All posts by Trading Technologies

It is a great honor for Trading Technologies’ X_TRADER to be named “Best Buy-Side Commodities Trading Platform” in this year’s Buy-Side Technology Awards. The award, which recognizes “the leading technologies and vendors in their area of expertise, through an auditable and transparent methodology underpinned by the input and experience of six judges,” was announced at the sixth annual Buy-Side Technology Awards in London on Friday.

The 2012 award is a significant accolade for TT in a period of increased agitation and uncertainty for our industry. That our platform was chosen from a large field of worthy competitors is deeply satisfying to all of us at TT.

At the core of our philosophy is the simple idea that everything we do, from providing exchange connectivity and hosting services to designing world-class algorithmic design tools, centers on the end user. Although our system addresses the needs of many constituents, including regulators, exchange operators and broker trading and operations staff, it is ultimately the buy-side end user who dictates whether we have succeeded. And with buy-side users facing new regulatory and market hurdles, they need an execution platform that provides superior performance and dependability as well as compliance with existing and emerging regulatory requirements.

Why Go Out on a Limb?

Because, according to Will Rogers, that’s where the fruit is. The futures industry exists because of risk, and unlike “capital markets,” where securities are issued and sold to generate business capital, futures are primarily about risk mitigation. But while you can hedge oil consumption or metals prices, certain forms of risk are harder to identify and mitigate.

Take, for example, the risks inherent in rapidly evolving regulatory requirements. With new regulation spanning a variety of derivatives and trading operations, today’s buy-side user faces a growing wave of change that makes forecasting near-term events, let alone the distant future, increasingly difficult. With the Republican presidential candidate vowing to repeal Dodd-Frank, there is certainly a lot that remains up in the air.

Regulatory change is moving at such a rapid pace that some observers speak of “regulatory arbitrage” as a potential response to ambiguous or overreaching legislation. Derivatives trading has never been simple, but the onslaught of new challenges overlaid on market participants adds even more complexity to the business.

Then there are the debacles. Things that were simply given in the past, for example, thinking of established brokers and customer funds as the trading equivalent of bedrock, have gone out the window, and the buy-side must now hedge previously unthinkable scenarios. Who could have predicted established brokers such as MF Global and Peregrine would disappear virtually overnight?

In light of the post-crisis climate, the need for trading system stability and flexibility has never been greater. More than ever, buy-side traders are demanding reliable, flexible and compliant trading capabilities to keep up with an ever-changing landscape.

In awarding the 2012 Buy-Side Technology award to TT, the judges had much to commend their decision. For buy-side firms needing to run their derivatives book while safeguarding both their assets and their reputation, our clients tell us the TT platform is second to none. TT’s comprehensive risk controls provide system-wide exposure and P&L limits to ensure that all orders are validated and managed against pre-trade limits in real time without exception, and without compromise to our microsecond-level performance. The Synthetic Strategy Engine allows buy-side traders to create broker- and exchange-neutral synthetic orders for finely tailored execution management, and our new ADL™ allows them to build proprietary alpha-seeking and execution algos that are also broker neutral. The TT FIX Adapter provides a robust means of integrating third-party order-management and middle-office systems with TT, and allows buy-side portfolio managers to stage orders directly from their OMS to TT’s X_TRADER for immediate execution or care order handling.

We Live in Interesting Times

Old curses of questionable attribution aside, we do in fact live in a much-changing world. Markets, products and rules now evolve at a dizzying pace. TT recognizes that buy-side traders are facing more challenges, and to this end we continue to develop flexible and trustworthy capabilities for buy-side traders worldwide. We are grateful to have been selected to receive this year’s award from Buy-Side Technology, and remain ever-committed to providing superior capabilities to our buy-side end users.

Note: If you’re not familiar with X_STUDY®, I encourage you to review the X_STUDY materials on our website. You’ll gain a solid understanding of this trader-centric charting application, which is fully integrated with TT’s X_TRADER® platform and provided to all X_TRADER users at no additional cost.

As the product manager for X_STUDY, TT’s charting and analytics application, I’d like to talk about constant volume bars. Constant volume bars build bars based on fixed volume instead of fixed time. There are several advantages to constant volume bars when compared to time-based bars.

Shorter time-based bars, like one-minute and five-minute bars, are great during the day when there are many market participants and the market tempo is fast. When market tempo slows and price action begins to consolidate, shorter time-based bars will continue generating bars as time passes. Too many of these time-based bars will inevitably flatten out your analytics, which can then generate whipsawed losing trades or take you out of a good trade.

A Case for Constant Volume Bars

A constant volume bar conforms to the market’s tempo. As the market tempo slows, so will the formation of new bars. As the tempo increases, so will the number of bars created. Volume bars are ideal for when events happen in the marketplace, too. For example, the release of an economic event at 1:15 can leave your five-minute bar waiting until 1:20, while the volume bars have already created four new bars in that five-minute window. These four faster-responding volume bars give your strategy more opportunity to react to the event that has just occurred in the market.

Likewise, who needs 12 five-minute bars from 12:15 to 1:15 before that economic number comes out when volume is light? Your analytics will be flat with time-based bars and won’t be able to help you make decisions. A volume chart in this same period might only form one bar. The concept of constant volume bars creates an intelligent bar that reacts to the market’s trading volume.

An Example

Let’s look at the scenario below, which uses the ES Dec12 contract from earlier this month. Compare a five-minute chart to a 20,000-volume chart. It will show advantages for when markets have both a fast and slow tempo. The five-minute bar chart shows a one-bar spike in the morning hours. The 9:00 to 9:05 a.m. bar in ES spikes to 1450.00. Comparing this bar to the 20,000-volume chart, we can see that approximately 5½ bars were formed on the constant volume bar chart during the same time.

Now look at the overnight market above. Here we can see more than forty bars have formed on the five-minute bar chart. This many bars will cause most technical indicators to flatten out and any automated system to start generating false signals, especially if the technical indicators are using fast values like a simple moving average of six bars. (I actually do not display all the bars here; there are more off to the right of the chart. You can tell this by the little red arrow at the bottom of the five-minute chart.)

 

The 20,000-volume bar has only produced two bars, with the second one still incomplete. At the time of the screenshot, the bar was only half complete, with around 11,000 volume. This example illustrates the improvement constant volume bars provide in both fast- and slow-moving markets.

In Closing

In my experience, I’ve found that constant volume bars can really improve analytics and help eliminate some of the whipsaws.This isn’t to say time-based charts are unnecessary. In fact, I myself still use time-based charts in much of my analysis. I don’t think I could give up daily charts; they are just too ingrained in my analysis. Rather, I’m simply suggesting that you might gain a little edge by looking at a combination of volume-based and time-based charts.Until next time, plan the trade and trade the plan.

More than two years after the Dodd–Frank Act was passed, it’s surprising how much still remains unsettled with regard to what new regulations may be implemented and how the industry will be transformed. One of the few changes that seems certain is that over-the-counter (OTC) swaps will move to a centrally cleared model.

What remains to be seen is which model for trading and clearing interest rate swaps will ultimately win out. Will these swaps remain custom OTC contracts traded via a swap execution facility (SEF)? Or will the industry move toward an exchange model where swap-like futures are traded on a designated contract market?

Siding with Futures

It seems more and more as if the futures model will ultimately win out. Exchange-traded interest rate swap futures have margin efficiencies that the OTC model can’t match. A number of strategies that make use of OTC swaps today may no longer be profitable once these swap positions are subject to margin requirements, an issue which the substitution of swap futures for OTC contracts substantially alleviates.

The trend toward either the “swaps as futures” or “futures on swaps” model is noted by research firms such as TABB Group, but is also reinforced by moves the exchanges are making. For example, the Chicago Mercantile Exchange (CME) recently announced plans to list deliverable interest rate swap futures, and IntercontinentalExchange (ICE) is transitioning its OTC energy contracts to futures.

Making the Swap: Eris Exchange on TT

For these reasons, I was very excited last month when we announced our plans to provide connectivity to Eris Exchange. Eris has created products that capture the best of both worlds. Eris contracts are futures, which means they bring with them margin requirements substantially lower than comparable OTC contracts—up to 95 percent lower for accounts with highly correlated positions. At the same time, Eris products are designed to replicate the cash flows of OTC swaps while also allowing for custom coupons, effective dates and maturity dates to be specified, giving firms the ability to tailor the contracts precisely to their needs.

In addition to being an effective vehicle for corporations to hedge their business risks, a number of strategies based on Eris futures can be executed using TT’s suite of server-side execution tools, such as the Autospreader® Strategy Engine (Autospreader SE) or the new ADL™ visual programming platform with Algo Strategy Engine (Algo SE). These include:

  • Invoice spreads between the cheapest-to-deliver Chicago Board of Trade (CBOT) or NYSE Liffe U.S. treasury future and an Eris contract with a similar maturity
  • Swap spreads between an Eris future and a similar-maturity BrokerTec treasury
  • Eurodollar basis trades between Eris futures and CME or NYSE Liffe U.S. Eurodollars
  • Swap curve strategies between different Eris maturities, between Eris futures and BrokerTec cash treasuries or between Eris futures and CBOT or NYSE Liffe U.S. interest rate futures

We plan to roll out our support for Eris in two phases. The first phase, due out later this year, will add support for Eris’ IMM dated forward starting swaps, including Eris’ invoice spread leg contract. In phase two, we will add support for the rest of the Eris product suite, including spot starting swap futures.

Learn More

For more information, visit the Eris Exchange page on our website and read the recent news release announcing our plans to connect to Eris.

And if you’ll be attending FIA Expo later this month in Chicago, stop by our booth (#820) on Wednesday, October 31 at 3:30 p.m. to learn more about Eris futures and how you can trade Eris with TT. Free passes to the exhibit hall, compliments of TT, are available here.

Hope to see you at the show!

By way of introduction, my role at TT has involved me in a number of strategic initiatives including proximity trading, synthetic orders, Financial Information eXchange (FIX) protocol and application programming interfaces (APIs).

Most recently I’ve been holding discussions with a variety of firms to further enhance the capabilities of our system for buy-side traders and portfolio managers. In this role, I’ve had the pleasure of speaking with some key players in the buy-side community.

Of course, the term “buy side” itself refers to a fairly wide swath of business models, ranging from asset managers to hedge funds. But despite the breadth of the buy side as a whole, a growing number of buy-side users is demanding the option of a high-touch capability in a world otherwise driven toward low-latency, low-touch trading.

All the World’s a Stage

Staged Orders in X_TRADER®

Order staging, which involves the creation of staged or “care” orders, is in some ways an idea that’s as old as agency trading itself. Although they weren’t called care orders at first, care orders started as a voice call to a sell-side trader over telephones and squawk boxes. As technology marched forward, the vehicles for submitting care orders evolved to include faxes, followed by emails and instant messages.

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