Matt Haraburda, XR Trading
AT: We'll start with how you got your start in financial markets.
Matt: I started my career very early, while I was working my way through school, working for the Chicago Board of Trade. I was fortunate enough to get involved in the earliest days of electronic trading here in Chicago, and fortunate enough to be involved in some high-profile projects, the biggest being the a/c/e partnership (Alliance/CBOT/Eurex) with CBOT and Eurex. I had a short foray with an ISV (independent software vendor) that provided software for the trading industry, and then after that went to work directly for Deutsche Börse, primarily supporting the CBOT-Eurex alliance.
AT: So you have very much an exchange background.
AT: How do you think that informs your work at XR? Does it give you a different take than some other people who might have gone straight to a trading firm, bank or brokerage?
Matt: For one thing, working for any exchange is really a wonderful opportunity. You get exposure to a tremendous variety of market participants, from the retail investor all the way up to the very largest money managers. You gain a perspective of the business that you typically wouldn't get, working just for proprietary trading firms.
And they tend to be larger organisations than your typical trading firm. So just from a corporate operating business acumen standpoint, you tend to learn quite a bit too. I wouldn't go back at this point, but I've certainly learned a lot working in those environments.
AT: As far as XR goes, if you had to describe the firm's philosophy, what would it be?
Matt: We see ourselves as mostly market makers, sometimes market takers or arbitrageurs. We believe in the use of technology that provides tremendous value to the market place, creates efficiencies in transferring information and bringing costs down. To a large extent it's the typical 'Why is high frequency trading good?' article. It's something we truly believe in.
AT: So can you tell us a little about the history and focus for the firm?
Matt: XR started in 2002. We're mostly a futures shop, but we do cash Treasuries, cash FX, cash equities and equity options. We definitely have a large focus on interest rates here. We also trade commodities, agricultural products, energy, metals, stock indexes.
AT: You do a lot. Has it always been that way or did you start in one area and branch out?
Matt: For the most part, we started as a fixed income shop and branched out from there.
"We see ourselves as mostly market makers, sometimes market takers or arbitrageurs. We believe in the use of technology that provides tremendous value to the market place, creates efficiencies in transferring information and bringing costs down."
AT: What do you see as some of the issues, when you do want to go from one asset class to another?
Matt: Often it's just as much, and sometimes more, of a challenge to adapt to different venues or market models than necessarily what's commonly thought of as an asset class.
AT: Such as trading in Russia or Brazil?
Matt: No, like comparing the market structure of the futures markets with, say, the market structure of the US equity markets. US equities are very fragmented - dark pools, a lot of internalisation, a tremendous variety of order types and interesting regulation regarding NBBO and Reg NMS - whereas when trading an equity future, we're talking about the same asset class but it's a very different experience.
AT: You have the same fundamental drivers, perhaps, but the issues in terms of liquidity, clearing etcetera are all different.
Matt: You see it every place you go: OTC, energy… Options has a lot of good examples. Trading fixed income futures and then going into fixed income options is just a whole host of different challenges. You're dealing with your classic risk management issues, inventory issues, a different technology regime, a different style of trading. It's not something typically talked about. That is often as much a challenge as getting to know a new market.
AT: When you bring on new traders, are you looking for people who have that kind of flexibility?
Matt: Yes and no. We're in a unique place. We're a very technical, automated firm. So people who have long tenure with technology are just rare. To some extent a lot of what we do has been recently automated. So you're typically hiring people less experienced. I have to say, most traders who come in are somewhat asset-class agnostic. That's a bit of a generalisation but I think there's some truth to it. They want to trade using powerful technology, they want to be market makers, they want to automate things, they want to research and solve interesting problems, whether that's in FX or equity futures.
AT: How many people do you have?
Matt: Approximately 80. It's about 25 developers, about 40 traders, and the balance between the management and accounting, compliance, front office, back office, HR.
We take a very technology-focused approach to trading. For the most part we only trade listed markets. We do trade some cash instruments, but we have a very strong preference for electronic execution and the fairness and transparency electronic execution brings to any market place.
AT: The trading horizons, do they vary much?
Matt: We have a very small time horizon. At the base of what we do, we try to capture bid-offer spreads. That's our payment for making a two-sided market. It's a core approach that's never really changed, whether you're talking about computers or trading pits or trading over the phone.
AT: So nothing in terms of generating signals for longer-term investment opportunities?
Matt: We tend to go home flat every day. We don't always, but it's not because we don't want to. We tend not to take an opinion on the market.
AT: I suppose it means you can sleep at night.
Matt: It helps! The exception to that is our option market making activity, just because of the nature of options. You're forced to carry an inventory. We obviously keep our positions as neutral as possible.
AT: So from an asset class point of view, are there specific issues in the HFT area that might not be there for a longer-term player?
Matt: It's very much market-model based. Can we compete in cash FX with some of the unique features of the cash FX market, where the banks still have a tremendous amount of control and there's not genuine transparency? It's not that it's challenging to trade FX. It's that the FX market has some peculiarities based on history that make it more of a challenge.
AT: If you're looking at a straight-forward arb-based strategy, does that really matter? If you can find the right bids and offers and get in and out within whatever milliseconds it takes, is an issue like that still a problem?
Matt: You have venues that you can't necessarily execute against, or you have to be careful how you execute against. There are FX platforms where, if you're too aggressive or you're trading directly against a bank feed …
AT: They'll boot you out?
Matt: Yes. They have bids there but sometimes they don't necessarily want you hitting on them! That's been a classic problem in the FX market.
AT: What about fixed income?
Matt: Fixed income futures, Treasury futures, STIR products are very liquid. The markets are very automated and there's a tremendous amount of liquidity on the screen from the futures venues. You now have on-the-run Treasuries in the United States, where automation transparency is really good. When you're talking about off-the-run Treasuries where you have less liquidity, you definitely get into more challenges when it comes to automation.
AT: Is there more opportunity in that as well?
Matt: There could be, but you're taking on different risks. You end up getting into risk/inventory issues that you have to manage. If you can manage those well, yes, there are absolutely opportunities.
AT: What about commodity markets. That's a whole different area. What are some of the idiosyncrasies you find there?
Matt: We're only dealing with futures there. There are cleared swaps in agricultural products for commodities and you've got a very robust environment in energies. But there you have a proliferation of products. You've got a zillion different energy swaps at Clearport or on ICE. That's challenging, but I think that's to a large extent some of the future. How will technology provide value to those products? I think that's going to be interesting. There are RFQ-type issues or social-media-type-based trade. There are a lot of interesting things happening in that space and I think that in years to come will be really interesting to watch.
AT: There's been a lot of discussion about the 'futurisation' of swaps. Is that something you guys are interested in?
Matt: I think what's most interesting is from a clarity-of-regulation point of view. On an exchange-related panel the other day someone asked: 'What's the difference between a future and a swap?' (pause) 'Spelling'. From an economic standpoint, they're not that much different.
AT: So what are your thoughts about regulation?
Matt: They're bringing the entire swaps world into a transparent, liquid, regulated, automated place. I don't think regulators or anyone realised how challenging it would be. You're seeing a lot of constituencies lobbying for this or that. What we're going to end up with, who knows?
AT: There is this flipside to it all where change creates opportunity?
Matt: Yes, absolutely. You're going to have constituencies defending the status quo, or saying, 'That's good, but it needs to be like this'. It's a very complex market place and it's hard for the regulators to understand. They're taking on something they never touched before. I kind of sympathise.
AT: There are people such as Scott O'Malia who are trying to listen to the market.
Matt: He's been good. He hasn't been easy on anybody, but he's been aggressively trying to understand our industry. He's been engaging with proprietary firms. He seems to be doing it in a productive way.
AT: When your firm wants to go into a new area, how much research do you have to do?
Matt: We don't get too exotic. We're active here in the US and in Europe and we're working on getting an Asian operation going. But what we value as a firm is open transparency. We want to develop a relationship with an exchange - that's very valuable to us. So to the extent that a lot of countries are still very closed to foreign entrants, that interests me less. If I've got to find the right local broker that has good access, frankly it's just a turnoff for that entire market. I want to compete on a level playing field with my peers. We've been able to do that here in the US in very competitive, very open, transparent markets.
AT: So you feel confident about going into the ring. What do you feel gives you the edge?
Matt: I don't think it's anything in particular. Markets that are very well automated are so competitive you have to do everything well. Your risk management's got to be good, your software's got to be good, your strategy development and research have to be good. Your cost structure has to be good.
Proprietary trading firms, and particularly in the automated space, are maturing and we're learning how to run businesses and grow businesses. That's evolving. There's been so much upheaval in this space.
AT: A lot of people talk about how the low-hanging fruit is gone, particularly in the HFT area. A few years ago, if you had low latency and some good models you could do very well and people were willing to pay top dollar for shaving a couple of milliseconds down to microseconds. How do you see that?
Matt: I agree with that.
AT: So what's the future? Will there be a weeding out?
Matt: I think we have seen that, especially this past year. Growing volumes over the past years supported that level of investment. Now, for a number of reasons, we've seen a tail-off in volumes. We're a very market-making type of firm. There are a lot of different ways you can spin high-frequency trading or use automation. We're passive, we trade a lot and we trade on every level. We're a very passive, market-making oriented firm.
AT: So you're very dependent on flows.
Matt: We're very susceptible to volume - or I should say good volume. We might be trading similar volumes to where we were last year but it's not necessarily more profitable trading. We're just fighting to keep a share of the pot.
AT: Some have said that as we start to get more interest rate normalcy we'll see a return of volatility and with that will be more volumes. Do you buy into that scenario?
Matt: As a general statement, yes, absolutely.
AT: So if you take that at face value, we have a couple more years of the current environment, given the US Federal Reserve's forecasts.
Matt: The interest rate situation is scary for our business, there's no question about that. I think it's just one factor.
AT: So you could say it could be like this until around 2015, but on the other hand, interest rate markets won't wait until then to start discounting higher rates. So maybe we're talking more about the tail end of 2013 and into 2014…
Matt: That would be good!
AT: There are signs that things are picking up in the United States.
Matt: I would agree. It's been a slow recovery and it continues to be and it probably will continue to be. It is what it is, at this point.
AT: Okay, one last question in terms of the asset class issue we've been talking about. Is there any asset class that's more fun, unusual or interesting to tackle than the others?
Matt: They're all challenging, there's no question about that. Different people are fascinated with different things.
My favourite is agricultural products, because it's easier to get your head around. Maybe the opposite extreme is the FX market. What's moving FX rates is a very, very complex macroeconomic discussion. Ag markets are just fun. Watching the weather… It's very cyclical… We've seen recent very high grain prices so probably we'll see a lot of planting next year, so how does that play out over the next couple of years? You have the seasons. What's the bean crop in Brazil going to do this year? What are the exports looking like?
AT: There's almost something poetic about how you can go from stuff that grows in the ground to racks of computers, and it's all connected.