The Gateway to Algorithmic and Automated Trading

Enough with the Footsie!

Published in Automated Trader Magazine Issue 20 Q1 2011

Is it break-out time for Osman Latif? After building up a track record by trading FTSE100 futures, the film buff, martial artist and former technical analyst behind K2 London is ready to bring his model to new markets. Larry Levy went to meet him.

Osman Latif

Larry Levy: Can you tell us a little bit about your background? How did K2 come about?

Osman Latif: I was born in Chelsea, London, in 1972. I went to Westminster University where I studied a very broad-based degree mainly in finance. Then I wasn't really sure what I wanted to do, so I did a masters in financial engineering at Brunel. That's where, also through self-education and motivation, I developed a passionate interest in global finance.

Larry Levy: So you were hooked from quite a young age?

Osman Latif: Yes. I think I was hooked from the day I saw Wall Street! Isn't that true for a lot of people?

Larry Levy: Tell us about the start of your career.

Osman Latif: I was at IDEA where I was responsible for providing timely analysis of FX markets, global fixed income, European short-term and mid-term futures as well as international equity indices and their related derivatives. Then I went to Daiwa as a futures and options broker. I was initially brought in to provide an analytical presence and develop the client base by improving market coverage and technical ability. Essentially, I was a technical analyst.

Larry Levy: At Daiwa you worked on the LIFFE floor?

Osman Latif: I worked on the LIFFE floor for a short while and then it got disbanded so I provided a lot of soft commissions, i.e. technical analysis and trading ideas mainly focused on European bond markets and equities and major currency pairs for the proprietary trading desk.

Larry Levy: Did this grounding in technical analysis help you with ideas for model-building?

Osman Latif: It did because it gave me a lot of confidence and increased my passion for forecasting markets. I developed a few things such as a volume-spread analysis and I did get a bit of a following from Daiwa. It wasn't enough at that stage for me to become a fully fledged automated trader however.

Larry Levy: What attracted to you to the automated route?

Osman Latif: Once I stumbled across a set-up that consistently worked in the market that I first traded, the FTSE, I had a eureka moment and thought: why not develop this and automate this fully to become a money-making machine? That was a while after I left Daiwa. I became a fixed-income strategist for S&P MMS, and that's where I had the eureka moment of developing this model and fully automating it. That was in 2004.

Larry Levy: Moving to the present, is your trading 100% automated? How long has it been that way, and do you make any exceptions?

Osman Latif: It's fully automated and has been since 2008. Before that it was being tweaked. I don't make any exceptions or take any discretionary trades at all.

Larry Levy: Tell us about K2, for whom you trade.

Osman Latif: It's a family office with funds under management of about £20 million of which £1 million has been allocated to myself.

Larry Levy: Tell us about your returns, your gearing and your risk profile.

Osman Latif: The percentage return in 2008 with a notional AUM of a million dollars was 89%. In 2009 it was 71% and in 2010 it was 86%. The initial margin for the FTSE is around £4,029.42 so at 30 contracts that's around £123,982.24 At 2:1 leverage that's under £61,991.12 and that remains so.

Larry Levy: Please give us an overview of the key factors in your trading strategy.

Osman Latif: The model is largely incentive-based, depending on performance, productivity and fund returns. It was very necessary to have a winning strategy and eschew emotion and day-trading patterns. The model itself is based on a set of inter-related principles, rules and procedures to enter and exit the market. It's a momentum model. It also tries to trade in a volatile market which is non-trending. The main key to how the model really performs is multiple time frames coinciding.

Larry Levy: When you say you trade 30 contracts, is that your standard trading size?

Osman Latif: Yes, that's the standard but it can get up to 45 as a maximum but then you get scalability issues, particularly if you are working stock-market orders. For example, you would rather scale into a trade rather than getting filled on a market order for around 45 contracts. Being a spread of around 1 point that spread could change quite quickly to 15-20 which kind of defeats the object.

Larry Levy: How are the above returns audited and verified?

Osman Latif: They are audited and verified by our own in-house accountant at K2.

Larry Levy: Do you essentially use the same models that you used several years ago or are you constantly evaluating and putting new ones in place?

Osman Latif: The moment the model starts to give returns that are not consistent over the last few years then at that stage the model would have to be tweaked. That hasn't really happened as yet.

Larry Levy: What was your worst monthly performance and worst drawdown?

Osman Latif: My worst monthly drawdown was around 4% but that has only happened in the last three years on three occasions. It wasn't sequential; it was purely on a random basis and probably when the market wasn't really trending that much. The worst peak to trough loss has been comfortably under 5%.

Larry Levy: So far you have only traded FTSE100 futures. Please explain?

Osman Latif: I traded the FTSE100 future on the LIFFE floor. That's where I started. Also, just by looking at other markets at that time, it was the one that traded quite nicely. I have the most experience in this market and this is what the automated model is traded on. But it's also being baptised into other asset classes.

Larry Levy: Do you trade ideas suggested by others as well as your own?

Osman Latif: No I don't. This model is 100% automated and there is no discretionary input from myself or others.

Larry Levy: Your AUM is around £1 million sterling. Do you have plans to expand this?

Osman Latif: This is predicated on our formal baptism in other markets. If the model shows consistent results then this will be expanded quite quickly to other markets.

Larry Levy: Tell us about the back testing on other markets.

Osman Latif: I have reached a point in the FTSE where there is scope to extrapolate into multi-asset algorithmic trading and diversify some of that risk, simply because futures are relatively cheap and liquid to transact into. It ultimately rests on performance results on formal back testing and the optimisation. I think the algorithmic models should be intuitively capable of producing similar returns in markets such as the ESmini, the DOW and the DAX, the SMI, Eurostoxx and even currency futures. This is probably due to equity indices becoming more correlated with the US in recent years. Also, scalability issues are unlikely to exist here for the purpose of how I'm trading and my size.

Larry Levy: What technology do you use in your charting, programming and execution?

Osman Latif: We use CQG for charting and Trading Technology for execution. CQG is the industry standard and it's one of the best. There are others that are pretty good but CQG is what I used from day one. I never had any serious problems. Trading Technology is another industry-standard platform that banks and trading arcades use. Using that API to run into CQG works quite nicely. I haven't had a problem that couldn't be rectified quickly. The support is also very good

Larry Levy: You mentioned using standard deviation in your model, can you expand on this?

Osman Latif: Standard deviation is used for when the market is non-trending. The FTSE, on average, has a standard deviation of 2. That's the potential range for the day. When this is dramatically reduced you are in a non-trending market so you have to adapt to that market condition. It's also gearing up for a big move.

Larry Levy: Is the model's trading reduced or does it just stop in a non-trending market?

Osman Latif: There have been instances where the model has not traded at all, mainly in a market that is non-trending and there is a very tight range. Usually the frequency of trades on any given day is anywhere between 3-7 trades at most.

A Volatile FTSE: happy hunting ground for Latif’s strategy

A Volatile FTSE: happy hunting ground for Latif's strategy

Larry Levy: Tell us about your testing procedures?

Osman Latif: It's tested and formally back-tested. When I tested it to start with, I manually back-tested it on paper. After realising it had a lot of legs, I decided to get it formally back tested, which you can do in Excel and it will give you a good run down with statistics to give you an idea of how good or bad the model actually is.

Larry Levy: Tell us about the analyser in Excel.

Osman Latif: It gives you a great perspective. From looking at a chart you can see, on any given day, what the trend has been and whether the model has captured that trend. You can also see it on a monthly basis, or a yearly basis; it will give you breakdown statistics of worst drawdown, best trade, win-loss ratio, Sharpe ratio et cetera.

Larry Levy: How do you quantify risk reward?

Osman Latif: It's 3:1. The model will only trade with at least a 3:1 risk reward ratio.

Larry Levy: Do you use volatility indicators?

Osman Latif: No, we have a daily stop-out. If the model loses 2% on any given day then it stops trading and it's turned off automatically

Larry Levy: Let's talk about trading time-frames. How long do your average trades last? What is your smallest time frame and the largest time frame?

Osman Latif: The smallest time-frame could be a matter of seconds, particularly if the trade is wrong and you opt out. The largest time-frame in my experience has been from the open to the close, simply because the market has been trending. The model tends to know if the market is trending after about an hour of trading and if that is the case it will probably hold it for the duration of the day.

Larry Levy: Do you take overnight positions?

Osman Latif: Never. It's our policy not to because it's just not worth the risk. With the advent of overnight trading in the FTSE that could be subject to change because the risk of extreme gap movements on the open will be considerably reduced.

Larry Levy: The 2% management fee and 20% performance fee has come under criticism recently. How do you react to that?

Osman Latif: In terms of extremely large funds with large scalability, I can fully understand that people don't like the 20% performance, 2% management. For individual traders like myself where there is a limited scalability, the 20% performance could be improved.

Larry Levy: What would you say to someone new who wanted to break into the automated world?

Osman Latif: They need to have a winning automated strategy and a consistent set of returns that have been fully automated and back tested. I know how difficult it is to have a model substantiated with real money if it's just in the early stages. Ideally, you need to have a model that has been traded for the last few years and back-tested for 5 years. To have one of those years backed up by real money and audited would be an absolute bonus.

Larry Levy: What is your trading limit?

Osman Latif: That limit is around 45 contracts.

Larry Levy: Tell us about your execution arrangements.

Osman Latif: TT for execution, and LIFFEconnect. This isn't done exclusively through CQG because it's slightly slower in terms of live prices. We are going directly to the market via TT. This works by the actual trade being generated from CQG through a GUI on my TT screen. CQG generates the signal but the live prices come in through LIFFEconnect into CQG. So we don't get the prices from the CQG feeder but from LIFFEconnect. That's the fastest solution.

Larry Levy: Do you find that speed makes a difference?

Osman Latif: I don't think you can get anything faster than trading directly with the market.

Larry Levy: What is your view on very high-frequency trading?

Osman Latif: I think it's found its legs over the last few years and it's definitely the future. Because of this I think the discretionary trader is being driven out by the smarter models.

Larry Levy: What is your view on the evolution of automated trading and its future prospects?

Osman Latif: The number of models that are out there at the moment and their efficiency is definitely improving and I think it will continue to do so. The scope for the discretionary trader is reducing.

Larry Levy: Where do you see yourself in 5 years?

Osman Latif: Diversification is the key to increasing profitability and AUM, so hopefully I will be managing more money across more markets.

Larry Levy: Is there a greater acceptance on your buy-side now for automated trading than, say, 3 or 5 years ago. Is this an easier sell now?

Osman Latif: Yes. Automated trading is increasingly accepted as the de facto standard so again it's squeezing out the discretionary trader.

Larry Levy: It's a tough business, isn't it?

Osman Latif: Absolutely, but what business isn't? It's yes and no though. One expects to reap the rewards but the flip side of it is the stresses involved. If you can't handle the stress then you are in the wrong game.

Larry Levy: Do you live to trade or trade to live, what makes you buzz?

Osman Latif: I certainly live to trade, it's my greatest passion in life. Obviously I trade to live as I need to make a living. I am extremely competitive and have been since a very early age. I never liked to lose and if I do lose I want to understand why I have lost so I don't lose again. I love competitive sports like football and tennis. I've recently been doing something called Krav Maga which is Israeli martial arts. Matt Damon uses it in The Bourne Identity; it keeps you on your toes.

Larry Levy: Osman, thank you very much.