Larry Levy:Tell us about your background in the markets and how 24FX came about.
Andy Schnappberger: I have been trading for about 17 years, starting with a small management firm in Germany, then co-founding Tactical Derivatives, a classic external portfolio manager for small institutions with branches in Spain and Switzerland. After a few years with great success we sold the business to a private equity firm, and I then worked as a prop trader and portfolio manager for a bank in Germany and a trading group in Singapore.
Later I joined a family office where I was responsible for building up new strategies and rebuilding the family's capital market activities. That was when I founded 24FX - because I thought it was a good idea. At first 24FX traded only for the family office, but later we started to accept external money too. Now we have more family offices worldwide and are looking to expand.
24FX is a classic risk management firm only for qualified investors, institutions and family offices. We give trading advice for hedging forex exposure as well as the usual advice about risk positions in different currencies.
Larry Levy: What attracted you to automated trading?
Andy Schnappberger: The current market is a really large pool of information and price action. As a small team you can't focus on just a single currency; you must look wider. You have to spread your risk - this is very important - and trade different currency pairs, but all with the same system. Automated trading helps spread the risk and maintain oversight of what is going on in the markets. It makes you more disciplined and neutral to the market, because you only have to focus on what is going on with the transaction. This saves time in the trading day. 90% of our trades are fully automated.
I am only interested in trading automatically where my system comes up with certain cross patterns. Most of the time I do not care about the cross itself.
Larry Levy:You have chosen managed accounts rather than funds. Tell me why.
Andy Schnappberger: The managed accounts route is just a simpler and cost effective way to give a more personal service than you can in a fund. You can provide for different clients with different needs; not every client likes the same risk parameters or risk ratios.
I am thinking about a fund, and have been for the last two years or so, but I haven't found the right partners. The idea would be not just to focus on different risk ratios, but also on market risk exposure. In a fund you can follow a stricter system than you can in a managed account. The fund theme is definitely a project for me and the company in the future, though if we start a fund we will keep the managed accounts.
Larry Levy: Over the past five years you have had some amazing returns: always over 20%, up 32.5% in 2008, and a total return of over 900% since 2001. What are the main factors in your trading strategy that have produced these?
Andy Schnappberger: We expect such returns from our trading strategies, so for us they are not that amazing.
The strategy is normally quite simple. It's not an HF trading route but rather trading the right market conditions. The system tries to find markets that are near breakout or at a significant level. It also tries to find re-entry points of an existing trend. This is nothing special to us.
Larry Levy: How are your returns audited and verified?
Andy Schnappberger: As we started by trading just the family's money there was no reason for a total audit - the main family office was audited in the last few years only for tax reasons. So we had audits in our first few years through our tax advisors. But a potential investor can have direct references from clients, and we will have a complete audit in the middle of next year.
Each new client follows our performance in our database and compares it with their own results from their accounts. If any significant changes occur then reports from compared performance can be made and the potential investor can ask why the differences have occurred. We've had external clients for about three or four years now, and are doing a complete audit in the next year. But at the moment we are not audited.
Larry Levy: Are the trades the same across all the accounts and just the gearing different?
Andy Schnappberger: About 70 - 80% trades are the same. The only thing that is different is the gearing. Some of our customers have less risk appetite, and some have huge risk appetite.
Larry Levy: For your published returns in your brochure what kind of risk and gearing are you using?
Andy Schnappberger:The average gearing is an average of 1:3, with maximum leverage of 1:5. Three months ago we agreed to offer our customers more risk with a maximum leverage of 1:7 or 1:8.
Larry Levy:Is the maximum leverage a reason why your performance is better this year?
Andy Schnappberger: It's one of the reasons, yes. We have also had a large drawdown this year and it happened the month we changed the maximum risk level. Typical!
Larry Levy: Your worst one-month performance was minus 19.28%. Tell us about that.
Andy Schnappberger: That was the month that, after requests from our customers, we raised our maximum leverage to 1:8. We then had a drawdown period. But normally our drawdowns are much smaller.
Larry Levy: Do you essentially use the same models as several years ago, or are you constantly evaluating and putting new ones in place?
Andy Schnappberger: Systematic trading is an ongoing, evolving process. In every trading development team you have to learn. Our systematic trades now occur with less frequency but with more significant impact. The quality has risen in the last two or three years and now we are trading less often but with more significant patterns and higher profitability.
Larry Levy: You trade only currencies. What kind of gearing do you use and which currencies do you trade?
Andy Schnappberger: We trade on an average of 1:5 with a maximum leverage of 1:8 and we only trade the most liquid currencies. We trade G7 but don't do any exotics or the eastern European currencies.
Larry Levy: What technology do you use in programming and execution?
Andy Schnappberger: We use well-known software packages like Metastock, Metatrader and TradeStation. We also use a very interesting program which deals with game theory. This has been designed for the financial markets and you can simulate all the market extremes with it. We developed it in-house about five years ago.
Larry Levy: Which software do you use the most in terms of back testing?
Andy Schnappberger: We focus mainly on Metastock and Metatrader. Metatrader is our number one program at the moment. Our code is written into Metatrader and executed from there in real time 24 hours a day. I am very happy with the Metatrader technology. We use Metatrader4 but next year we may switch to MT5.
Larry Levy: Do you execute through a particular Metatrader broker?
Andy Schnappberger: Yes we do, but every customer can choose their own broker. We do not have any particular broker we prefer. My interest lies with trades being executed properly.
Larry Levy: Are any of your MT scripts available for sale?
Andy Schnappberger: We do the programming by ourselves and don't use any programs you can buy. Sometimes we lease them out, but it depends on what the person is looking for. If the customers want the signals rather than the execution, then we lease optical signals.
We have a daughter firm that leases out signals. Customers can log into a secure area where there are four charts for 5-minute EURUSD, EURJPY, USDJPY and GBPUSD. You will see the optical error signals which we use in our own systems in real time.
People can lease these systems for €120 a month if that's what they want. It's just a sideline thing we do.
Larry Levy: What instruments are you trading at the moment on the automated trading side? Are some clearly better than others?
Andy Schnappberger: We are automated on EURUSD, USDJPY and EURJPY. All crosses are difficult, so we have specialised the signal generation on these three and it works quite well.
Larry Levy: Tell us about your testing procedures?
Andy Schnappberger: We have a large database of currency data and simulate different market conditions. After that we write the risk parameters for sizing down the risk as well as the volatility levels. We do this until we get good results. This is like a relative risk simulation. The main aim is to test the system at different volatility levels. The testing goes between five and seven years back.
Larry Levy:How well did your system cope through the Lehman crisis?
Andy Schnappberger: That crisis was not typical for the market, though we have built in some stress factors that can simulate the Lehman crisis. We have factored in simulations like Chernobyl and 9/11. These get built into the systems to see if a strategy is working or not.
Larry Levy: Your system holds up well in crises like that then?
Andy Schnappberger: Yes, absolutely.
Larry Levy: How do you quantify your risk-reward in terms of relative returns?
Andy Schnappberger: The system is built with the objective of producing a steady yearly profit of about 20-25% on a low risk basis. The current ratio moves between 3:2 and 4:1 as maximum. This means that on three winning trades we should see one or two losing trades - this is the idea and focus.
In terms of real numbers, I look to achieve my target performance of about 25% with my maximum yearly drawdown of 20%, more or less.
Larry Levy: And you have never had a yearly drawdown?
Andy Schnappberger: That's right.
Larry Levy: Is there any type of model that you prefer over others? Are there any you automatically exclude?
Andy Schnappberger: I prefer clear breakout patterns, timed breakouts. The system also works with classic trend-following strategies but from my personal view I like the timed breakouts. The risk-reward ratio is much better and they produce really good results on a yearly basis.
I wouldn't program anything on seasonal cycles. The systems are OK and are widespread and everyone knows systems now, but for programming them and for building up systems you can't use Elliott Wave. If you have ten Elliott Wave analysts then you get ten different meanings. Ten different brokers analysing candlesticks burning produce ten different results. This is why I focus only on breakout patterns.
Timed breakouts are very simple. Let's say you have a trading range that has developed two hours after London starts, so you have a significant high and significant low. If you go in through this low, or further than the last high of this trading range, then you have a result.
Larry Levy:You talk about trend and counter trend, and the use of volatility indicators to determine the model. Can you expand on when you would use one or the other?
Andy Schnappberger: From my personal view, the best trades are trend trades with a low volatility, and counter-trend with high volatility. Market extremes have to go together with a high degree of volatility, in my opinion, so if we are counter-trend trading we can see if we are right or not. The market should immediately move after a significant extreme is reached. If the market does not move a significant extreme is not reached. Then you can see 90% of the time the trade will be a loser.
Larry Levy: Let's talk about trading time frames. How long do your average trades last?
Andy Schnappberger: The trades from our system can last from several minutes to a maximum of three days, if a really good trend is in place. The average is between three and eight hours.
Larry Levy: Do you have a maximum drawdown or loss limit policy?
Andy Schnappberger: I stop trading if I exceed 6-7% a month.
Larry Levy: You just stop trading if you get to 7% a month? How then did you have that 19% drawdown one month?
Andy Schnappberger: This was an exception. We asked our customers if we should go ahead with the trading and everyone said go ahead until the highest level, the program's calculation, of risk is reached. The highest risk levels that could occur at the time were about 22% and this was the reason we almost got to 20% drawdown.
Larry Levy: So the customers instructed you to keep trading?
Andy Schnappberger: That's correct. When we reach 7% we ask them if we should carry on or not.
Larry Levy: What percentage of 24FX trades are fully automated?
Andy Schnappberger: Round about 70%.
Larry Levy: Are executions identical across all client accounts?
Andy Schnappberger: No, not really. It depends which dealer the clients are using and their broker connection. Not all prices can be the same. They are nearly the same, but in the real world they are not always the same.
Larry Levy: Please tell us about your fees.
Andy Schnappberger: These are straightforward. We have a 2% management fee and a 20% incentive fee. The management fee is payable monthly and the incentive fee is calculated quarterly. That is calculated on the high-water mark.
Larry Levy: The 2% management fee and 20% performance fee have come under criticism recently. How do you react to that?
Andy Schnappberger: We are outside these discussions. My customers are very happy with the cost and fees structure. So we have no problems.
Larry Levy: Who pays you the fee? Is it the broker or do the clients write you the cheque?
Andy Schnappberger: We have different methods. Some go through the broker and some pay direct.
Larry Levy: You have accounts worth a total of about $35 million USD at the moment. What is the size of a typical account?
Andy Schnappberger: The average account size is around $1.5 million to $1.8 million. The largest account is over $15 million, the smallest is $1 million. But you can use a notional account. You could have $500,000 (the smallest account we would accept), trading it as though it was a million.
Larry Levy: Can clients decide to gear down or gear up?
Andy Schnappberger: Yes, it depends on the risk appetite of the client. We stop them at a risk ratio of 1:20. This is the absolute maximum. We have just one trading at this top ratio. But we have had a long relationship with that client, and he has made a lot of money with us, so he can afford some losses.
The lowest gearing we go to is 1:3. We don't go lower, as the customer can't make any significant amount below that, so it makes no sense.
Larry Levy: Tell us about 24FX back office and execution arrangements.
Andy Schnappberger: The back office is simple. We check all the trades with a computer program, which makes screen shots of all our executions and trades. We can see exactly on which prices we are trading, so we can evaluate the prices. The execution arrangement is dependent on the customer's clearer. That is not our line of business.
Larry Levy: Are you trading through anything other than Metatrader with the automated trades?
Andy Schnappberger: No we are 100% with Metatrader at the moment.
Larry Levy: Do you plan to add any method of execution or are you happy with Metatrader?
Andy Schnappberger: We are happy, but we are changing some infrastructure in the first quarter of next year when we will add some different execution possibilities. We have some new relationships in Germany and Europe and customers are asking for new execution methods.
Larry Levy: How does 24FX handle monies and disbursements? Can customers withdraw or stop trading at any time?
Andy Schnappberger: Yes they can. If a customer decides to stop trading we can stop trading immediately and execute all positions until the customer is flat. When the customer can have his money then depends on the broker side.
With the managed account the customer is essentially in control of the account, so we don't have to worry about security of funds. That's between the customer and broker.
Larry Levy: Do you have or believe in mixed models - automated trading with some discretionary input or circuit-breaker factor?
Andy Schnappberger: Yes. You should be careful with too much automation. If there are rumours or some important data we shouldn't be totally on the automated side. This is where a mixed model makes sense.
Larry Levy:How do you handle that? If you know there is a big number coming out and the market is very volatile, do you simply close the automated system's positions before that happens?
Andy Schnappberger: Yes absolutely. We can close up to 100% of positions if a really big number is coming out.
Larry Levy: How many people work at 24FX besides yourself?
Andy Schnappberger: Five or six people. We don't have a 24 hour trading desk, but we always have people on monitoring trades in real time.
Larry Levy: Do you generally execute at market or limit price?
Andy Schnappberger: 70% of the time we are going at the market price. In certain market conditions we are looking at limit prices.
Larry Levy: The reason I ask is because there is a known problem with Metatrader with certain brokers with limit executions.
Andy Schnappberger: We are aware of this. We do not see a real problem at the moment but from my point of view I like to go at the market price. Most of the strategies are executed at market.
Larry Levy: Do you trade your own ideas as well as those suggested by others?
Andy Schnappberger: Yes, sure. I trade my own ideas but have always got my eyes on other systems. You shouldn't be too blind on the development of new systems. There are a lot of ways that lead to Rome.
Larry Levy: What is your view on very High Frequency Trading?
Andy Schnappberger: HFT works but it's not my line of business. For some institutions or trading groups it may work well. There are a lot of ideas behind it, and everyone uses different tactics and equipment. It's a part of the trading world but we do not do that.
Larry Levy: Is most of your business from within Europe?
Andy Schnappberger: Yes, it mostly comes from Europe and Asia. The US business is coming up. There are a lot of questions and inquiries from the US and 2011 will probably be the year of a fast growing US client base.
Larry Levy: What is your view on the evolution of automated trading and its future prospects?
Andy Schnappberger: Markets are more and more complex, and new market segments are coming up. Growing automation is a must for every trader - this industry will be one of the fastest growing industries ever.
Larry Levy: What kind of new segments are coming up?
Andy Schnappberger: I would compare it with the 70's. In the 70's a trader grew up with industries like the NASDAQ and S & P and perhaps the first currency futures. Now you have a thousand sub-industries and this process will not stop.
Every fund manager and asset manager is looking for additional
and special bench marks, so a lot of new segments are developing.
Automated trading is important for every portfolio manager. You
cannot work with all the information and all the
relationships between these new industries and segments without AT.
Larry Levy:It's a tough business! Would you say there is a greater acceptance than three years ago on your buyside? In other words is automated trading an easier sell today?
Andy Schnappberger: Yes. It's a lot more transparent for investors now than it was before. It is also easier for them to implement these strategies in their portfolios. The new complex trading tactics that they want should be automated. So it is a real must for any investor or asset manager.
Larry Levy: And would you recommend the Metatrader to an institution?
Andy Schnappberger: That depends which institution it was and where their focus lay. If you talk about the large and well known institutions then you can't forget that behind these big players are real people. These traders may be 25 or 30 and he/she is a trader and not the institution.
The question to answer is what the focus of these traders or their bosses is. What will they achieve? I know small banks that are very professional and efficient but I also know big banks with terrible trading desks. It depends what the institution is looking for.
Larry Levy: Do you live to trade or trade to live?
Andy Schnappberger: I live to trade. Trading is a large piece of my life and so my life is surrounded by markets and market talk and the building of systematics and so on. I really live to trade.
Larry Levy: What makes you buzz outside trading?
Andy Schnappberger: I like spending time with my family and taking short trips just to see different things other than screens or prices. I have the opportunity to move around, and where I am now I can relax and trade.