RK's Musings

Advanced Trading Apr - 2012

In the Apr 2012 issue of “Advanced Trading ” magazine , I found these points . quotes worth noting down :

• Exchanges have announced plans to roll out measures aimed squarely at eradicating the technique of
  quote-stuffing, a common strategy in which high-frequency traders rapidly fire off, and then cancel, millions of orders as a means to probe the direction in which the market is heading.
• Under Dodd-Frank, hedge funds and other private fund advisers that manage $150 million in assets or more will have to fill out Form PF, the brainchild of regulators who are looking to prevent seismic events like the demise of LTCM
• Stephen Davenport :  It looks like Dodd-Frank could be put on permanent hold, and regulators are probably not going to hit their July deadline. My understanding is that they’re thinking if they can postpone it until after the election, and the Republicans end up controlling the House and Senate, it might never get implemented to the degree that it was originally intended. This is why financials are doing so well recently.
• George Michaels CEO of G2 Systems to a buy side business head :  “All your VWAP orders are being worked by the sell side, and the algorithms are moving the large block of orders — so why are you paying guys half a million a year to sit around and scratch their noses?”
• So what skills does the new breed of buy-side trader need to successfully supplant yesterday’s order taker? In the good old days, an MBA was the degree de rigueur. In these days programming and quantitative skills are imperative for a trader.
• A large global asset management firm’s header trader says,that everyone he’s added to the trading team in the past five years has either been a quantitative analyst or a developer.
• How will the buy side trader look like in a few years from now ? Will he be needed at all ? There will be firms that don’t need the overhead of five guys with Bloomberg terminals on a fancy trading desk with a nice view of downtown Dallas. That’s a thing of the past.

Traders Mag March 2012

 

In the Mar 2012 issue of “Traders” magazine , I found these points worth noting down :

• The FIX Protocol Ltd. Americas buy side working group has been trying to amend FIX Protocol to make it easier to track orders. It is considering the adoption of new FIX tags later this year
• Interview with Keith Ross, the early partner at GETCO
• HFT guys are incredibly good risk managers
• The good HFT firms very rarely have losing models or they lose at best $50 to $100 a trade, and these firms very rarely have losing trading days where they don’t make any money.
• HFT guys aren’t equipped to fill in liquidity in stocks that have low turnover
• Consolidated Audit Trail system ( that is expected to cost $4.1 billion to build and $2.1 billion annually to maintain) is still years away from now.
• Cover Story- Fear Factor
• Retail investors own about half of all stocks, either directly or indirectly.Institutional Investors the other half. Both are shunning away from equities have given the worst 10 year performance ever.
• Pension plans own about 20% of all US equities are also shunning equities
• Asset allocations towards equities have gone down drastically. So is the turnover. Both these factors have hit the equity markets simultaneously
• ETFs peaked an average 12.3 billion shares a day in 2009 and in Dec 2011 it fell to average 6.4 billion shares. 47 % reduction is a BIG change in the way things are happening
• Investments in index funds have gone up considerably. From 19.% of all stock mutual fund investments in 2007, it has risen to 28% by end of 2011

• Rosenblatt is creating a visual analytics team – Rationale - Today’s markets produce exponentially more data than in the past, and visual analytics are the key to better understanding that big-data explosion.

• The options industry experienced its ninth consecutive year of growth in 2011, as the total number of contracts traded jumped 17 percent to 4.2 billion.

• A nice story on how a company founded in 1975 , Abel /Noser , has had sustained run over the years while remaining an essentially private enterprise. Delivering value via TCA is the niche they have cracked.

• In the last 40 years, there have been 4 instances when clearing houses have failed and the outcome has been a virtual breakdown of the entire financial system.

• Dodd-Frank’s 1000 page document is considered as a meteorite about to hit the financial industry. CFTC commissioner voices his concern relating to the rules, fall out of the rules and general regulatory uncertainty hanging over brokerages and exchanges

Advanced Trading - Mar 2012

In the Mar 2012 issue of “Advanced Trading” magazine , I found these points worth noting down :

• Gone are the days when you could take a prime brokerage account from Goldman/big Prime brokerage  and start your hedge fund. In Today’s world, launching a hedge fund is becoming harder than ever. You have to have the tech platform that talks to multiple primes , an ops team , at least two counter parties. Further compounding matters for new hedge funds are much more stringent compliance requirements
  than a decade ago. Under the Dodd-Frank Act, firms with at least $150 million in private assets under management will have to periodically file Form PF documents with the Securities and Exchange Commission. The Financial Stability Oversight Council will use those filings to gauge how much risk is flowing
• CDS Futures, still a work in progress instrument . The irony is that after legislators and regulators spent years trying to convince the world that CDSs are evil and have caused everything from the credit crisis to the rising price for a cup of coffee at Starbucks, the rules they are putting in place to control the market in fact drive more rather than fewer people to take bets on creditworthiness.
• Hedge funds are relying on cloud technology to for their tech needs. Case in point :  PVE Capital relies on cloud technology to power its operations in overcast London and in perpetually sun-blasted Malta in the Mediterranean just south of Sicily. The small macro credit fund manager, which has roughly 14 employees, including five traders, and manages an estimated $280 million in assets, recently adopted Options PIPE Core, a cloud based financial office delivery and support system from Options IT.
• Swap Market poised for a BIG change : In a bid to prevent catastrophes such as Lehman Brothers’ $9 trillion interest rate swap default in 2008, lawmakers mandated that OTC derivatives trades be conducted out in the open, on swap execution facilities, or SEFs. Basically they are planning to bring the $600 trillion OTC derivatives market out into the open. So that means a huge opportunity is for Liquidity Aggregation tool providers
• Does HFT hurt the markets? When you look at the number of offers and cancelations made each second of the trading day — we’re talking in the millions — the people with concerns don’t sound like Chicken Little. Industry observers estimate that HFT shops cancel a jaw dropping 95 percent of their offers only to make hundreds more in the next instant.
• Regulators including the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission are struggling to keep up with and keep a grip on this warp-speed world. Keeping a tab on HFT is no joke as you need to be one step ahead of technology as compared to all the HFT shops. After the 2010 Flash Crash,CFTC commissioner admitted that  his group lacked a fundamental understanding of the new trading patterns being used in the markets.One of the reports say that they need a system that will take 4 Billion USD to build and additional 2 Billion USD annually.
• Argument against HFT “liquidity” marketing slogan
• High-speed trading leads to very high degrees of market fragmentation. Liquidity is only valuable when it can be aggregated and aggregated in a space where there’s very high transparency and regulation that allows capital and ideas to trade freely.This is why we have high profile exchanges located in major cities, such as New York, London and Tokyo.
• What’s being proposed or debated for  “containing HFT” ?
• HFT Tax on cancelled orders
• HFT traders should hold to a trade for one full second
• To get a better handle of HFT and what’s inside the algorithms, the SEC has also proposed requiring HFT firms to hand over their data and trading formulas for detailed analysis.

Traders Mag Feb-2012

In the Feb 2012 issue of “Traders” magazine , I found these points worth noting down :

• A 300 page document, Volcker rule, signed into law in July 2010, prohibits U.S. banks from engaging in proprietary trading as of July 2014. This rule is similar to “asking you to switch off mobile phones” in the flight. The chance of electronic signal messing up with aircraft is 1 in million. For most of the passengers this does not make sense. But we still have been following this switch off iPods/electronic devices for the past 20 years. Volcker rule banning prop trading is supposedly a protection against trades that can pull down the entire system. Prop trading accounts for 11% of trading volume. So, who will fill in as liquidity providers ?
• Buy Write funds are making a comeback, thanks to low yielding Fixed income funds
• Citi rolls out pairs algo
• Well, Pairs was first used at Morgan Stanley in 1987. 25 years later, Citi is rolling out some variation of this algo. The strategy is the same,find stocks which show cointegration. But the change that is happening over the years is – Execution. Alpha lies in execution.Like my friend who says, there are only about 10 HFT strategies that are all well known. The secret lies in execution. So, another 10 years from now, I guess we will still see a new pairs algo released by firms, but it will more and more look like a sell side algo than a buy side algo.
• Book review of “Street Freak” – experience recounted by Jared Dillian , a former coast guard officer who became a trader at Lehmann. The review says,”  Dillian writes very well and at times has the sensibilities of a brilliant fraternity- house party boy let loose on Wall Street. One stays with the book to the end for the same reason people can’t take their eyes off a train wreck and will then speak about it in hushed tones for weeks afterward.
• Considering that the trading in US is scattered around 13 exchanges and more than 40 execution avenues, price discovery has become an issue.There is a proposal made by NASDAQ to SEC to allow companies to opt out of a fragmented market
• Top Predictions for 2012
• Even though there is a talk of regulatory changes that would be in place, one should remain skeptical. Why will the govt put in place some regulatory changes, knowing the presidential elections are in Nov and they will be relooked at , under the new administration in 2013
• New Threshold Proposals to control market volatility will be put in place
• Better definitions for HFT from SEC
• Bull market for paper work. More algo supervision leads to an insane demand for paperwork.
• End of Prop trading. Most of the banks are already out of it.
• Consolidation of dark pools
• Many of the much heralded exchange mergers of 2011 never came to pass: ASX/SGX, TMX/LSE and NASDAQ/ ICE/NYSE all fizzled out. This year might not see a slew of mergers, but a number of innovative alliances are in the works.
• An ex-Jones trading guy reads the book ,”The Electronic Call Auction”  from a Baruch professor, and launch a start up , Ax ATS that automates “upstairs trading”.
• SEC Squashes market making proposal - The SEC rejected a proposal by Nasdaq to establish a “Market Quality Program” that would permit issuers of exchange-traded funds to pay market makers to quote these funds on Nasdaq’s flagship exchange. The proposal was intended to be followed by a similar proposal from Nasdaq’s new BX Venture Market for small capitalization stocks. The exchange operator plans to launch BX Venture this year. Behind both proposals is an attempt by Nasdaq to solve a longstanding problem of illiquidity in small cap stocks.
• Buy side has only an illusion of control, most part of the actual trade path is not known to the buy side trader fully. Post Pipeline disaster buy side has demanding more transparency.
• Basic conflict of interest is Buy side want Best Execution and Sell side seeks Best Price
• A recent study by Pragma Securities found that routing behavior is influenced by fee structures, with  brokers tending to prefer cheaper venues when price is held equal.
• Rosenblatt reported that when combined, dark pool and exchange dark volumes are 15.3 percent of U.S. equity trading.
• Increasing concentration of HFT in dark pools make it difficult for a buy side to follow an algo more than a couple of months. It has to keep changing execution algos to prevent getting gamed by HFT players

Advanced Trading - Feb 2012

In the Feb 2012 issue of “Advanced Trading” magazine , I found these points worth noting down :

• 2011 was an extremely bad year for hedge funds, with Asia seeing the maximum number of fund closures. Hedge fund managers have quoted random volatility as a major reason for leaving business.
• The top performer in 2012 will be Commodity managers who have inside information about an underlying commodity — it is legal for them to utilize that, as opposed to equities, in which insider information is illegal.The managers who have fabulous networks and a really good understanding of supply and demand chains within the commodity space actually have a real advantage — more so than their equity counterparts.
• 233,000 jobs were cut in US Financial services firms in 2011.Massive round of layoffs expected in early 2012.
• There is a demand for quants in places like Facebook, Twitter, etc and there has been a sign that new graduates are preferring them over Hedge funds, Banks and trading desks.
• A prediction about India - “They have very high inflation, very high food and energy costs, a growing middle class, and they will be there for the next five to 10 years.Their economies are going to grow through this crisis, and that’s one of the attractive things about these regions”
• Using a standard like FIX as a smaller firm in an emerging market gives you the ability to punch above your weight and compete on equal terms with larger firms.
• Start-up hedge funds and prop shops must get their market data strategies in order before they open shop and print their business cards and prospectuses. In terms of strategy implementation, it’s absolutely important. It’s one thing if you go into the lab, develop a strategy and paper trade it for a while But once a hedge fund manager moves from research to production,the market data has to be meticulously developed and monitored.
• The demands of managing an internal market data distribution platform feeding traders’ desktops pale in comparison to those of managing global, low-latency market data feeds, colocation and proximity connection.
• The market today is an increasingly strange and foreboding place. It seems to limp along all day till the closing, at which time the traders finally wake up and trade like Rip Van Winkle coming to from a six-hour nap. Increasingly, more and more volume is transacted on the close. In fact, 10 to 12 percent of the S&P 500 and 18 to 20 percent of the Russell 2000 volume now trades in the last five minutes of the day. Why is as much as 20 percent of the volume transpiring in just 1.2 percent of the trading day?
• Retail investing in U.S. equities simply is down — investors have pulled almost $500 billion out of U.S. equity mutual funds since January 2007.
• HFT firms go flat each day and hence volumes spike towards the end.
• Traders seem to be moving away from the continuous market to an auction-type environment — driven by indices and closing prints.
• One of the biggest stories of 2011 was the Pipeline Trading scandal, in which the operator of a leading dark pool paid a $1 million fine to the SEC for failing to disclose that buy-side customer orders were matched against proprietary flow while claiming that the crossing network matched customer order flow against natural liquidity from other customers.

Traders - Jan 2012

In the Jan 2012 issue of “Traders” magazine , I found these points worth noting down :

• In 2011, Knight Capital earned $172M from market making operations out of its entire on $517M
• According to a Buy Side survey, the top 5 providers of algo trading systems are Credit Suisse, Goldman, ITG, Bank of America and Merrill Lynch and UBS
• Aquaequities is a firm that focuses on proving block liquidity by aggregating from various mid tier specialized brokers. Very niche solution provider and making money.
• Market Makers are watching the developments on Volcker rule with utmost attention. It is like a “comet heading towards Earth”, says a hedge fund manager about Volcker rule fine print.
• SEC is hiring non-lawyers to aid investigations in to the complex world of HFT and algo trading
• Canadian market is witnessing new trading venues, new order types,  a dramatic change in the market microstructure
• HFT has had little impact on options market. The dearth of HFT in options has largely been attributed to market structure barriers.
• The only strategy you can run in high-frequency trading is market making,” says Peter van Kleef, chief executive officer of Lakeview Arbitrage. He added, “Because once you go beyond the in-the-money strike, spreads widen out. So you can’t just keep lifting the offer and hitting the bid. The spread will just eat you up.”
• But for an HFT, the statistical work necessary to price an option has not been part of the tool kit. For the most part, these shops have focused on three things: speed, speed and more speed.Being the fastest meant being first. That may work in simple markets such as futures and equities, but does little good when trading options.
• With the race to zero latency winding down, many high-frequency shops are looking for the next thing. There is a very high probability that options trading will be next.
• Cover story on TCA where the firms are now offering suites that contain real time TCA. This is unlike the scenario in the last decade where simple metrics like VWAP , expected cost metrics was all that was there to TCA, besides the fact that it was always a hindsight analysis. TCA in the current environment is much more real time and  next generation TCA would suggest different strategies in the middle of the trade, based on the partial execution of the order.

Advanced Trading Jan 2012

Its been quite a while since I have read any magazine. In fact I have stopped reading magazines for no reason. Thought I will resume this activity and at least read a couple of them on a regular basis.

Jan-2012 issue of Advanced Trading covers the following aspects:

• Risk Management Takes Center Stage After MF Global Collapse

  • Broker dealers who have prop desks are posing a big problem on Wall Street. 
  • Failure of MF Global is a classic case of the failure to take seriously, counter-party risk( the same story as Lehman’s but in a different context)
  • Sadly risk management costs money and hence traders, pension houses,etc are not showing as much of interest they need to be showing.
• Does TCA Really Work?
  • TCA is becoming more important. Real time TCA is the need of the hour.
• Navigating Market Volatility
  • Some general write up on volatility. Probably this is the reason I don’t like reading magazines. They are no good for reflecting seriously on issues.
• Sifting through the ashes of MF Global
  • Story of how various firms who dealt with MF Global had to shut shop / are currently near the brink of closing their operations
  • MF Global had 5.5 Billion USD in managed accounts and estimated firm value of was 40 B USD. It declared bankruptcy on Oct 31 2011
  • 1.2 B USD of customer money went missing
  • MF Global accounted for 28% of the futures trading volume on CME
  • Corzine , the resigned CEO seems to be have known it all, despite his statement that he wasn’t aware of the risks in the portfolio
  • MF Global took a bet on sovereign debt from five countries: Belgium, Italy, Spain, Ireland and Portugal. They took this bet using the money from customer’s managed accounts.
• Need for the buy side to get data management operations in place.
• Buy-side traders are demanding stronger trading tools to navigate the increasingly volatile markets. They are showing a lot of interest in the next generation algos. Such algorithms include adaptations of high-frequency-trading algorithms, alpha generating or venue-analytical algorithms, and those that effectively bob and weave in the market so as to be undetectable by sniffer programs. 
• Buy-side traders are calling for stronger, sharper tools, but they still want to own and control the toolbox.