Trade Talk Blog

The official blog of Trading Technologies, your source for professional futures trading software.

This post about TT’s new MultiBroker ASP solution by Jim Kharouf was originally published in today’s John Lothian Newsletter. Jim is editor-in-chief of JLN.

Sometimes it is the small innovation or service that changes an industry.

Jim Kharouf, editor-in-chief
John Lothian Newsletter

Trading Technologies (TT) announced last week the launch of a new trading function that allows TT customers to choose which brokers they will route their orders through on its X_TRADER® platform. In other words, if you want to trade 100 crude oil futures, you can route 10 contracts through one broker, 50 to another and 30 to another and 10 to another, all from one trading screen.

This could be a game changer for the futures industry.

This technology is not groundbreaking, as other technology vendors already offer it, from Bloomberg to Realtick to Thethys and Trading Screen. But none of those firms have the futures footprint of TT. And in that sense, the new multi-broker solution could usher in a new era of competition among FCMs and choice for end-users. TT’s multi-broker functionality is in the beta testing stage, and also includes 11 banks, who have agreed to adopt the service including: BofA Merrill Lynch, Credit Suisse, Deutsche Bank, HSBC, J.P. Morgan, Jefferies, Macquarie Bank Limited, Mizuho Securities USA, Morgan Stanley, RBC Capital Markets and UBS.

Why would a broker ever want to be put on a system that could ultimately route order flow away from it? Because that broker believes it is better than the competition. So far, 11 FCMs think they have what it takes to not only keep existing customers but add new accounts as well.

When thinking about the impact of this concept, one example comes to mind. The airline and travel industry, has been massively challenged and changed with the introduction and spread of online travel booking sites such as Orbitz, Priceline, Travelocity and others. Customers have always had a choice of airline, but now individuals have more transparency on pricing and ability to pick the right trip for them. And customers have responded. Orbitz, launched in June 2001, was initially supported by five major airlines and drew 2 million visitors in its first month. Last year, the company said it handled more than 18 million per month.

TT’s solution just offers potential competition and convenience to its customers in a similar way. TT plans to expand that FCM list as the beta testing leads to a full launch planned for this summer.

The question is whether TT’s service will attract more FCMs, particularly Goldman Sachs and Newedge. The other issue is whether TT might take this service to another level – offering brokers a chance to display commissions, discounts or other services that might garner new customers to their platform.

It is a fine line to walk for TT, but the fact that it has created this service and found buy-in from both customers and the solid group of FCMs already is a sign a change in the industry may be brewing.

– Jim Kharouf, Editor-In-Chief, John Lothian Newsletter

UPDATE: If you missed our live broadcast of this ADL Hangout, you can view the recording here.

The next Google Hangout featuring our ADL algorithmic trading tool is set for Wednesday, January 30th, at 3:30p.m. CST. Product Manager John Yoo and Senior Business Analyst Tom Zagara will use the If-Then-Else block to build advanced logic for the exit-side order of the scalper algorithm featured in our previous Hangouts.

To watch our live broadcast, visit TradingTechTV at 3:30 p.m. CST on Wednesday. No registration, login or special software is required.

If you missed the first two live Hangouts, you can watch the recordings below.

Episode 1: Build and launch a basic scalper algo. It joins
and maintains a one-lot bid on a given instrument as long
as the bid quantity is greater than 100. When filled, it places
an exit order at one tick higher than the fill price.

Episode 2: Build the exit-side logic to the
scalper algorithm introduced in the first episode. 
In doing so, we also cover the Value Extractor 
Block and the concept of “virtualization”.

X_STUDY charts offer more than traditional bar data. Along with the open, high, low, close and volume for each bar, X_STUDY provides additional data points, like the total number of market sellers hitting the bid, or bid volume, and the total number of market buyers lifting the offer, or ask volume. As explained in my last blog, these bars can be time-based or volume-based.

Today I’d like to talk about TT CVD, a true leading technical indicator that works off these powerful market data points.

You might be thinking: “All technical indicators are lagging indicators.” But after you see how TT CVD is calculated, you will probably agree that this is a leading indicator. It can complement just about any trading strategy, too.

TT CVD Overview 

TT CVD uses the bid and ask volume data to display the running difference of the ask volume (the market buying pressure) minus the bid volume (the market selling pressure)—or, in short, the cumulative volume delta (CVD). Let’s walk through a real-world example to illustrate how TT CVD is calculated.

Figure 1 below shows a chart of the December E-mini S&P 500 contract with three studies. The first, Volume Delta—Histogram, displays the total bid and ask volumes. The second, Volume Delta, displays the difference of the ask volume minus the bid volume. These two studies will help me explain the third study, TT CVD.

Figure 1: One-Minute December E-mini S&P 500 Chart

In the opening one-minute period, 7,254 contracts are bought on the ask and 5,940 contracts are sold on the bid. There is a net market volume change, or volume delta, of +1,314 (7,254 minus 5,940). Since this is the beginning of the session and TT CVD is configured to reset at the beginning of a session, its value is simply the volume delta for this opening bar of +1,314.

Moving on to the next minute, in Figure 2 below, we see 2,111 contracts are bought on the ask and 3,444 contracts are sold on the bid. The volume delta is going to be negative here, since there were more market sellers than market buyers. The volume delta equals -1,333 for the second one-minute period of the day (2,111 minus 3,444).
Figure 2: One-Minute December E-mini S&P 500 Chart

TT CVD for the second bar is equal to the previous bar’s TT CVD value plus the volume delta. Continuing with our example, the previous bar’s TT CVD is +1,314, and the second bar’s volume delta is -1,333. Therefore, TT CVD equals -19 (1,314 minus 1,333). TT CVD continues to cumulate the volume delta for the remainder of the session and is a clear measurement for market order flow.

TT CVD and Daily Net Change 

Now that we’ve explained how TT CVD is calculated, let’s compare the same setup for this study to the daily net change. TT CVD values trend similarly to the actual price data, since net market buying and selling should have a direct and correlated impact on the price. The larger the magnitude of TT CVD value, the greater the net change should be for the day.

Figure 3 below shows several days, with each day outlined and a net change value labeled. I used last traded price for each day, not the settle. For most days, if TT CVD is positive, so is the net change for the day. Likewise, if TT CVD is negative, so is the net change for the day. Sampling the last 90 trading days for this contract will show this statement is true for 67 days, or 74 percent of the time.

Figure 3: 60-Minute December E-mini S&P 500 Chart

The remaining 23 days sampled will be similar to December 4 and 5 in Figure 3. These days are generally neutral days with sideways action. The net change and TT CVD values are both near unchanged.This is one of the main reasons why the two values sometimes don’t line up with one another.

Now that you’ve seen how TT CVD works off more powerful market data points than just the open, high, low and close, I hope you agree that it is a true leading technical indicator. If you aren’t already using TT CVD, take the next step and add TT CVD to your X_STUDY charts so you can observe this leading technical indicator work in real time. And if you aren’t already using X_STUDY, what are you waiting for? It’s included free with all X_TRADER licenses. Learn more about X_STUDY here.

My next blog will look at another influential market data point that’s included in X_STUDY. Until then, plan the trade and trade the plan.

The country of Brazil derives its name from the Portuguese word for the trees that once grew up and down its coast. In the 16th century, the timber from these trees was the first main export to Europe from what was then known as Terra da Santa Cruz (“The Land of the Holy Cross”). The wood from these trees produced a deep red dye, resulting in a name derived from the Latin word “brasa”, meaning “ember”. Over time, European merchants began to use the colloquial term for the county and its most valuable commodity: “Brasil” or “red like an ember”.

Red like an ember is a good way to describe Brazil’s economy these days. As one of the world’s fastest growing economies in 2010, the Brazilian economy was white-hot. In 2011 and 2012 though, the economy slowed to a low simmer as growth slowed substantially. In 2012, the stimulative policy changes put in place by the Brazilian government and central bank resulted in a record volume year at BM&FBOVESPA, as well as a number of compelling trading and investment opportunities.

Big Year for BM&FBOVESPA

November 25, 2012 marked the one-year anniversary of TT providing native market access to BM&FBOVESPA, which coincided with the exchange’s migration of the last of their futures products to the new PUMA matching engine. While the last year has been a challenging one for the Brazilian economy in general, the country is still expected to set the pace for growth in Latin America going forward. At the same time, the exchange continues to focus on product innovation and expanding their offering for both local and foreign investors.

In a year that saw volumes declining at most major futures exchanges around the world, BM&FBOVESPA’s volumes are actually up. Through the first nine months of the year, the exchange’s futures volumes were up 5% over the same period a year earlier. The increase in volume can be traced back to two things: uncertainty in the Brazilian interest rate markets, and BM&FBOVESPA’s technology and product launch initiatives.

On the technology front, the PUMA matching engine, developed jointly with the CME Group, was built with high-frequency traders in mind. It shaved the time the matching engine takes to process a trade from 10 milliseconds to less than one. In 2013, BM&FBOVESPA will move their equities onto this platform as well.

Product-wise, this past summer, the exchange listed eight new FX contracts, including mini-dollar and mini-euro products. In June, the exchange also began cross-listing contracts with the CME Group, launching a mini-soybean product that settles to the price of the same product on the CBOT. And in October, BM&FBOVESPA similarly launched a product based on the CME’s S&P 500 future. As these markets develop in Brazil, they may offer interesting spreading opportunities against similar products in Chicago.

“North-to-South” Access

While it is still a somewhat cumbersome process for foreign investors to trade on BM&FBOVESPA, even here, both the exchange and the Brazilian government are slowly greasing the wheels. Trading by foreign participants is expected to comprise 25% of total volume this year, versus 16% in 2011.

Connectivity into São Paulo has long been costly, but slowly prices are starting to come down as more and more “north-to-south” customers enter the market. Increasingly, extranet and hosting providers, such as TTNET, are setting up shop in Brazil, making it easier and more cost-effective for the global community to access Brazil.

The Brazilian government is doing its part as well to entice foreign capital. Long fearful of inflation, Brasília put in place capital controls, such as the 6% IOF tax on inflows of foreign capital for the trading purposes, to tamp down appreciation of the Brazilian real (R$) against the U.S. dollar. As fears of a strengthening real turn into fears of a weakening currency, the government is slowly eliminating some of these controls. Last December, the IOF tax on equities trading by foreign participants was dropped, and in early December, the number of foreign loans to Brazilian firms subject to the IOF tax was reduced. While the 6% tax on foreign capital inflows related to some derivatives trading remains in place, the government will likely look to remove that, too, as long as the real continues to look weak.

Information regarding how foreign investors can access BM&FBOVESPA is available on the exchange’s website here.

Looking Ahead to 2013

Somewhat turbulent economic times in Brazil have also played a part in the uptick in the exchange’s volume in 2012. In years past, with the Brazilian benchmark Selic interest rates hovering between 10% and 20%, the carry trade has been a popular one on BM&FBOVESPA.

That has changed somewhat in the last year, though. The Brazilian economy, which grew at a 7.5% clip in 2010, will slow to about 1.5% this year. Not bad when you compare it to Japan, the U.S. and Europe, but meager by BRIC standards. In an effort to get the economy back on track, the Banco Central do Brasil has cut interest rates from 12.5% in mid-2011 to just 7.25% as of October. It was the resulting uncertainty and volatility in the interest-rate markets that led the exchange to a record volume month in May of 2012.

Low interest rates coupled with low inflation (for now) offer a number of interesting trading opportunities going forward. For local Brazilians, they can no longer ensure themselves a healthy rate of return just by sticking their cash in a savings account. For the first time in a long time, Brazilians are looking to invest in their country’s stock market. As the CEO of BM&FBOVESPA, Edemir Pinto, told the Financial Times, “For any stock exchange, high interest rates are the biggest competitor you can have so this is a big moment of great transformation for the Brazilian market.” Traders who want to gain exposure to Brazilian equities can do so via the Ibovespa index futures on BM&FBOVESPA, which track the total return of the most liquid stocks on the Brazilian stock market.

Further Selic movements by the central bank also offer opportunities for traders looking to trade the DI interest rate swap curve. With an election looming in October of 2014, President Dilma Rousseff’s government will look to get GDP growth back on track. Earlier this year, she announced a stimulus plan consisting of 955 billion reais worth of infrastructure projects. These projects, coupled with other construction related to the 2014 World Cup and the 2016 Olympics, will lead to the issuance of debt that will likely have to be hedged in the futures market.

Still, that stimulus package might not be enough. Economists had projected GDP growth north of 4% in 2013, but lately they have been revising those forecasts downwards. So, the near term question is whether the Rousseff government will continue to cut rates in an attempt to jumpstart the economy, or whether the central bank will turn its attention to preventing inflation and a further weakening of the real and will, as a result, raise rates back into the double digits.

It’s going to be an interesting new year in Brazil, with the BM&FBOVESPA futures markets offering plenty of opportunities for new and unique trading strategies for foreign investors. The embers of an emerging powerhouse economy are still there smoldering, and it’s just a question of whether the Brazilian government can find the right policies to stoke the flames.

If you follow us on Twitter at @Trading_Tech, you’ve probably seen our compilation of 2012’s top 10 news stories in trading, tech and Chicago businessor as we called it on Twitter, the #TTTop10. To close out the year here on Trade Talk, we’re recapping that list.

We chose the news stories that made the biggest impact on the trading industry and on TT’s customers. Whether or not you agree with our selections, hopefully you’ll be entertained and informed by the list.

Without further ado, let’s count down our picks.

10) TT Gets Social

We joined the social media fray in a big way this year with our Twitter feed, our LinkedIn page, our TradingTechTV YouTube channel and, of course, this blog. In 2013, we’ll expand our social reach to other venues, including Google+. If you’re not already familiar with this increasingly popular platform, take a look at “Google+ Is Growing at Facebook Speed, a recent (and brief) article from Wired.

9) Chicago Tech Scene Emerges

Pundits from near and far wrote about the tech boom in TT’s toddlin’ (home)town. Among the reports were “’The Midwest Mentality’: Why Chicago’s Supposed Weakness May Be Its Greatest Strength” from The Atlantic and “Relic of an Era, Revitalized”* from the The New York Times. We’re loving this trend and very proud to be a part of it.

8) Libor Scandal

What’s a year without a scandal? We saw a big one unfold last summer, when news broke that several major U.S. and European banks had manipulated the London interbank offered rate (a/k/a the “Libor”) and other benchmark lending rates. The Financial Times created “Libor Scandal”*, an extensive web-based compilation of relevant coverage. It’s a good source for updates as the story continues to unfold.

7) No Prosecution for MF Global

Our industry was rocked to the bone in October of 2011 when MF Global imploded amidst widespread allegations of criminal wrongdoing. Although a whopping $1.6 billion in customer funds went missing and many cried for the government to bring a criminal case against ex-CEO Jon Corzine, a 10-month investigation failed to result in the filing of charges. An op-ed from The New York Times titled “Is MF Global Getting a Free Pass?” foreshadowed this outcome. Five months later, the Times made the bad news all but official in “No Criminal Case Is Likely in Loss at MF Global”. Meanwhile, The Daily News recently photographed Corzine roaming free in wealth-ridden East Hampton.

6) Eris Exchange and the Futurization of Swaps

Throughout 2012, the upstart Eris Exchange attracted an avalanche of media attention (and inked a connectivity agreement with TT) for its move to futurize interest-rate swaps by launching contracts that replicate swaps in a cheaper, more efficient manner. Waters painted a bright picture in Eris Exchange Seeks to Futurize, Standardize, Capitalize”*, and we covered the story on Trade Talk in “Swaps: They’re in Our Future”. More recently, news broke on December 20 that Morgan Stanley will make a strategic equity investment in the exchange and become an anchor bank liquidity provider. The Wall Street Journal spelled out the details in “Morgan Stanley Stake in Eris Exchange Spotlights Market Shift”*. With the deal slated to close in early 2013, and with TT’s new Eris Gateway scheduled to launch in the same time frame, we expect Eris Exchange’s star will continue to rise.

5) TT’s Platform Rebuild

TT made news in October when CTO Rick Lane announced here on Trade Talk in “The Pace of Innovation at TT” that development of a brand-new trading platform based entirely on the TTNET™-hosted ASP model was underway. Rick talked about the rebuild and other issues last month with MarketsWikiTV in this video. You’ll hear more about this next year as TT’s next-gen platform continues to evolve.

4) Regulation

Ah yes, what would our list be without this one? Not a day passed without a mainstream media mention of Dodd-Frank and regulatory reform. Waters recently provided an interesting perspective in “2012 Review: Economy, Regulation Create Perfect Data Storm”*. We even covered it ourselves on Trade Talk in “The New Role of the Software Vendor in the Midst of Risk Management and Regulatory Reform”. This issue will continue to be top of mind in 2013.

3) ADL™ Changes Trading

As we approach the peak of our list, we get to one that makes all of us at TT very proud. It’s ADL, the game-changing visual algo programming platform that we released with X_TRADER® 7.11 in March. Futures magazine tested X_TRADER 7.11 and awarded it a perfect four-out-of-four stars, citing ADL as a “potentially important programming innovation for the algorithmic trading community” and saying it “achieved its goal of providing a powerful graphical interface for the high-frequency algorithmic trader”. Read the full report in “Software Review: ADL/X_TRADER”.

2) Cliff Diving and Sandy

The runner-up in the #TTTop10 is actually two stories because we felt they were equally impactful.

At 2a is Cliff Diving, which every serious media outlet on the planet has covered ad nauseumespecially over the past few days, as we’ve been edging perilously close to the edge. Will the U.S. go over the fiscal cliff in a freefall towards economic doom and gloom or be saved by a last-minute deal? We’ll know very soon. For now, if you’ve been living under a rock and need a primer, you can read up on this debacle in “Stocks Sink 2% for the Week” from CNNMoney. Or if your eyes are starting to burn from reading the articles listed above, sit back and watch “MarketWatch Ahead: Cliff Diving”, a video from The Wall Street Journal.

At 2b is Hurricane Sandy, which ravaged the East Coast in October, killing at least 125 people and reportedly causing damages in excess of $160 billion. Sandy brought Wall Street to a grinding halt, forcing a two-day shutdown of New York’s iconic exchanges. “NYSE and Nasdaq Closed as Hurricane Sandy Hits” from CNNMoney reported the situation as it unfolded.

1) Trading Errors Abound

Atop our list of the year’s most important stories is the epidemic of trading errors and software malfunctions that plagued the industry in 2012. There were some biggies, including Knight Capital’s near-fatal mistake and the aborted BATS IPO. Rather than go through the details here, we’ll direct you to Traders Magazine, which devoted two covers to this ongoing story with “Glitch! Part 1” and “Glitch Part 2”.

That takes to the end of the list, which is fitting because we’re only hours away from the end of the year. If you’re inclined to share your top stories for 2012 or your predictions for 2013, please leave a comment here on the blog, or tweet us at @Trading_Tech and use the hashtag #TTTop10.

Thanks for joining us on Trade Talk these past few months. We look forward to connecting with you in 2013, and we wish you a happy, healthy and prosperous new year.

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