Archive for the ‘ Trading ’ Category

Panel Discussion Announcement: The Future of Option Trading

Options Alliance

I’ve been asked to speak at a panel put on by the kind folks at the Options Alliance entitled The Future of Option Trading: Finding Edge Outside the Pit. At this Options Alliance event, panelists will discuss many of the environmental changes that have taken place over the last few years in the options space. The evolution away from pit-based markets; new opportunities that have been created by entrepreneurs in the options industry; legal and technological hurdles to overcome; and how to market and promote your new business venture.

I’m on the second panel entitled Roadblocks to Your New Options Business along with Andrew May of May Law, PC and Earl Humphrey of iOwn Advisors.

The event will be held on November 5, 2013, from 12:00 to 5:30 pm at The Buckingham Athletic Club 440 South LaSalle Chicago, IL 60605. Tickets are $25 and you can register here. I hope to see you there!

Trade Smarter, Not Faster

The Race To Zero

High-frequency-trading1Since the financial crisis of 2008, the media has been in a state of constant awe of high frequency traders. High frequency traders profit by taking advantage of tiny and fleeting discrepancies in the price of exchange-tradable financial instruments. It’s an expensive game of reducing tick-to-trade latency called the race to zero.

Some, like the folks at Zero Hedge and Nanex felt it was their mission to end high frequency trading, seeing it as a parasite preying off of the honest hard work of main street investors and commercial hedgers. High frequency firms argued that they were providing the service of liquidity to the market and were rightfully deserving of their profits. Moral high ground for either side notwithstanding; no one could argue that high frequency firms were printing money fast enough to make even Ben Bernake blush.

Where Does it End?

It may be big business, but like the floor and point-and-click trader before him, the algo trader may soon be eating humble pie. In May of 2013, the Eurex exchange, under the pressure of European regulatory bodies, made changes to its matching engine that add around 100 microseconds of induced latency on GTC orders. Thus wreaking havoc on a book stacking, a favorite HFT algo. In the US, predatory practices such as dark pool pinging, stop-hunting, and even more benign practices such as stack widening are becoming increasingly illegal.

Some high-speed firms have already thrown in the towel. Getco, for example, merged with Knight to form KCG, a financial services company. It now leverages its enormous technological infrastructure for the purpose of servicing its customers. Though some internal prop trading does still exist, its a shadow of its former self. The race to zero may be coming to an end, but the technological arms race has only just begun.

Trade Smarter, Not Faster

One area of particular interest is the use of Artificial Neural Networks, or “neural nets.” Neural nets mimic the central nervous system of animals and are particularly useful at solving non-linear problem sets where there is not necessarily one right answer or one method of solving a complicated problem. A neural net can approximate an answer rather than simply throwing exceptions or saying “I don’t know.”

For this reason, neural nets are popular in areas such as facial and handwriting recognition. Google uses them to recognize street signs in their self-driving cars and Netflix uses them to guess which movies you’ll like based on what you’ve watched. They could be used to produce accurate polygraphs, predict what route would be the most efficient way to get to work, guess what freight rates might be, or as we care about in financial technology, predicting the price of a tradable instrument. Just as high speed trading algos threatened to put human trade executors out of a job, a neural net could put quants out of a job.

As a trader, what can I do to prevent being left behind?

Unskilled labor has always competed with machines for work, and technology has has always raised the bar of what constitutes “unskilled labor.” Assembly lines have made the blacksmith obsolete, robots have made assembly line workers obsolete, matching engines have made floor traders obsolete, and neural nets just may make the algo traders themselves obsolete. One thing is certain, the only playing field leveler in this rapidly changing world is education and constant reinvention. Having help and building the right tools certainly doesn’t hurt either, in which case I’d recommend calling your friendly representative at Scaled Dynamics.

Update 9/30/2013: Due to the popularity and response to this article, I will be giving away one day of my time in the form of 8 one hour consultations to discuss the evolving needs of the algo trader. Because I’m only going to set aside one day of my time for these, spots are limited. Please submit an application to explaining a bit about your trading style and how you’d like to evolve as a trader.

Dark Pools

Dark PoolsI’ve been reading Dark Pools, by Scott Patterson over the weekend and I’ve got to say that it has been the most thoroughly educating introduction to the wild and confusing world that is electronic equity trading. I’ve really had my head in the futures and options sand for way too long. No longer.

The whole experience has inspired me to spend my weekend working on writing an Interactive Brokers adapter to SD Gatekeeeper. When it’s finished, my customers will be able to trade a HUGE VARIETY of financial products instead of just futures and options, provided of course that they open an account with IB. More details to come when it actually launches!