Cross-Product Margining July 16, 2006
Posted by jbarseneau in Uncategorized.add a comment
Some firms are starting programs that offer hedge fund managers and certain other client’s portfolio margining for broad-based index options and corresponding Exchange Traded Funds (ETFs). This is a big move in hedge fund electronic technology and a bigger move for the business as it will free up capital for the funds.
Through freeing up capital for the hedge funds, non-US broker/dealer proprietary accounts and private clients, portfolio margining can bring additional liquidity to already booming equity options markets and will eventfully lead to a cross-product platform that truly leverages economic advantages across the asset classes.
A letter to the SEC applauding the New York Stock Exchange (NYSE) and Chicago Board Options Exchange (CBOE) proposals to permit cross margining of futures, securities and other instruments on a portfolio basis was sent.
As other markets permit the cross margining of their assets the more capital will be freed up within the industry. Equally important the electronic implementation of the cross margining of the portfolios will improve the over all risk management of the funds.
High Frequency Trading is High Frequencey Analysis July 14, 2006
Posted by jbarseneau in Uncategorized.add a comment
High frequency trading is not just about putting a lot of trades on in the fashion of a day trader. High frequency Trading is more about the analysis of real-time data that has a frequency that is much higher then we are traditionally used to. In fact it should be called Ultra high frequency. The follow statement I found on a blog just shows how little people do know about High frequency trading:
“HFT is not an inherently better way to trade the market. Indeed, given transaction costs, it is a relatively expensive way to trade. Furthermore, it emphasizes the importance of nano-second order transmission and smart order-execution routing.” –Finance Blog
High frequency can come in the form of pricing data that are consumed and acted upon by market participants. The original form of these prices is tick-by-tick data; each tick is one logical unit of information, like a quote or a transaction price. By nature these data points are irregularly spaced in time. Data vendors like Reuters transmit more than 275000 prices per day for a foreign exchange spot rate alone Ironically practitioners, most often, determine their trading decisions by observing high-frequency data but yet most studies published in financial literature deal with low-frequency, regularly spaced data. There are two main reasons for this. First, it is still rather costly and time consuming to collect, collate, store, retrieve, and manipulate high-frequency data. The second reason is somehow more subtle but still quite important: most statistical apparatus has been developed and thought for homogeneous time series. There is little work done to adopt the methods to data that arrives at irregular time intervals.
With the availability of these new data sets come new challenges associated with their analysis. Modern data sets may contain hundred of thousands of transactions or quotes in a single day for a single stock, time stamped to the nearest second. The analyses of these data are complicated by irregular spacing, diurnal patterns, price discreteness, and temporal dependence. These challenges are described below.
Cross-Product Electronic Trading July 10, 2006
Posted by jbarseneau in Computation.2 comments
Can banks provide cross-product electronic trading applications to their front office, proprietary desks, trading partners, and prime brokerages. Several years ago one bank developed a strategy just to do that. Their strategy seemed sound at the time; they would conduct a two phased approach, the first would be to consolidated varying instruments into one seamless front-end that had a single-sign-on to all the different systems that supported the varying instruments, fully electronic or not (Meaning some systems eventually passed off the transaction to people to process or execute). To the user it would smell and feel like a cross-product application; it had a nice interface that had all the asset classes needed to service one customers needs, but that was it. When it came to execution it was very disjointed and complex. Trade confirms came back to the front-end in all sorts of methods and formats from all the varying systems. Confirms were sent directly by some systems and others would be received by a physically phone call. There was no concept of cross-product accounts, so there where no concept of using cross-leverage or credit netting. It was a mirage.
The second phase of this project was to fully integrate the various systems using a common message bus that would formalize the transaction formats and communication methods. It was also planned to ferret out as many systems that did not lead to electronic execution as possible. This would enable them to build a “true” cross-asset application that unified risk and financial (P&L) across assets. Alas, the business dream was ahead of were the technology market was, both in terms of underlying infrastructure technology like cluster techniques and high-speed messaging, product technology for electronically trading certain instruments, and finally industry services technology such as exchanges and clearing capabilities. This was eight years ago so people now surly would understand that, at that time, what the bank was taken on was a huge undertaking. Times have changed and the technology and supporting services have changed with it.
Current Opportunities in Electronic Trading June 30, 2006
Posted by jbarseneau in Clearing & Settlment, Execution, Finance, Instruments, Market Microstruture, Risk Management, Trading.3 comments
According to a new 10-year industry forecast by a large service provider to the financial services industry, electronic trading, regulatory pressures and interest in emerging markets will change the very foundation of the world’s capital markets businesses; the convergence of market transparency, the speed and completeness of modern electronic markets and the investor’s demand for greater returns will lead to a major market shakeout. Some of the already emerging initiatives in electronic trading include the following:
Automated Pairs Trading: Pair trading is a trading strategy with a relatively low-risk position. The goal is to match two trading vehicles that are highly correlated, trade one long and one short and when the pairs price diverges “x” numbers of standard deviations – “x” is optimized using historical data. If the pair reverses to its mean trend, a profit can be made on one or both of the positions. With new computational scale availability and the increase in electronic connection to liquidity, firms are employing computationally intense algorithms that can search massive amounts of opportunities, much more than ever thought. One firm searches 180,000 pairs, searching for Alpha, and presents their clients with the top 15 per day.
According to the TABB Group, Hedge funds are under pressure to increase Alpha, which is defined as the returns attributed to the fund manager and not newly exposed risk. Automated Pairs Trading is one way to find more Alpha.
– TABB GROUP
Electronic Trading; what is it? June 25, 2006
Posted by jbarseneau in Execution, Finance, Instruments, Market Microstruture, Risk Management, Trading.add a comment
Electronic trading; a phrase for all Electronic trading, what is it, or more importantley what has it become!? It means so many differnet things to so many differnt people, from the buy-side to the sell-side it mean vastley different things. Within Broker-dealers it depends where you sit on the way in which you would define electronic trading. Traditionally, and I think purely, it has been defined by the following:
“Electronic trading is a mode of trading that uses information technology to bring together a buyer and a seller through electronic media to create a virtual market place. Markets such as the new age stock exchanges are a prime example for such and electronic market place.“
–Wikipedia
This definition is certainley true but it is an all encompassing statement and begs to be described more. I think we should explore it, break it down and understand all its complexities. Lets first outline a taxonomy that covers alot of the areas that include electronic trading or are effected by electronic trading and then I will drill into them one by one.
- Electronic Communication Networks – ECNs (The renaissance, trading off one’s own book)
- Electronic Match Making (Electronic Market Place)
- Electronic Market Aggregation (Allowing traders to view all [or more] liquity)
- Direct Market Acccess (Through technology allowing end users direct access to markets)
- Algorithimic Trading (using sophisticated math to make trading process decisions)
- Program Trading (using sophisticated algorithims to make execution decisions)
- Automated Trading-Black Box (using sophisticated algorithims to make trading choices)
- Block & basket Orders using Program Trading (algorithims to make execution decisions)
- Electronic Trade entry and order routing (Electronic order creation, routing and transmission)
- Desk-level Electronic Rsk Management ( realtime automated margin, credit or limit control)
- Automated Electronic trade crossing (Reg. Capital Optimization)
- Automated Electronic Position Netting (Reg. Capital Optimization & Risk Management)
- Electronic Cross-product access with Cross-product leverage and Margins
- Data concerns in an Electronic Trading Microstructure
- Reglatory concerns in an Electronic Trading Microstructure
