All posts by Trading Technologies

A Leading Technical Indicator for Charting in X_STUDY®: TT CVD®

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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.

Brazil in 2013: Where There’s Smoke, There’s Fire

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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.

The New Role of the Software Vendor in the Midst of Risk Management and Regulatory Reform

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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.

X_TRADER® Named Best Buy-Side Commodities Trading Platform

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LinkedIn

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.

Leveraging Basic Tenets of the Cloud

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LinkedIn

The operational costs of managing and maintaining a professional trading platform and the capital investment required to stand up the necessary infrastructure to support such a platform are substantial. This is particularly true for our TTNET™ hosting service, which provides the expansive functionality and robust performance of TT software along with global reach that spans the world’s major financial markets.

The TTNET global distribution network

The value proposition for customers of TTNET is the transfer of a significant portion of the aforementioned costs and risks to TT, while at the same time procuring higher quality services with lower overall costs than they could do on their own. It’s a similar value proposition of most service providers across all industries.

Our clients who utilize TTNET tell us they prefer our hosting services because it combines the advantages of our world-class, professional trading software platform with the advantages of a highly available, purpose-built infrastructure. An infrastructure deliberately tailored to meet the needs of professional traders, with attributes that include bare-metal computing performance, dedicated and performant connectivity options, and hosting proximity to, or even co-location with, major trading venues and other financial markets partners.

Providing these benefits, though, comes at a cost premium over more general-purpose IT hosting venues. And while we believe these benefits are in the best interest of our end users and worth a premium over lower-cost alternatives, we don’t believe our current implementation, execution and standard service offerings are as efficient or relevant as they could be, irrespective of the constraints of our current software platform. In short, there is room for improvement in both cost and quality.

The prominence of cloud computing in mainstream IT is accelerating the maturation of many IT technologies, and it is leading to better tools for automation and service deployment. But it’s also helping to dispel many industry misconceptions about the security, reliability and performance around three fundamental technologies of “the cloud”: multi-tenancy, virtualization and Internet connectivity—three fundamental technologies that are also fundamental cloud tenets because they directly impact scalability (and consequently cost).

Like all technologies, cloud technologies have their own challenges and limitations. But when applied intelligently and to the right problems, they are viable and cost-effective tools, even for our industry (see: NASDAQ and NYSE Technologies).

Those familiar with TTNET know that we’ve been leveraging many tenets of the cloud for a while now. In retrospect, TTNET is effectively a private cloud and has been since its inception. And while we plan to leverage cloud paradigms, cloud technologies, and even private and public services extensively in our next-generation platform, we’re not waiting for it to arrive before we take advantage of changing perceptions and extend our use of fundamental cloud tenets.

For example…

Historically, TT has only offered dedicated broker environments—meaning an end user in TTNET could only trade through one broker if he had a single X_TRADER® screen. But soon, TT will begin offering MultiBroker service to TTNET clients through a multi-tenant version of TT’s futures execution platform.

Designed as a single execution environment for traders supported by multiple brokers, MultiBroker is TT’s first foray into offering a true application-level, multi-tenant service. Multi-tenancy is a concept that can be applied to any layer of the IT service stack, from the physical layer of shared data center facilities (e.g., power, space and cooling) all the way up to the application layer serving user transactions. Typically, the further up the stack a service provider goes, the greater economies of scale that can be achieved. With MultiBroker, we are going way up the stack.

In addition to the commercial benefits MultiBroker will bring to our client base, its multi-tenant design will greatly enhance the scalability and efficiency of this service offering for both our customers and end users. And now, with the majority of our platform supporting multi-core technology, even greater scale can be achieved while maintaining competitive execution latency and efficient throughput scalability.

Our customers and end users who continue to utilize our original single-tenant hosting option in TTNET will not be left behind, as we are looking at improvements there as well. Today, TTNET uses virtualization technology and tools to support a number of management systems, but only for a very small percentage of trading-related applications, and only where functionality is out of the trade execution data path. Going forward, we plan to leverage virtualization technologies to support mainline trading applications in failover and disaster recovery situations where availability is paramount, but where some compromise in performance is acceptable. But even in the case of failover, by retaining the host’s proximity to the trading venue, we anticipate better performance than we offer today.

Finally, as our customers become more comfortable utilizing secure Internet connectivity, we are looking to transition more leased connections to the Internet. For example, we are evaluating the use of Internet as a backup connectivity option to dedicated private-line circuits without restrictions. This would result in lower connectivity costs to TTNET for our broker firms and end users. Additionally, while TT continues to expand and mature its Strategy Engine (SE) server-based execution solutions, including Autospreader SE, Synthetic SE and Algo SE, we expect more users to connect to TTNET directly via the Internet. As a consequence, we anticipate growing demand for lower-cost back-office connectivity options that offer “Internet-like” connectivity, but over a private cloud.

Look for more insights and perspectives on TTNET in my next blog. Thanks for reading.