How to incorporate high frequency trading into your business model? Peter van Kleef

Transcription

1 May 2011 How to incorporate high frequency trading into your business model? Peter van Kleef

2 Main topics Trading requirements for HFT in futures, options and FX Critical components for development and implementation Technology needed. Comparison off the shelf vs custom 2

3 Trading requirements for HFT in futures, options and FX Key Questions: Electronic access available? What speed/technology? How reliable? Inclusion into global clearing agreement with netting possible? Transaction/brokerage fees? Competition? Available instruments? Trading hours? Any market idiosyncrasies? Physical delivery or cash settled? Electronic access on all legs of a trade is not a must Substantial medium to long term profit potential is a must Beware of market idiosyncrasies 3

4 Trading requirements for HFT in futures, options and FX Key decisions: Multiple access routes? Target market share? Full automation or semi-automated? Importance of voice broking market? Local staff or remote access? Full automation best protects intellectual capital Multiple access routes also protect intellectual capital Outsourcing possible without loss of intellectual capital 4

5 Critical components for development and implementation Platform independence Allows for faster performance scaling Prevents reengineering of working tools Increases scope for reuse in different business areas Forces strict adherence to best programming practice and documentation Separation of data, calculation and action triggers Data storage and processing usually database and I/O intensive Calculation does not necessarily have to be real time as results can be stored Action triggers require minimum latency Combining all three is almost never optimal Separation much facilitates performance tuning, reusability and reliability improvements Conclusion: It is not possible to have everything at once and unlikely to be the best in each Using public APIs and protocols facilitates portability and integration Chance of severe bugs in market standard public APIs and protocols is small 5

6 Critical components for development and implementation In practice a usual development path could look like this Excel test sheet / off the shelf (open source) core system Interpreted/Java external add on to core system Native/C++/Java/C# internal add on to core system Native/C++/C# external add on to core system (only input and transactions are from core system) Native/C++/C# Hardware external standalone system 6

7 Critical components for development and implementation Test system Control client Production system Control client Cleaned Historic Database Calculation engine Test/Simulation/ Backup Server Periodic Parameter Synchronization Production Server Market Places 7

8 Technology needed. Comparison off the shelf vs custom Off the shelf products vs.custom development Off the shelf Quick Simple Relatively cheap Inflexible and slow? Not any more Custom built Slow to build, superior performance when done right Arbitrary level of complexity Expensive? Developing necessary know how in-house or outsourcing? In-house Very simply strategies that can be run simply and efficiently with commercial packages Very complex strategies that are highly proprietary and / or speed critical Outsourcing Medium complexity and well documented strategies Open systems and architecture ready for integration and reuse are key either way Robust and low cost straight through processing is key as well 8

9 Technology needed. Comparison off the shelf vs custom Outsourcing Fast, flexible and cost efficient Profiting from efficiencies of scale and reuse Know how for most purposes these days readily available Considerable potential savings in terms of hardware, software and IT support Safety layer Building expertise Most important when customer experience is involved Critical for anything highly dependent on speed Increasingly important with complexity of strategy Argument of intellectual property is an illusion Sometimes necessary for regulatory reasons Managing increase in sophistication 6 Ps are key Building block design and platform independent architecture are vital Documentation often neglected despite importance Integration into business process helps a lot User skills as important as developers Culture of precision and attention to detail is very important 9

10 Technology needed. Comparison off the shelf vs custom Off the shelf system with Multiple electronic market and broker connections Fix compatibility Built in auto-quoting functionality Built for speed and volume Integrated risk and trading system Algorithmic trading platform Open API for extension and adaptation ASP available Electronic Broker with Multiple direct market access capability Excel, Java, C++ API connectivity Integrated trading and risk management Open API for extensions Downside: no dedicated bandwidth and direct exchange membership (quoting) too expensive (fees) and slow for high frequency trading 10

11 Technology needed. Comparison off the shelf vs custom Market fast replay functionality Market replication capability Historic order book data Historic implied data Current and historic news linked to above 11

12 Latest developments and future trends in tools and technology ASP Application Service Provision Proximity hosting - Colocation GPUs- Graphics Processing Units FPGAs- Field Programmable Gate Array Elementized news Tagged news Social networks Viral marketing Trend scouting 12

13 Thank You! 13

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