Kevin Yokley (left), Brian Tehako (Middle) and Andrew Tehako (Right)
Larry Levy spoke to TnT Group's Brian Tehako, Andrew Tehako and Kevin Yokley in January 2011.
BrianTehako started at the CBOT in 1993. He became one of the first Murex traders in 1998, working with Bill Noyes at Yes Trader. He formed his own prop shop at Gelber Group, in 2005, called Boss Trading, which had 28 click traders at its peak. In 2009, Brian left Gelber Group with the aim of increasing his involvement in automated trading. With Kottke Associates to supply infrastructure and support, Brian used his own capital to start TnT Group.
Andrew Tehako, Brian's younger brother, majored in economics in Chicago. In his sophomore and junior years he interned at Boss Trading as a clerk, and then, in his senior year, interned at a grain brokerage firm. Andrew followed Brian to Gelber Group and left with him to form TnT Group.
Kevin Yokley began his career as a developer at Gelber Group in 2009, where he met Brian and Andrew and others who would become part of TnT Group. "When they decided to leave they asked if I wanted to come with them and I did. I like the idea of the group and the principles Brian was putting forward." Kevin has a degree in applied mathematics and a minor in computer science.
Larry Levy: Let's start with some background and a run down of the TnT group?
Brian Tehako: The TnT group was formed in January 2010. The idea was to form a group with three functions: to click trade; to long-term trade; and to have automation. The in-house trading, click trading, and the long term trading are proprietary and the automation was going to be proprietary to traders in-house and out-of-house. I thought, why not make the old prop style of trading into an automation prop style?
Larry Levy: You are effectively forming an automated prop shop? Are you carrying on with the conventional prop shop alongside that?
Brian Tehako: Yes, exactly. We are trying to form the two so they can support each other. From my understanding this is completely new.
Larry Levy: Do you think that the increasing prevalence of automation, and the rapid-fire opportunities that it brings, are pushing the click trader out?
Brian Tehako: I would say 90% have already been pushed out.
Larry Levy: You don't think that's anything to do with the financial crisis?
Brian Tehako: No. Every trader has gone through different crises. The thing about crisis is that we love it. It causes movement and volatility on an intra-day basis, which as a click trader, or a trader in general, you want. You don't want low volatility.
Larry Levy: It's generally assumed that the decline in the number of people in the trading chat room and the discretionary individual market is because the amount of disposable income in the US has gone down.
Brian Tehako: I disagree 100%. I think what happened was the traders used to be the hunters. We used to hunt the automated stuff and the roles have been reversed. The automation got so good that they became the hunters and they hunted out the traders. They could tell what positions they had on, how far they could go. It's the same exact thing that happened when we went from the floor to the screen. The floor traders used to pick off the screen guys until the screen guys became so good they could pick off the floor guys.
Larry Levy: Can anyone submit just a trading idea or concept or must it already be a complete trading model with entries, exits and risk control all already defined?
Brian Tehako: We will take on all your risk, develop your idea, we will forward test it and back test it and we will run it for you. It's the same as any trader that walks in the door and says hey I want to trade xyz and you sit them down and give them an account so they can trade it. I wanted to implement that same thing because the prop trading groups are dinosaurs and they are going away.
Andrew Tehako: Anyone with just an idea can submit it. We can take their thoughts and experience and possibly improve upon it. If you have an idea that is fully defined then that's great and we will take a look and throw it at the markets. With that we can still take our experience and throw it on top of an already defined automated system. If it's a very raw idea we will take that and test it and back test it and see what it can do.
Larry Levy: If someone comes along with an idea that you already have, how do you politely explain to them you already have that one and you aren't going to share that with them?
Brian Tehako: We would just tell then we already have it and we have run it but if they have any other ideas that could complement the system or some small changes to make it better, then we look at it. If they have the exact same idea as someone else then we just tell them that.
Larry Levy: Are any models that you accept traded by TnT using your capital alone so that there is no financial risk to the model's developer?
Brian Tehako: We take on all the financial risk.
Larry Levy: How do you handle the issue of intellectual property security so that those submitting trading models are reassured?
Brian Tehako: There isn't a ton of reassurance that you can give someone except to sign a contract and grow a relationship with them. You have to show them what you are doing is beneficial to them. There isn't too much else you can do and a lot of people have problems with giving up their ideas. Once they realise that what we are doing is beneficial to them and it is something where they can gain access to the market with no risk, they do normally come around.
Kevin Yokley: On the technology side, we develop our own software and everything is traded on our hardware. Nothing given to us is shared or given to anyone outside the TnT group.
Larry Levy: Do you find yourself having to do additional work on the business logic of ideas/ models submitted or do you just confine yourselves to programming the idea or model?
Kevin Yokley: A lot of the time we have to do additional work with the business logic portion. By that I mean times to run the actual system, whether to put stop loss systems on it for each individual trade, when to turn it off or what products to trade. There is a lot of extra input that we end up putting into these systems that goes along with the business side of it.
Larry Levy: So I could walk in the door today and say I have a great idea for trading the German bund and you would still pay me out but you would end up saying we did some work here and it works better on another product?
Kevin Yokley: Yes. We are always in contact with the person that developed the system and it's a joint development process. We have a lot of experience here so we like to throw our thoughts and opinions at it. While we do test the system on the product it originated on we also try and test every other product possible just to get a feel for what it can do in other markets.
Larry Levy: Do you think that running an ordinary discretionary prop shop and an automated trading based prop shop are complementary?
Brian Tehako: They are very complementary. Without having the ordinary prop shop involved, watching the markets consistently on a daily basis, I think you lose that focus and idea of how the markets are still moving. We still create our own automated ideas in house and we base those ideas on what types of relationships we are seeing in the market and how things are moving and reacting. Having those things that go hand in hand is great for what we do on a daily basis.
Larry Levy: If you are cannibalising some of your normal discretionary trading ideas to the automated side, do you predict further decline for the discretionary trader?
Brian Tehako: There are two things that I feel are going to happen in this market. The automated trader is only going to live and breed in a market like this where they can work hand in hand with programmers and developers. The human element of the game right now is taken out because of the automated side. The other thing is that I think the click trading is going to move towards a fund atmosphere. People are going to take four or five good traders that can click trade and tell them not to click trade but put their ideas together in one model and maybe trade on both an intraday and long term basis.
Larry Levy: Like intraday position trading rather than scalping?
Brian Tehako: Right. The scalping in and out is what the automated traders are eating up. The normal fundamental macroeconomic movement of markets are still there on an intraday basis. It's just how they get there is what is screwed up right now.
Andrew Tehako: Yes. Automated trading has taken out the emotion in the markets. If you see something move, and a market you expect to move off the back of that doesn't really move, it is just because it's a computer controlling the trade so there is no emotion to the trade.
Larry Levy: When trading with a discretionary technique do you sometimes think it could be better done if it was fully automated or vice-versa?
Brian Tehako: I think most of the time you are better automating than using your own discretion. The only problem I have with that is relationships are changing on an intraday to daily basis. So you can't be that fast at automating your ideas and changing them quickly with your developer.
I still like to be able to discretionary trade my ideas but the problem is you have to be very disciplined. If you aren't disciplined then that is when you get into trouble. I personally think that for success down the line the future is going to be fully automating your ideas and watching them trade on a daily basis. I think you have to be involved and watch the market but still let your system trade it.
Larry Levy: What technology do you use in programming and execution?
Kevin Yokley: We have created a proprietary platform written in C# which we code all of our automated strategies into. That platform actually controls the taking in of the data and running whatever calculations necessary and then it's able to execute through Cunningham's T4 API. That's how we run all of our automated trades right now.
It's not a FIX protocol API and they offer their own API to do the execution but what is nice about the T4 API is that they actually developed their front end using their own API. This means anything their software can do you can actually do yourself behind the scenes so it gives you a lot of ability to tweak things and it's very versatile.
Larry Levy: What made you decide to use C# rather than anything else like C++?
Kevin Yokley: I actually chose not to use C++ because it's a lower level language. The advantage of using C++ is that you get a speed boost, but none of the strategies we have worked with so far are high frequency so we don't necessarily need that boost in speed. C# gives you a lot of things that you would have to handle manually in C++. I just don't have to worry about them. The amount of time it takes to develop a strategy and get it to the market - we are able to do it quicker in C# because we don't need the speed boost of C++. So it was just the obvious choice.
Larry Levy: What operating systems do you use?
Kevin Yokley: All of our systems operate 64 bit Windows 7. The hardware is all solid-state drives with 12GB RAM in each system. They are running quad core 64 bit processors, Intel, at about 3.2 GHz.
Larry Levy: Please give us an overview of your hardware back up and networking and communications solutions?
Kevin Yokley: Our back up systems are still being set up. We are a new group and a lot of that will come in throughout the next year. We do have some redundancy in our systems just in case anything gets lost in one system. We have multiple copies. We can be up and running quickly if anything were to happen. The networking is controlled by our joint-venture company, Kottke Associates, so we don't deal with any of that.
Larry Levy: What communications provider are you using? Are you all within the CBOT or are you trading in the Eurex and other markets?
Andrew Tehako: We trade Eurex. We all trade in-office so communicationwise, if you are talking about an office in Europe, we don't do anything like that.
Larry Levy: If you had a robbery or a fire how long until you would be back up and running?
Andrew Tehako: We could be up and running tomorrow.
Larry Levy: What instruments are you trading at the moment on the automated trading side and are some clearly better than others?
Andrew Tehako: Currently our automated systems are trading the same range as the click traders. We have autos trading the Emini S&P500, Emini NASDAQ100, Emini Dow, crude oil, whatever really. If it's out there and someone has an idea for an automated system for it we are happy to try that. As for which instruments are better it's really dependent on the strategy itself. Some instruments are more volatile than others so those strategies are taking bigger swings but ultimately in terms of profitability it is really difficult to say.
Larry Levy: How do you quantify your risk and reward in terms of relative returns?
Brian Tehako: Same philosophy as when I brought in a new trader for prop trading. We are going to start small and have a small lot size and small daily risk. Once we see success we ramp it up. My personal philosophy on risk is that we never want to lose more than a 10% drawdown in a day on someone's account. So if we can get someone's account up past that £6,199.11£619.91 mark the risk is basically a day. Whatever that goes up to then the risk stays at 10%. We want to be active in the market and we don't want to be limited to the amount of trades.
Larry Levy: So you are in the high-risk, high-reward business then?
Brian Tehako: Absolutely. That was the way I was taught and that is the way I have always lived my life.
Larry Levy: Do you have that 10% circuit breaker automatically in the systems so when it reaches that figure it just shuts down?
Brian Tehako: Yes that's right.
Larry Levy: Tell us about your testing procedures, Kevin?
Kevin Yokley: These are easily summed up as a process that goes through the back-test phase, then optimisation, back-testing again, optimising again and we continue like that until we find something that consistently makes money. At that point we will actually begin forward-testing, which is just running the test in a simulated environment with live data; we are checking to make sure all of the execution is going through correctly and only then if it's still looking profitable will we turn it on live.
Larry Levy: How long would that typically take, say if I came to you with a complete system today how long until you might see fit to take that live?
Kevin Yokley: If the system is complete, then we are able to do the back-testing and optimisation fairly quickly. If it is complete with all the stops in place and profit targets and all the parameters are set the way you want them, we'll run the tests. We may even skip the optimisation phase because you may have already done a lot of testing there. That whole process may take a day and at the same time we would be coding it into our platform to go ahead and do the forward-testing. We may do a week of forward-testing just to make sure everything is running correctly, but we could be up and running by the week after. I would say if you had a complete idea it would take between 5-10 days for it to be up and running.
Larry Levy: Given your experience, Andrew, is there any type or category of model that you prefer over others, Are there any that you automatically exclude?
Andrew Tehako: We tend to look at any idea that comes to us as long as the person with the idea can define, to Kevin, the principles behind the system. We will take a look and entertain that idea. Computers don't really have a thought process to them so in order to run the system Kevin really needs to be explicitly told what to tell the computer to do. That plays a major factor in accepting an idea.
Larry Levy: Do you have a maximum drawdown policy?
Brian Tehako: We haven't run into that problem yet. The idea I have on that is the same thing I would use for a trader that is trading proprietary for me. There are a lot of different routes to get to a £61,991.12 loss and I think you have to take that into consideration. To put a number on that would be really hard, but if a system is losing money consistently on a daily basis we are not going to let it keep going. We will shut it down and take another look at it. That could be after £3,099.56 We could take another system that has a daily risk of £6,199.11 a day and all of a sudden it loses 5 times in a row for £50,000 dollars, but it made money in the past - it gets looked at two different ways.
Larry Levy: So it's more on a case-by-case basis?
Brian Tehako: That's right. It all depends on how we got to the point we are at and that always depends. If a system the year before made us a million dollars we are not going to shut it down after a £61,991.12 dollar loss the next year. It's the same thing with a prop trader. If he makes a ton of money in '07 but starts out with a loss in '08 you aren't going to fire him.
Kevin Yokley: This is the reason why we put up all of our own capital. It's because we have to have complete control over whether the system is running or not.
Larry Levy: How long does your average trade last, how often do you trade and what are your shortest and longest time periods for a trade. Is latency an issue?
Brian Tehako: On both click sides and automated sides those answers can vary. It really depends on the trader or system. Some trades may be very short and only last a few minutes and then some can be more medium-term, which could be a day or two.
Larry Levy: Do you have systems that would only trade for a second or two?
Brian Tehako: We are not as high frequency as that, no. Our shortest is probably a few minutes here and there. It also depends on the market. In more volatile markets you are going to be in faster than slower markets.
Latency is not an issue. We are not really into the high-frequency game right now. It may be something we take a look at in the future.
Kevin Yokley: We can probably do trades within a second, but anything shorter than that then latency would become an issue. Like we mentioned before, we don't have any strategies that need to execute that quickly.
Larry Levy: Do you execute on non electronic markets?
Andrew Tehako: No, we don't.
Larry Levy: What percentage of TnT's trades are fully automated?
Andrew Tehako: There is no exact answer to that. There are plenty of ideas and models that don't work for whatever reason. We do take any volatile models but we also take the consistent models where everyday it will make a little bit of money. It's hard to put a percentage on it because there are a ton of models that don't work.
Larry Levy: What percentage of models that come in through the development process are finally accepted?
Kevin Yokley: We go through a lot of strategies before we find profitable ones. I would say maybe 10%. The other thing is that maybe a strategy starts off profitable but then whatever it was looking at in the market may be gone. The opportunity might not exist anymore. At that point that strategy would become obsolete.
Larry Levy: Do you have, or believe in, mixed models? Automated trading with some discretionary input or circuit-breaker factor?
Andrew Tehako: We definitely believe in the circuit-breaker aspect of it. We are very adamant in making sure the systems don't react and cause major problems. We always have circuit breakers in there just in case something does go wrong. Then the system just shuts off. As to discretionary, if you are doing an automated system then you have to make sure it's automated and leave it alone.
Brian Tehako: I think the only time where you can mix those two is basically signals. If you have some sort of automated system that is creating a signal I think you could use that as a click trader. If it's something that gives you a signal that says you should look to sell oil here because 30 different technicals are pointing to that I think a click trader could use that to his advantage and be discretionary.
Larry Levy: Do you use volatility-based stops?
Kevin Yokley: We are able to use whatever kind of stop the idea developer requires of us. Whatever they would like to see in their strategy, we are able to develop it for them.
Larry Levy: What, if any, execution algos do you use to trade your automated or discretionary strategies?
Kevin Yokley: The only thing we use is the platform we developed. Whatever execution is necessary we would prefer to code it from scratch. We don't work with anyone else's execution platform. The only thing we use is the T4 API.
Larry Levy: Brian, do you trade your own ideas as well as ones suggested by others?
Brian Tehako: I trade only my ideas.
Larry Levy: What is your view of the evolution of automated trading and its future prospects?
Kevin Yokley: I do believe AT is the future and I think we have made it to a point where we can't go back. We can't get rid of all the computer systems and go back to click trading. At the same time I think the AT systems are not going to be able to push all humans out of the system. That is only because computers are basically tools which do what they are told. When a computer is executing trades there is no actual price discovery going on. The system is just following a set of rules and anytime it sees that criteria in the market it's going to do whatever it is supposed to do. People are capable of making decisions without saying this price is way out of whack so I need to get in on it. That whole process is what makes markets efficient. People will always be necessary.
Larry Levy: Do you think AT systems are introducing new opportunities for common-sense discretionary trading?
Kevin Yokley: I believe so but that's just me. Since I'm not an actual trader and I don't see it and deal with it all day its hard for me to say for sure.
Brian Tehako: I'm not sure. On a daily basis, watching the markets, it's hard. I'm not sure if there is price discovery out there or if it's price discovery like too many people sold it so we are going to go higher. There is a fine line and a grey area there that I'm not sure about at this moment in time. I think in the next year or two I'll be able to understand it better.
I think right now there are more automated systems that are predatory than they are value based. I think the predatory systems will win out right now because there is not enough volume or players in the market to find that price discovery and take that value into account. You see a lot of something that gets out of whack, but stuff does come back.
Larry Levy: How do you see the future and what plans do you have for expansion at TnT?
Brian Tehako: The future that we are looking at with the automated prop is where we are, I think, going to find a lot of our success. I'm heading that way and will go full steam ahead with that and try and bring in as many systems as possible. I am getting our name out there and getting my face out there to grow that side of the business.
The other side that we are changing, and that I'm growing, is more of the fund-type trading. I will be doing more persistent-type and longer term trading, taking out everything of the market that is going on visually and trading more of a macro-type term. Holding for long-term, macro, and not getting caught in the minute-to-ten-minute type moves. I personally feel that this is the way of the future of the click trader and I want to be an innovator along that path.
Larry Levy: Does being in Chicago make a real difference to your trading or would another financial centre be just the same?
Brian Tehako: I don't think it really matters where you are. Your location is there for your connections. Dinners and drinks and other networking-type things. With the technology today, with the connectivity, it doesn't really matter with your location because we can be anywhere in any exchange in the world. With what we are doing, we don't need to be next to a server or anything.
Larry Levy: What made you call the company TnT Group?
The T stands for "Tehako" the N stands for "and" and the other T stands for "Trading".
Larry Levy: Outside financial markets, what makes you buzz?
Andrew Tehako: I'm a pretty big sports fan. I played football and baseball in high school so anything to do with sports really makes me tick outside work. Being from Wisconsin I'm a pretty big Green Bay Packer fan. Now being in Chicago with the Chicago bears it's hard being a packer fan but I get by!
Brian Tehako: I'm married with kids so I like spending time with my family. I coach youth football and baseball so that keeps me busy. I also own a restaurant and sports bar called Mullets. I also have another business venture doing sports performance and personal training called Pure Fitness. All of those things keep me happy and busy and I also enjoy having a beer once in a while.
Kevin Yokley: I'm a big soccer fan. I love Manchester United and I watched Barcelona dismantle Real Madrid the other day and that couldn't have made me happier! That's pretty much me.
Larry Levy: Gentlemen, thank you very much.
Further information at www.tntgroup.me