Monday, July 02, 2012

Turning Metals into a Goldmine

Posted by Ben Ernest-Jones

"Every man now worships gold, all other reverence being done away," said Roman poet Sextus Propertius sometime around 15 BC.

Metals are hot. The Hong Kong Exchange's extravagant £1.39 billion bid to win the London Metal Exchange (LME) shows just how hot. HKE bought LME, which accounts for 80% of trade in nonferrous metals such as copper and aluminum, in a bidding frenzy against NYSE Euronext, CME and ICE.

From gold and silver to copper and nickel, it seems everyone is interested in buying and trading metals. Once the domain of producers and specialty traders such as Glencore and Marc Rich, investors globally are clamouring for access to this non-traditional asset class.

There is a natural cyclicality to asset classes; they wax and wane in popularity depending upon the opportunities to make money by trading them. Lately, investors have lost heart in stock markets and volumes are plummeting. Commodities such as oil and agriculturals lost their shine when demand in China and other emerging nations dwindled.

With returns shrinking in equities and fixed income market plays, it is no wonder that investors are interested in asset classes outside the traditional. Foreign exchange markets have been extremely active in recent years, for example, and with the current uncertainty over European debt problems demand for "safe haven" currencies is high. Precious metals often fall under that safe haven umbrella, which is presumably why interest has soared of late.

The correlation between gold and currencies such as the US dollar and the Japan yen is well documented, as gold and other metals are often used as a hedge against inflation or against a weak currency. There is also a strong correlation between gold and oil prices, and gold and the stock market historically. So there are plenty of opportunities to use metals for cross-asset-class trading, particularly in high frequency or black box strategies which monitor for anomalies in these correlations.

Luckily, pressure from investors is giving banks and brokers the incentive to break down the barriers to trading metals. Some brokers are adding metals to their foreign exchange trading platforms. We’re seeing an increase in the number of banks that are converting metals futures -  from CME, NYMEX, LME, etc. - into spot prices to stream to clients for trading. It looks like the beginning of a trend.

It is only a matter of time before banks and brokers are aggregating FX, metals, oil, stocks and bond markets for their clients - all onto one trading platform. Then we may finally see true cross-asset class and cross-geography trading. In the meantime metals trading may be the next goldmine for banks.

Wednesday, June 13, 2012

Therapy for Toxic FX Order Flow

Posted by Dan Hubscher

DhubscherAs high frequency and algorithmic trading infiltrate foreign exchange markets some of the problems that dog equities, such as high order cancellations, are arising.

Equities markets, which have seen HFT and algo trading go through the roof, have recently started clamping down on excessive and cancelled orders. As my colleague recently explored, Deutsche Börse, Borsa Italiana, NASDAQ and Direct Edge have all announced intentions to discourage the number of cancelled orders they receive. They will encourage the "good" liquidity, those players with high fill ratios, and punish the "bad".

The IntercontinentalExchange has already seen good results from a policy it implemented last year aiming to discourage "inefficient and excessive messaging without compromising market liquidity." Regulators, too, are taking note; the SEC is considering charging HFT firms for cancelled trades.

A combination of economic incentives and controls makes it happen.  In addition to adjustments to their rebate schemes, exchanges must monitor their market makers in real-time to make sure that they are living up to their quoting obligations. This monitoring can also include spotting the "Stupid Algos" blamed for generating a burden the exchanges cannot bear. 

It was only a matter of time before other asset classes started to see similar problems with excessive orders, and a similar response via a new generation of intelligent “sensing” algos – but with a twist.

FX is increasingly traded by computers.  Consultancy Aite Group said in a report last year that FX algorithms will account for more than 25% of FX trade volume by the end of 2014. And as algorithms take control, the opportunity for a flood of quotes and cancellations increases. Order-to-trade ratios, the number of orders that come in compared with the number filled, FX Algorithm_Toxic Flow Warning_Progress Software create a load on exchanges and electronic markets and they can provide a smokescreen to hide potentially abusive behavior (so-called “quote stuffing”).

We see innovative FX brokers taking measures to rein in unproductive order flow.  Similar to equities marketplaces, FX dealers and brokers are increasingly utilizing tactics that discourage excessive orders, but in a very different way. Because FX is mainly traded via single dealer platforms, multi-dealer platforms such as FXall, and interdealer marketplaces, it is fragmented in a different way from equities. 

So it is the FX brokers that are acting like exchanges and taking the initiative to control toxic order flow with their pricing strategies. Brokers need to see every opportunity and threat hidden in their customers’ flow patterns, and automate their own real-time responses, to stay profitable as markets change. Brokers servicing HFT clients react to predatory algorithms and fluctuating fill ratios by manipulating the spreads they offer.  Traditional customer profiling based on purely historical data is good for strategic decision-making.  But for more tactical decisions with immediate impact,real-time analysis is additionally required. 

A responsive broker can, for example:

  • Mitigate "toxic flow" by detecting predatory patterns in real-time, and automatically widening spreads to those clients
  • Increase business by detecting reduction in flow from “good” clients, and automatically reducing spreads to those clients
  • Preserve the relationship by detecting pending credit breaches, and immediately calling the client

Our customers use the Apama platform to perform their own customer flow analysis.  Both global and regional FX brokers now optimize how they serve their customers based on detailed real-time diagnosis of their flow. Key parameters include P&L on individual trades, an aggregated view of individual trades over time, and the performance of tiered client groups.  Using real-time customer flow analysis brokers (and banks and trading platforms) can figure out which customers are providing the types of order flow that they need. 

Customer flow sits alongside other real-time market trend analytics such as volatility, average daily volume, and depth of book.  For example, flow from a specific customer is high but liquidity is thin - then time of day impacts spreads in addition to customer behavior.  Our customers have also been generating pricing dynamically – adjusting spreads and skews - based on market conditions and customer trading patterns – including HFT patterns.

Dynamic pricing builds on an aggregated order book as source pricing.  A basic pricing service dynamically applies a set spread to the base price generated from the aggregated book.  A more advanced service changes the spread based on any data or rule, for example:

  • Current volatility
  • Depth of book (volume on bid/ask side)
  • Real-time risk parameters such as profit/loss levels
  • News
  • Current vs. target position (changes the spread or skew automatically, and updates the auto-hedger service)
  • Customer tier
  • Historical & real-time customer trading behaviour

Brokers can take input including aggregated FX prices, customer trading patterns, market volatility and hedging activity - all in real time - into the platform. The analysis generates dynamic pricing (spreads/skews) and it can work to incentivize market participants to provide quality - not quantity - orders. 

Toxic order flow, like excessive orders-to-trade, can tax trading systems and create an environment where fraud and market abuse can flourish. Using real-time customer flow analysis to get a handle on your customers' order flow will help to prevent this. Customer flow analysis can be used not only for dynamic pricing, but also for customizing product offerings and enabling banks and brokers to create execution algorithms for their clients to use. By being proactive, FX brokers and banks can avoid the issues that plague equities. And make money along the way.

 

Thursday, June 07, 2012

Twice as Nice – Progress Apama Retains Title of Best Algorithmic Trading Platform

Posted by Dan Hubscher

For the second consecutive year, the readers of Profit & Loss Magazine have named Progress Apama the Best Algorithmic Trading System as part of the Readers' Choice Digital Market Awards. The Digital Markets Awards recognize the efforts of the FX services industry in providing the tools and functionality that make trading FX more efficient.

Progress Award picture
In photo: Timothy Jones, Charlie Little, Ben Ernest-Jones Dan Hubscher (from left to right)

It's a tremendous honor and it means even more knowing that it was determined by your votes. So thank you. Let's see if we can make it three in a row!

 

Tuesday, May 29, 2012

Déjàvu all over again?

Posted by Richard Bentley

Richard.bentleyIt is fair to say that High Frequency Trading (HFT) is a divisive subject at the best of times; for every expert claiming that it benefits markets in the form of liquidity provision, tighter spreads etc, you can always find another who claims that it poses significant dangers and creates a 2-tier market. Whatever the truth, it appears that there are an increasing number who subscribe to the latter point of view, with the aim of excluding HFT from the market altogether.

I wrote previously about recent declines in trading volumes as an indicator that the HFT “backlash” is having effect. HFT is the unpopular kid in the class no-one wants to sit next to. Witness the recent spate of announcements of new venues that explicitly exclude or penalize HFT and its practitioners. In the FX space we’ve heard about

Mako FX’s plan to build what it calls the fastest trading platform in the wholesale FX market, and more recently the launch of a new venue called FXSpotStream backed by 6 major FX banks who will also be the primary liquidity providers. 

Man-thinking

This all gives a real sense of déjà vu, bearing in mind that the EBS FX market was started by a bunch of banks to provide a private inter-bank market, before they let the sharks in and ruined the party. It seems that EBS themselves are now having second thoughts. This highlights something I’ve been saying for some time with regard to HFT; namely, that the market is well equipped to take corrective action if participants care enough, without knee jerk recourse to poorly thought-through regulation. Commercial imperatives will force balancing actions once the pendulum swings too far. This trend is not confined to the FX markets – see CA Chevreux’s launch early this year of Blink, a Dark Pool for European Equities that excludes HFT.

Besides excluding or penalising the HFTs, another "balancing action" I'm seeing is the rapid rise of smart FX execution algos. Our customers have been using traditional VWAP and Percent of Volume style Algos with our Progress Apama FX eCommerce solution for some time, but more recently customers have been telling me how they've had to adapt these algos and build more sophisticated variants, to avoid signalling risk and defeat the HFTs.

This trend to smart algos follows closely what we've seen in the equity and exchange-traded futures markets previously. If it seems like we're re-treading old ground here than that's hardly a surprise - fashions come and go.

But right now it certainly seems that HFT is rapidly running out of friends to play with.

Tune in to our P&L Webinar  “FX Aggregation without the Aggravation” tomorrow to hear more. If you're attending P&L's 2012 Readers’ Choice Digital Markets Awards and Hall of Fame dinner in NYC on Thursday May 31, stop by the Progress Software table to learn more about the Apama FX eCommerce solution. 

Friday, May 25, 2012

The Rat Race to Regulate High Frequency Trading

Posted by John Bates

John Bates

 

The following is an excerpt from Dr. John Bates’ recent commentary on Huffington Post, whch discusses the current state of high frequency trading regulation.


Images

As Aerosmith famously sang: "Rats in the cellar... losin' money, getting no affection." Lately, HFTs have been compared to everything from rats in a granary to highway robbers intent on stealing Granny's pension. Bashing high frequency trading firms has become the latest sport in the financial services industry. So much so that the Futures Industry Association has publicly taken exception to the "emotive language" being assigned to HFTs.

"For example, many people don't realize that market abuse -- as well as being morally reprehensible -- comes at a hefty price for the market. So principal trading firms such as our members have a very real economic incentive to fight market abuse and back regulatory reform," said FIA European Principal Traders Association chairman Remco Lenterman. He noted that the industry's critics chose to overlook the value that principal trading firms add to the real economy in terms of lower transaction costs and greater liquidity, according to Finextra.

Read the full post from Dr. Bates here

 

Friday, May 11, 2012

Automated trading restrictions: are they a presumption of guilt?

Posted by John Bates

John BatesAnyone who’s seen the news in recent months will know that High Frequency Trading is facing a sharp increase in the number of regulatory challenges, with some tough measures suggesting that it has been presumed guilty until proven innocent by many. ESMA, implemented in Europe in May 2012, is the latest set of regulatory guidelines around the systems and controls required in an automated trading environment. But are these regulations fair?

It seems clear that, with the ever-increasing volumes of data that firms need to manage and monitor in order to catch abuse, Europe has decided to take a firm stance on automated trading. But is all this a case of, as my colleague Richard Bentley suggests, using a sledgehammer to crack the nut?

Shutterstock_48500095Clearly, increasing red tape will place a significant burden on firms and may, if we’re not careful, lead to a situation of regulatory arbitrage, or lock those without deep pockets out of the market. Perhaps a better answer is to adopt a three-layered approach to surveillance where the brokers, trading venue and regulators all have a different role to play will help stamp out abuse without necessarily stubbing innovation?

On a recent visit to London, I met with Phillip Stafford at the Financial Times Trading Room to discuss EU market abuse regulations as can be seen in the video here.

 

Tuesday, May 01, 2012

Today in Event Processing

Posted by The Progress Guys

In “Cracking the High Frequency Trading Nut”, Richard Bentley discusses the effectiveness of the new guidelines from the European Securities and Markets Authority.  He compares the guidelines to a sledgehammer, questioning if such extreme measures are necessary to regulate HFT.  Would a more precise approach, which targets specific issues with HFT and offers real-time surveillance, better regulate automated trading? Find out in yesterday’s post

4

Tuesday, April 24, 2012

Today in Event Processing

Posted by The Progress Guys

In his blog post “BRICS Win by Coming in Second”, Richard Bentley explains how emerging markets benefit by coming in second when it comes to high frequency trading. By looking at the first-comers, namely the U.S. and Europe, Bentley highlights how regulators were not prepared, resulting in unsafe practices. 

3

 

Thursday, April 05, 2012

Today in Event Processing

Posted by The Progress Guys

Solving the Cross-Market Surveillance Conundrum”, from Theo Hildyard, offers his thoughts and insights on the World Exchange Congress, where he discussed the MiFID directive. Although MiFID was created to protect customers in investment services, the market has been manipulated and abused since the directive was first announced in 2007. Based on his conversations with other attendees at the April event, Theo gives his thoughts on how to better regulate and protect the market. 

2

Friday, March 30, 2012

Today in Event Processing

Posted by The Progress Guys

In his most recent post, Dr. John Bates discusses the technology glitch that caused BATS share price to plummet within minutes of its first IPO. Comparable to an “own goal” blunder, Dr. Bates refers to the malfunction as a wakeup call, urging exchanges and trading destinations to perform extensive back-testing and market simulation to prevent such a problem from occurring in the future. 

1
Check out his full commentary here

 

Previous | Next