Gil Tene, Azul Systems
"When I look at spend on what you call big data…my experience is, when there is money to be made people are very aggressive."
New York - It's a long laundry list of conflicting signals in US markets. Industry trading volumes are at five-year lows, the actual state of liquidity for ETFs is in question, and markets are volatile against a backdrop of slow wage growth. In short, fund managers are adapting to life in the new normal.
In opening remarks at last week's Trading Show in New York, co-founder of SMB Capital Mike Bellafiore, said that he would characterise the state of the markets in three words: challenging, opportunistic and interesting. A recent poll, he noted, found that 90% of retail traders were either bullish or neutral on the market.
"This may be a time period when we look back in 10 years, where we had to position our companies, take advantage of Asia and the next really big trade is around the corner," he said, pointing out that the $25 billion IPO of Chinese e-comm giant Alibaba was the best day for stock traders in a long time.
"Is it going to be Dropbox? Is it going to be Spotify? Insert the next really great stock," he said.
Turning to issues of market structure, Bellafiore noted that firms are facing numerous challenges in an environment run by "bots" and dark pools.
"That makes it more difficult for us as discretionary traders competing against very fast algorithms," he said. "I spend way too much time learning about new dark pools, how to access them, how to get them in our platform, which ones are best, which ones are cheaper. (It) would be nice if that era ended for us traders."
A major rift on this very issue became evident at a panel discussion featuring speakers from exchanges, asset managers and market structure experts.
One of the statistics that popped up was order cancellation rates. Sean Hendelman, a former equity trader with expertise in HFT and currently CEO of T3 Trading Group, a trading education firm, said that some 95 to 98% of quotes going up in the market are being cancelled.
That figure may have come from an often cited Tabb Group estimate that is specifically related to orders submitted by HFT firms to US securities markets. A more far-reaching breakdown is provided by the SEC.
Whatever statistics you choose however, there are clearly reasons to scrutinise underlying reasons behind this ratio.
"If you just think about (what) is going on, the flash crash, all the big events that have occurred in the markets that are complex, and these complexities that everybody is creating are becoming really a mess in our markets," said Hendelman.
He pointed specifically at the Order Protection Rule and features of RegNMS as a major part of the problem.
Nataliya Bershova, VP of Quant Trading at Alliance Bernstein, agreed that RegNMS created a lot of complexities in the linkages among electronic books and in terms of order types. "I think that some of the (order) types should be carefully reviewed because price sliding logic order types essentially create an opportunity for HFT to get top position," she said.
It was a difficult panel to be the exchange representative.
"A lot of the market makers (and) HFT have been demonised and we should weed out bad behaviour (but) whether putting in 100,000 shares one cent away from the inside, hard to say that is illegal or not. There is sort of a grey area on what is legitimate," said Bryan Harkins, EVP, head of US Markets for BATS Global Markets.
"But if people are…spoofing or layering, or manipulating, we should be penalising those players. Do the regulators, do the SROs (self-regulatory organisations) do we have the tools to do that? That is where we do talk about market complexity."
So does that mean the answer is more transparency backed by regulatory mandates?
Dave Lauer, president and managing partner at KOR Trading, said that outdated SEC rules legislating transparency practices, such as 605, no longer reflected modern market realities.
"Everybody recognises and understands the rules are outdated and they are critically important for understanding what is going on in markets. Yet SROs have refused to change," he said, adding that exchanges and venues should not have to be handed a regulatory mandate to publish more market quality information.
The big tech debate looked at what might come next for financial services in terms of expanding capabilities in a budget conscious environment.
Gil Tene, CTO of Azul Systems, said: "When I look at spend on what you call big data…my experience is, when there is money to be made people are very aggressive."
And that means increasingly, large amounts of data are telling machines what to do better and smarter.
"People are applying gigabytes of live streaming data…affecting second by second what algos actually do and anybody not doing that is fighting a smart algo with dumb data and that is not a winning battle," he said.
Tradeworx's CTO Michael Beller, who was moderating the panel, put forward that financial services will be "entering the cloud" in a more diversified way. Although using cloud technology brings up a complicated set of compliance and security-related concerns, it presents a viable option to setting up data centres and associated infrastructure.
At the same time, Michael Azzopardi, IT, Infrastructure Architecture and Strategy at Credit Suisse, warned that maintenance, monitoring and other operational costs are substantial and that hidden expenses need to get flushed out, according to research conducted by the bank. "Just because it's the cloud doesn't mean it's cheaper," he said.
Automated Trader was asked to be part of roundtable discussions on news analytics and behavioural sentiment analysis. The host and moderator, Tommi Vuorenmaa, president of Triangle Intelligence, a research firm currently backtesting models in anticipation of starting to trade, said that using news to trade has not been a particularly successful strategy in his own research.
There has been some indication however that it works with small cap stocks, but once transaction and other fees are taken into account any profit realised is quickly eroded.
Another participant pointed out that some research showed little to no benefit from news flow over pure price signals.
Bloomberg and Dow Jones detailed their own strategies in terms of aggregating and prioritising social media channels to create actionable information for subscribers. However, a major distinction was made about the actual strategies at play - news-based latency-sensitive, events-based and machine learning sentiment analysis. Each distinct strategy comes with its own nuances yet to be researched thoroughly.
Participants at the roundtable, much like the industry as a whole, were cynical outside of those that directly profit from selling such services. But there is undoubtedly major interest in pursuing research in this area. However, it is uncertain what will happen as more and more people take part in analysing and trading the data - will the strategy saturate or evolve?
Speaking on the sidelines of the conference, Oliver Schmalholz, CEO of News Quantified, told Automated Trader that he estimates there is a long way to go with just some 10 to 15% market penetration at present. Moreover, there is a greater variety of consumer interested in the data - for example, companies seeking self-referential analysis.
Swaps Execution Facilities were a big part of the conference. Along with Swap Data Repositories, these new infrastructures are expected to become an integral part of the swaps market as regulators clamp down on derivatives trading in the wake of the financial crisis. At the moment, participants are still choosing to trade off exchange however, said Angelo Toglia, CEO of interdealer broker BGC Derivative Markets.
CFTC's chief economist, Sayee Srinivasan, speaking on his own behalf and not that of the CFTC, said that with 22 SEFs in operation moving towards final registration in the next couple of years, the Commission has been hard pressed to offer guidance while collecting and analysing data to understand what is happening in the swaps market.
Historically, the size and scale of the swaps market was detailed by quarterly reports from the Bank for International Settlements. The CFTC now publishes a weekly swaps reporting covering interest rate swap futures and credit markets broken out into main products and tenors. But there is more work to be done, such as making it easier to identify which SEF executed which trade.
But as it becomes apparent it's going to be a slow burner, players want answers about going forward. "Lots of innovation (is) beginning to happen, and industry would like clarity from us that innovation is (in) compliance with the rules," Srinivasan said.
Answering a question on what the Commission is expected to focus on over the next six months, he said that there are challenges in what the implications of a swaps and futures market in Bitcoins might be as well as mandatory clearing for non-deliverable forwards for cross-border trading and market fragmentation.
Other topics of the day included; how to make systematic quantitative strategies work best for firms, how regulatory policies are generating unintended consequences in high speed trading, new models for matching buyers and sellers in the market such as frequent batch auctions and creatively using existing technology to increase efficiency within data analytics.