Chris Hehmeyer, HTG Capital
AT: Why don't you start by describing your company.
Chris: HTG is a proprietary trading firm that trades most futures and options on futures. We also trade US government securities and foreign exchange. We have a number of different types of strategies - market-making, block trades, some allocation of capital and some high frequency strategies.
AT: So you run the whole gamut?
Chris: Yes, but you'll notice we don't trade equities, and we don't trade equity options.
AT: I mean not necessarily in terms of asset classes but in terms of trading styles - everything from sub-second to longer-term.
Chris: That's exactly right.
AT: A lot of firms specialise, but you do a number of different things. Why have you chosen to spread your strategies across a variety of methods instead of specialising?
Chris: The nature of our business model is to allow traders to come to HTG and with us they can approach the market the way they want to approach it. We have three parts to the business. Market making, where we're making markets over the phone and electronically where we stream some prices. Then we have this business that's the platform, people become part of the firm and have their own strategies and we really are partnering with them. And then third we have allocations of capital to managers who are independent.
The nature of our business is to have a diversity of different approaches.
AT: Can you talk about that model where you provide the platform and partner with prop traders?
Chris: As a pre-requisite, we have to be able to control the pre-trade risk and we have to understand the strategy of what they're doing. We have to be able to see the risk - with most of the futures exchanges we can do that. So we have to have transparency of what they're doing on a real-time basis.
So we manage the risk, but other than that we're open to partnering with people who take all kinds of different approaches. Some of them day trade, they swing trade, they spread trade, they run automated HFT systems, all kinds of different things.
AT: How do you choose who to bring in for that?
Chris: It depends because they're each unique. A programming team is much different than a person who trades with a mouse in their hand and clicks. So all of these things have to be independently analysed; and we have decide whether or not we think the thing's going to be successful and whether we're willing to take the risk of whatever it is that they're doing. And we have to understand the people.
AT: A lot of trading firms will have an approach or a philosophy and people come in and either fit or they don't. It's a very top-down approach. But this is very much bottom-up.
Chris: Yes it is. A lot of the guys who have come here have come from those firms that have top-down approaches. They learned to trade for themselves and they wanted to go on their own.
AT: Is there much cross-fertilisation? Anything like a 'town hall meeting' where people talk about what's working?
Chris: I would say there's some. I wouldn't say that there's a lot. If a person retains the intellectual property, they're not going to just share that with everybody else. There are a few topics, like risk management, that we design or write software release protocols. We get everybody involved to help write those because the risk management's in everybody's interest. So if there's a shared interest they collaborate. But if it's on a trading strategy that's really theirs, typically they don't.
AT: How many traders do you have, and how big is the whole group?
Chris: It's about 85 people. It's 23 different relationships or P&Ls or groups.
AT: All based in Chicago or multiple offices?
Chris: It's based out of Chicago and we have a small London office and a Singapore office. But we have remote traders. The CTA allocations are all remote.
AT: This is a particularly intense time for markets, with so many changes in regulation. What has the experience been like for you and what do you think is working or not?
Chris: The intent of Dodd-Frank to move products into clearing houses seems to be working in the sense that the whole futurisation phenomenon is forcing products and risk management tools to go into clearing houses. It's not exactly what a lot of people envisioned. The SEF rules which are going to be finalised here are going to be the last piece of that. It does seem to be headed in the direction that the legislation intended. It remains to be seen exactly how that's going to shake out.
AT: Has it had a material impact for you and the way you do business?
Chris: Not really yet. The products that got futurised went from being swaps to being futures, but that wasn't a huge difference for us. The things that we were trading on ICE just became futures - there wasn't a huge difference in that. The bigger issues, with SEFs and interest rates and credit, they probably hold the potential to be more disruptive than the energies because they energies were already trading a lot on ICE.
AT: In terms of the potential disruption, what are we talking about?It seems like - because of that momentum moving towards cleared products - it feels like it's kind of catching on and slowly but surely headed that way.
Chris: For the banks, if the CFTC holds to the interpretation that all rolling spot FX trades are swaps, it's very disruptive. They're slowly having to move to all these cleared products and that's disruptive for them. The SEF rules are going to get approved and as the clearing of these products take hold, as futurisation becomes more and more prevalent, I think it'll get a critical mass. That's the way it looks.
AT: Are you expecting it to increase trading costs?
Chris: It depends on how you define that, right? If the banks say you've got to put up margins, it increases the trading costs rather than just dealing on credit. There are studies about that. But not on a transaction basis.
AT: There are some arguments out there that it could all lead to wider spreads.
Chris: The added transparency of the price discovery is going to shrink the spreads. And it's in their own interest to keep it in a market where you've got to have credit because that's what their value is. So they're going to say it's going to increase costs. They've got a strong vested interest in that position. But once you increase transparency to lots of market participants in the price discovery it will shrink the spreads. It will make price discovery more competitive.
AT: In terms of the transparency that will result, for a firm like yours presumably you are expecting new data to become available so that some of your traders can do new things?
Chris: Yes, we hope so. It depends partially on how they define the stuff. The banks want the swap execution facilities to only have to have one participant, but they want to be able to deal with a customer directly to just put on a SEF what they're now doing over the phone. The Commission has said there have to be five participants. A lot of people think five is too many. It doesn't take but two to make it more competitive, right? I don't know how that's going to evolve, but it will be interesting to watch. It seems like Dodd-Frank will open the market up.
AT: On the European side, will the move towards financial transaction taxes cause you to trade less in Europe?
Chris: I certainly think that London would like nothing better than for the EU to pass a transaction tax. The part of London that was hit by the financial crisis, they would love to have all that business back in London. So it's hard to tell the barking from the bite. I don't know what over there is real from what is squawking, but a lot of people certainly want a transaction tax.
AT: You mentioned an operation in Singapore. What do you trade out there?
Chris: We trade a number of futures products. We have a lot of different types of strategies. We trade some arbitrage and reversion to mean strategies out there.
AT: Given the vast array of products your traders trade, are there any technological developments that your firm has found particularly interesting?
Chris: It all evolves so fast. It's kind of breath-taking how fast this stuff evolves...
AT: Do you tend to build a lot of your own system?
Chris: Yes, we write our own stuff and we use vendors. It does fit the diversity of strategy approach. We use a number of the vendors and we also use guys who programme their own automated systems.
AT: In terms of the future, are there new markets you're interested in? Are you considering expanding?
Chris: We want to expand in market-making, and part of that depends on how Dodd-Frank falls out and how the SEF rules fall out, to what degree we'll get to participate. But moving products into a central counterparty gives more participants the chance to play.
I think the markets are getting ready to get busier. And I may certainly be wrong. What I think has happened in Washington since the first of January, is that they've given businesses certainty. And that's a bigger factor than what, I think, gets attributed to it. If businesses know what tax rates are going to be, and they know what the health care system is going to be, and they can plan, then they can hire. So, now they've got certainty. They may not like the rates. But if they've got certainty about Obamacare - it's not going to get repealed, it's constitutional, and the same thing with the tax laws - already I think you're starting to see businesses expand pretty fast in the United States. If that happens, I think it's going to gain momentum quicker than what a lot of people think … It wouldn't take much for that interest rate market to shift if the Fed starts to indicate that they might pull out. And so, the market could get busy quickly.