains how derivatives exchanges are adapting to new demands (page 14), while Jukka Ruuska outlines the Nordic Exchange’s plans to handle higher automated order flows (page 68). As a counterpoint, our cover story (page 76) explains how the rejection of a revolutionary matching engine by futures exchanges led Vladan Jovanovic to turn Communicating Ltd into a pioneering and highly profitable automated trading operation.
Chris Hall - Editor Issue 06
- Less Smoke; More Mirrors
Lets start with a quick multiple-choice quiz. What are Cobra, Ambush, Arid, Nocturnal and Covert? A) The line-up for a heavy rock weekender? B) A new range of toiletries for adolescent boys? or C) A new five-part Iraq War saga by Andy McNab? The answer of course is D) all of the above. Oh, and they’re also the names of algorithms, too. Add in a few references to dark books and deep pools of liquidity and you begin to understand how staff at certain marketing departments (mis)spent their youth.
This issue of Automated Trader marks the launch of a new set of tradability statistics called Alphability. Andy Webb outlines some examples of their construction and their application as tools to expedite the development of automated and algorithmic trading models.
- Communicating Ltd: The Trader Stripped BareCommunicating Ltd’s path to becoming one of London’s most profitable trading operations started with a revolutionary matching engine that fitted on a floppy disk. Vladan Jovanovic, Managing Director, tells AT how a stripped-down approach to trading and technology has been a consistent factor behind Communicating’s success.
- Algorithmic Traders & Their Impact on the Derivatives WorldHaving revolutionised the equity markets, algorithmic trading is already reshaping the derivatives sector. Neal Brady, Director of Products and Services Technology, CME, looks at the technology and infrastructure changes that are fast attracting algorithmic traders to the futures and options markets.
- Using Order Book Data to Improve Automated Model PerformanceAutomated traders now have access to unprecedented levels of market data. Thom Hartle, Director of Marketing, CQG, conducts a theoretical comparison between two trading systems to explore how order book data can be leveraged for optimal trade performance.
- Backtesting: Best practice principles for beating the marketIn an increasingly crowded market, traders need comprehensive, integrated backtesting capabilities to ensure their algorithms stay ahead of the competition. Jorin Daleanes, Sales and Account Manager, RTD Tango and Backtester, and Steffen Gemuenden, Co CEO, RTS Realtime Systems Group, lay out the key principles.
- The L WordIt is widely considered as critical to the performance of an algorithm, but what do we actually mean by latency? Dr Usman Malik, of algorithmic trading specialists P.E. Lynch LLP, explains the main sources of latency and suggests some practical steps for minimising its impact.
- Catch Me if You CanAutomated traders whose strategies depend on speed are turning to ‘true’ direct market access to avoid the latency burden of futures clearers’ pre-trade risk management tools. Chris Hall looks at clearers’ efforts to monitor trading risks without imposing unnecessary restraints on high-frequency clients.
- Pennies from Heaven?As the SEC’s six-month penny pilot scheme draws to a close in the US options market, Chris Hall reports on the initial impact on different market segments and asks whether decimalisation will open up the market for higher levels of automated and algorithmic trading.
- A Global Round TripExchanges around the world are investing in new technology and services to attract a greater share of algorithmic and automated trading volumes. Chris Hall takes a whirlwind tour of the exchanges that are pulling out the stops to bring much-needed sources of liquidity to local markets.
- Application LatencyAs growing competition places ever greater emphasis on the fine-tuning of automated and algorithmic trading programmes, AT asks leading solutions providers for their views on the tweaks that can minimise application latency and maximise performance. With: - Ary Khatchikian, president and chief technology officer, Portware - Amir Prescher, vice president, business development, Voltaire - Matt Meinel, global director, business development, 29West - Gena Ioffe, CEO, EGAR Technology - Ali Pichvai, managing director, Quod Financial - Jonas Lindqvist, head of system development, NeoNet - Yuriy Shterk, vice president, product development, CQG - Nimrod Gindi, business development manager, Mellanox Technologies
- Northern ExposureThe rising level of algorithmic and automated trading is one of the key drivers behind a major technology and service overhaul at OMX’s Nordic Exchange. Jukka Ruuska, President, Nordic Marketplaces, OMX, provides a snapshot of the exchange’s plans for handling further growth.
- Algorithms Where do we (and you) go from here?A whole industry has developed around algorithmic trading. Connferences, exhibitions, publications carrying articles (not dissimilar to this one) and advertising are but a few of the activities that are providing employment and profits for many. On top of this,one must consider the costs to sell-side providers of employing project and programme managers,developers, programmers, connectivity specialists,integrators,systems, trading and support teams.Not forgetting,of course,sales people and marketing budgets needed to make the potential client base aware that the broker or bank in question is in the 'game'.
- Survival of the FastestIn historical terms,the speed and movement of sensitive data can clearly be seen to have delivered execution advantages. Looking back nearly 200 years, Nathan Rothschild proved the benefit of having the quickest communications system in Europe in 1815 by knowing prior to the British government the outcome of the Battle of Waterloo.The communication and anticipation of market momentum continued to develop from the first stock ticker launched on the NYSE in 1867,through Louis Bachelier’s thesis on market movement predictability at the turn of the 20th Century to the dawn of the electronic era and the development of Instinet’s DOT system. The current environment,with its proliferation of order management systems and execution management systems supported by numerous instantaneous execution choices, underlines the success of market entry strategies based on timing.