All posts by caxy

Source: Nanex
Source: Nanex

Not long ago, we published the blog post All Washed Up: Putting an End to Self Trading. We’ve since officially released our order-cross prevention functionality on TT, which provides users with the option to transfer a position when two opposing orders within the same group match on price.

We’re excited to make this feature available to our users, and we’re already working on enhancements. For example, within a few weeks, we’ll provide the ability to match exchange spreads and synthetically generate the spread and leg fills for each account.

As mentioned in my last blog, stay tuned to learn more about this feature as we continue to iterate and roll out new enhancements. In the meantime, feel free to reach out to us to learn more or to schedule a product demo. Or try TT yourself at trade.tt—it only takes a few seconds to create a free demo account.

Last week the CFTC issued a report detailing the flash crash experienced in the U.S. Treasury cash and futures markets on October 15. The report highlighted the lack of a “smoking gun” culprit as the cause of the sudden and dramatic price swing witnessed in these markets. Instead, it pointed the finger at a culmination of many factors, including downward pressure on yields leading up to the event combined with an economic data release which contradicted the market’s expectations of a rate increase. It also highlighted another phenomenon prevalent in today’s highly automated markets: self trading.

Technology to Blame

According to the CFTC report, nearly 15% of all transactions were “wash trades” during the period in question, meaning the same person—or two people trading the same account—represented both the buyer and seller on a trade. While this is an incredibly high percentage, what is more troubling is the fact that the average daily percentage of self trading on the cash Treasury markets is nearly 6% of all volume according to the agency’s report. Even though wash trading is typically forbidden in futures markets, it is nevertheless a common occurrence as trading systems and strategies grow in complexity and capabilities.
Source: Nanex

Many exchanges have built self-match prevention measures into their matching engines, but they are an “opt-in” feature and are largely considered a blunt instrument trying to solve a more nuanced problem. Self-match prevention is also increasingly under the regulatory microscope due to its role in facilitating spoofing: the assumption goes that if a spoofer is really looking to sell, he or she can put a large bid into the market to encourage other buyers to join and then sell through the level he or she was bidding. This has the effect of creating the necessary size into which the trader can sell while relying on the exchange to safely cancel the resting bid when self-match prevention is enabled.

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Last week, #PreviewTT showcased some of the risk management capabilities that are built into the TT platform.

TT couples familiar risk-management and user-administration functionality, including popular risk controls, with significant enhancements. For example:

  • Administrators can customize their own account hierarchies to apply controls at any number of levels within those hierarchies or apply them directly to users.
  • FCMs can provide firms with administrative access and give them control over the limits and settings on their sub-accounts without giving up control of aggregate risk limits.
  • Trading firms can have their own administrative access to TT, with fine-grain control over the limits and settings on their own accounts and sub-accounts, even when positions get reset.
  • Limits can be set per user as well as per account/sub-account. All limits work in conjunction with each other and must be approved before an order can be sent to the exchange.

And just like the trading application, the risk management and user administration apps are accessible via mobile devices.

Below you’ll find the content we shared last week on Twitter. It includes a video that highlights some of the key enhancements plus many product screenshots.

Starting tomorrow, we’ll talk about the TT platform architecture and benefits it delivers to our users. So keep following @Trading_Tech and #PreviewTT.
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If you follow us on Twitter, LinkedIn or Google+ or if you get our newsletter, you probably already know that we’ve begun to preview some of the noteworthy functionality that will be available in the next-generation platform, which we are calling, simply, TT. You can easily find this content on Twitter and Google+ by searching for the hashtag #PreviewTT.

Last week, we showed how easy it is to get started with the new platform. The software-as-a-service (SaaS) delivery model makes it possible for firms to onboard new users in a matter of minutes from virtually any internet-connected computer, and the process is just as simple from the user’s perspective. Since the new platform doesn’t require a software install, a user with an established FCM account can typically begin trading on TT immediately after accepting an online invitation.

This is exciting news for our customers, some of whom are now starting to experience these benefits firsthand as we accelerate rollout to early-stage users.

Below you can see the content we shared last week on Twitter. This week, we’ll be spotlighting the unique aspects of workspace creation and access.

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Image via Renjith Krishnan/FreeDigitalPhotos.net 

As someone who has been at TT for more than just a couple of years, I have seen various CTOs and product managers come and go. One common trend was always this: in the world of limited engineering resources and competing priorities, risk management features would typically take a back seat to the high-performance demands of the end user who was routing orders on TT’s platform. Historically, I guess that made some sense. At the end of the day, screen sales drove the business, and screen sales weren’t driven by the demands of the risk administrator.

TT Must Change with the Times

Only recently has the product management responsibility for risk and administration at TT become my own. So, now it’s my job to give the risk administrator a voice. Call it fate or bad luck (depending on the day), but this responsibility happened to coincide with some major risk management blow-ups resulting in quite a bit of regulatory reform. This, in turn, has resulted in rising compliance concerns and a major overhaul of how FCMs view risk management. So, the role I’m performing now looks very different than it would have five years ago at TT.

The conversation between TT and its customers has gone from common questions like these:

  • Does your system do pre-trade risk checking per user?
  • Can fat-finger limits be configured?
  • Can I configure a daily loss limit?

To these:

  • I’m concerned about high-frequency trading algorithms; how do I prevent a trader from flooding the market with orders?
  • I have my own sophisticated system for evaluating risk exposure; how do I use that system to programmatically shut off trading at the user, account or account group level on your platform?
  • We have a customer that hosts their own TT trading environment on their own servers; how can we ensure that we have exclusive risk management control over that trading environment?

 

So, What Has Changed?

There are some very real risk and compliance concerns that did not exist before—or if they existed, they have since been amplified. Proper risk management practices are more critical than ever.

What Else is Different?

For starters, TT has taken notice. What was once an afterthought has now become a major driver for us. We understand the importance of having multiple types and levels of risk control on our platform. Implementing these on our existing and next-generation platforms is something that sits atop our priority list. Risk management has found its voice and its place at TT.

Risk and Regulatory Challenges Faced by Large FCMs

As I meet with some of the larger FCMs who currently provide TT’s software to clients, I hear many of the same stories. Mainly, that TT is just one of many vendors that they offer. Managing risk across all platforms is a challenge, and they’ll gladly take any opportunity they can to consolidate the number of systems they have.

For us, the message is clear. We must make our software more flexible and easy to integrate with the FCMs’ existing risk management systems. They are looking for API functionality to get data in and out of TT’s platform. Pre-trade risk checking on TT isn’t valuable if it isn’t encompassing trades that are happening on other systems or on the floor. Because TT is just one of several systems, real risk management is happening outside of TT’s platform, often in the FCMs’ proprietary systems.

So, What is the Role of the Vendor?

Our response to this is to build flexible API functionality that provides a means for integrating TT’s software into other systems and processes. We’re doing that with products like TT API, and a brand new TT User Setup Risk API. And, when necessary, we must evolve our risk management features. We just launched, among other things, order throughput limits on our gateways, and we’re in the process of introducing new account and account group-based risk checking features into a platform that has historically been trader-based. Meanwhile, we will continue to develop new and compelling products, such as ADL™, to provide end users with advanced trading solutions.

Challenging times? Yes. But, for me, it creates an exciting opportunity to work closely with our clients to meet their changing needs. We either become flexible and adapt, or we must be replaced. If we can’t help to minimize their risks, then our trading features won’t matter. As of late, I’ve been inspired by the ability of our engineers to build platform-wide solutions into our current trading architecture. Look for more on this in future blog posts.