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VIII International conferenceTheory and practice of options trading.Evolution of market making and algorithmic trading
Christopher LedererMD, Orc Software BV
VP Sales Continetal Europe ORC AB
2011-06-04
Who am I and why I am here. . .
1991 – 1998 Studied Medicine at University of Bonn / Germany
1998 – 2001 RTS Realtime Systems AG Frankfurt (Head of Support and Projects)
2001 – 2005 RTS Sydney Ltd. Founding Member (Head of IT APAC)
2005 – 2007 Tick-TS AG (Joint Venture of HSBC and Sino (Brokerage) (Key Accountmanager IT)
2007 - 2008 ORC Software Frankfurt, Found and establish ORC Office in Amsterdam
2008 – 2009 MD Orc Software BV
2009 – now VP Sales Continental Europe
© Orc Software AB, All Rights Reserved. Proprietary and Confidential . | 2
Evolution ? Survival of the fittest
1998 Amsterdam Trading Firm˃ MM on Eurex (Options) / Xetra (Stock)
–2 Series with 1 Trader and one Assitant (8hours)–ISDN Lines 64kb/s max 128kB for MM
2004 same Amsterdam Trading Firm˃ MM on Eurex/Xetra
–15 Stock all Options Series one Trader (12 – 14 hours)–10Mbit
2001 – 2005 Market Makers in Sydney˃ Initial 24 Market Makers registered (2001)
˃ 14 left (IMC, TH and Optiver dominated the landscape after 24 month)
© Orc Software AB, All Rights Reserved. Proprietary and Confidential . | 3
Evolution - lead the race?
Latency comes at the price of lower flexibility
Conditions are usualy „same“ for all.Leading MM companies have a very static approach to markets˃ Leaving them exposed if conditions change beyond the expectd˃ Global players educate and train staff themself – very strikt approach towards market
conditions caused by that.˃ If conditions are as expected 10+ years expiriance are executed on a market
MM has suffered under small spreads, low volume and volatility.Algo traders suffer under high TCO with lower revenues – investments have to be justified. 2008 – 2010 have been hard yearsThere is thirst for new markets – main European markets are already at a technology level where more is hardly possible.. Quote „Every millisecond we save we see in revenue increase next day“˃ Developer Amsterdam Market Maker 2009
Quote „We hire Operators not Market Makers“˃ MD Market Making Company (globally connected)
© Orc Software AB, All Rights Reserved. Proprietary and Confidential . | 4
OFT Technology Vision (basic requirements)
Segment Independence˃ Allow Independent Segment Development – deploy to new markets
Redundancy Minimization – one does all.Open Architecture˃ Ability for segment solutions to only pick the components they need˃ Ability to only pick the components they want˃ Ability to build their own market gateways˃ Ability to customize different components from parameters to plugin-code
–Market Maker–Limit Management –Compliance
Consistently Low Latency˃ Market Access layer can be accessed directly from customers without
going through service layer (unless enrich functionality is desired or needed)
˃ Not lowest possible latency whatever the cost
© Orc Software AB, All Rights Reserved. Proprietary and Confidential . | 5
Automated trading (MM/ARB/gAlgo)
© Orc Software AB, All Rights Reserved. Proprietary and Confidential | 6
Trader Trader & programmer
Financial markets
A trader gets a trading idea. Trading ideas are converted to
strategies understandable by the computer. LAST POINT FOR EMOTION!
Computer runs millions of calculations per second, reacting to market changes in microseconds, implementing strategies and sending orders to the exchange much, much faster than a human could.
Algorithmic trading engine
The Key to Success (Technology)
Technology is key in MM and Algo˃ Well-defined and well-tested connectivity
˃ New product can be as simple as combining a set of existing building blocks in a new way
Continously strive towards shorter time to market˃ Remove unnecessary overhead (releasing process time)
˃ Focus on minimal transactions approach–Fire and Forget (Mifid helps in Europe)–Better diagnostics for latency and bottelnecks
© Orc Software AB, All Rights Reserved. Proprietary and Confidential . | 7
Possibility to rapidly adapt to changing requirements
Competitive challenges (service a market)
Low-latency: Constant push to be faster and process data more quickly
Scalability: Increasing competition within markets requires that underlying technology is highly scalable (handle more exchanges and more instruments simultaneously) to be able to grow business and stay ahead.
Quality/up-time: Continuous push to build solutions that have greater up-time – especially at peak periods like market opening and closing where maximum trading profits are made
Market access – market connections to worldwide exchanges
Global presence – regional knowledge
© Orc Software AB, All Rights Reserved. Proprietary and Confidential | 8
Market Making and Volatility Trading
© Orc Software AB, All Rights Reserved. Proprietary and Confidential | 9
High
LowNone Significant
Structuredproducts MM
CompetitiveMM
StrategicMM
Ag
gre
ssio
n le
vel
Market view
Market Making and Volatility Trading
© Orc Software AB, All Rights Reserved. Proprietary and Confidential | 10
High
LowNone Significant
Structuredproducts MM
CompetitiveMM
StrategicMM
Ag
gre
ssio
n le
vel
Market view
Volatilitytrading
Volatilityarbitrage
High Frequency Trading success factors
© Orc Software AB, All Rights Reserved. Proprietary and Confidential | 11
Mostly technologysome analysis
Only technology
Technology andanalysis
Only analysis
Some technology mostly analysis
None
Ho
ldin
g p
eri
od
µs
Complete Automation
Days
HFT challenges and opportunities
Challenge
Technology demands
Opportunities
New liquidity
New instruments types
New regions
New trading strategies
© Orc Software AB, All Rights Reserved. Proprietary and Confidential | 12
Full automation
Holding period
Arbitrage
Statistical arbitrage
Spread trading
Manual
Amsterdam HFT firm – 2008
© Orc Software AB, All Rights Reserved. Proprietary and Confidential | 13
Orders
London Stock Exchange
Amsterdam
Amsterdam HFT Firm
Trading desk
Orders
Amsterdam HFT firm – 2010
© Orc Software AB, All Rights Reserved. Proprietary and Confidential | 14
Orders
London Stock Exchange
Amsterdam
Amsterdam HFT firm
Trading desk
Orders
Co-Location site
Orc Spreader
TCO +50%, Revenues stay the same – competitive effects that can change landscape of markets – only the one that can invest can survive. 2009 MM Amsterdam reported 90% lees EBITA due to crisis.
Outlook for Russian
Regulation?Exchange competitionTechnical Infrastructure (TCO)˃ When do costs block expansion? – Investments are drastic in
competitive markets. Return of investments have to materilize quickly before others follow and competitive factors have effects on revenues.
Products –ETF, Strutured Products . . . Education on ProductsLocal Economy and Conditions have to there . . .Russia has show stable grows in all measurable conditions as well as emotional.˃ Language and cultural differences will adjust within time
Pragmatic and smart approaches can make the difference!˃ Being smart is not necessarily linked to measuarble parameters and
therfore can not be ordered, forced or bought.
© Orc Software AB, All Rights Reserved. Proprietary and Confidential . | 15
Q & A
© Orc Software AB, All Rights Reserved. Proprietary and Confidential . | 16
Thank You!