Konstantin Khlebalin, a 27-year-old applied maths whiz from the Moscow Aviation Institute, started as an assistant analyst at Russian investment brokerage company Infina before he had even finished his degree. He cut his teeth as a trader after he graduated, and now he is a deputy CEO and head of the trading department at Infina. The company runs its own proprietary trading, specialising in algorithms, as well as offering broking services. We asked him about how his funds use algorithms and what it's like to trade in Russia.
1. What sort of algorithmic trading do you do, and do you build your own algorithms?
Algorithmic trading is one of the key features of our business. We do business on domestic and global markets, and provide services inside and outside Russia. Yes, our company makes its own algorithms. We do not use or offer algorithms created by other providers. Our three major strategies are:
- Classic arbitrage. The core of our strategy is based on catching price spreads on the same assets (futures, bonds, equities, currencies), which are traded on the different exchanges (MICEX, RTS, LSE, NYSE, CHIX, etcetera). Due to our experience we have developed our own arbitrage analytical model. It analyses key parameters, such as volatility and volume - this is our competitive advantage. Also we have our own-developed trading system, with our own algorithms, money-management and risk-management functions. Our classic arbitrage strategy is market neutral. Our rate of return per year is around 20-25 percent in USD. In 2011 the fund earned 29 percent.
- Basket trading. This strategy is low risk level. We reproduce Russian index futures (RTS, MICEX), RSX and major western ETFs; our basket contains about 75 percent of the index constituents. The major benefits are high capacity, high correlation levels between base instrument and traded basket, and low competition.
- Balance Price Model. It's a trend-type model, which is implemented by algorithmic trading, with two unique parameters which calibrate frequently. Our model is patented and has proved itself in different markets. We use this approach in our Infina-Equity Fund, an open-ended fund which has beaten the MICEX index by 14 percentage points in the last three years.
2. How much of your trading volume would you say is high frequency?
High frequency trading is an integral part of our modern arbitrage operations: 80 percent of our trading volume consists of operations made by high frequency trading algorithms. It is our major competitive advantage, compared to other companies with their own arbitrage desks.
3. What do you think are the unique features of the Russian market from an algo trading point of view? And what are the biggest challenges for developing automated models for Russian markets?
We think that the strong correlation of trading opportunities with western markets is a unique feature of the Russian market. The challenges for us are the same as for any investor in the world who wants to trade across many markets - plugging our trading platform and trading methods into many different systems across markets, adjusting it to many different methods of evaluating risk, etcetera.
4. Some people say the increase in IPOs and listings of Russian stocks in other markets, particularly the LSE, have drained some of the liquidity away from Russian markets. But the dual listings in Moscow and London also mean an arbitrage opportunity. What do you think about the competition between the Moscow exchange and other markets?
I think that competition only increases liquidity on the Moscow exchange as well as increases arbitrage opportunities for us. I've done arbitrage for four years between the LSE and Micex, and I can confidently say that dual listings only help Russian markets.
5. Russia's Micex and RTS exchanges merged a year or so ago to create the Moscow Exchange. What's your view of the impact of that?
Liquidity is likely to grow as a result, especially because of plans to introduce T+2 settlement. Existing T+0 settlement means investors have to deposit money or stock with a broker before trading, and can't net out transactions - that's expensive. T+2 settlement brings Russia into line with other markets.
6. What is your outlook for the future of algorithmic trading in Russia? Most markets around the world are experiencing relatively low liquidity and low volatility, which is a challenge for algo traders.
We think the future of algorithmic trading in Russia is positive. The opportunity is great. The Russian algo trading market is getting underway, and our exchange technology is competitive with western markets. Russian markets don't have low liquidity and low volatility for algo traders, I think. Right now we feel the decline in liquidity, but I think this is a short-term phenomenon, part of the liquidity cycle. Since September, investment companies in Russia are able to trade the rouble directly (in the past only banks had direct access), so Russian currency markets particularly have high liquidity.