Automated Trader Magazine Issue 31 Q4 2013
Stock market values may have recovered, but volumes are still a long way off from before the global financial crisis. The average daily value of share trading around the world was more than $47 trillion in the first half of 2008 (source: World Federation of Exchanges). At nearly $28 trillion now, the total is more than 40% below pre-crisis levels.
But that’s only part of the story. The latest number is also up 23% since the start of this year after notching its first significant increase since the crisis.
This sense that the mood may be shifting, coupled with a series of huge developments in the world of financial exchanges, convinced us to make the theme for this issue of Automated Trader focused on what’s happening in the exchange space. The short answer: a lot!
In ‘Exchange Wars’ , we examine some of the drivers behind all of the change, from regulation to product innovation. Then, in ‘New kids on the block…again’, we talk to two former Chi-X executives who are building very different exchanges, each of whom thinks he has a potential game-changer.
Anyone who trades knows that the industry has been beset in recent months by technological problems. ‘Ain’t life a glitch?’ looks at what the venues, their users and regulators are saying about how to deal with the ever-present threat of a tech failure. And we conclude our exchange series with an update of an article that got a lot of attention in our Q3 edition. Ion Asset Architecture’s Dennis Lohfert gives us more to chew on concerning Eurex’s new trading system.
Mary-Ellen Barker examines what’s happening in Japan in ‘Muscle and Speed’. Japan’s economy and markets are enormous, but the country has been slow to adopt algorithmic trading. Is that starting to change?
As usual, we begin our issue with an extended chat with a buy-side player who is doing new and interesting things. This edition’s ‘First Person’ interview is with Andrew Auerbach, who is starting a trading outfit in Brazil and thinking about launching another one in Russia.
‘Me and My Machine’ meanwhile features Jim Moore, a fund manager who has been in the markets since before some Automated Trader readers were born. He embraced algorithmic trading in the 1990s and he’s still at it.
In ‘The underlying dog and the option tail’, AT founder Andy Webb talks to Dr. Tyler Brough of Utah State University about his work exploring whether options prices can act as a leading indicator of their underlying instruments.
Finally, for all the film buffs out there, you may enjoy a couple of homages to two of the classics in these pages. We’re pretty sure you’ll spot them without our help.
- Financial wanderlustAndrew Auerbach began trading at university and soon realised he'd found his calling. Starting with simple long-only blue chip positions, his strategies became progressively more sophisticated. Now head of Auerbach Group, this young American fund manager is embarking on his most adventurous journey yet as he starts an algorithmic trading fund in Brazil.
- Promoting transparency through data analysis on latencyTechnology is one of the most important cornerstones of electronic markets and, more broadly, of today's global markets. As technology allows for increasingly complex systems from a design standpoint, it is essential to get a clear view on each step inside a system to understand outcomes. Gathering data at discrete points within such systems is a practical way to break down the complexity and deliver digestible information.
- Exchange warsSecurities and derivatives exchanges around the world are facing severe headwinds, or depending on your viewpoint, "opportunities"...
Adam Cox talks to senior exchange executives and a range of industry players in this "six-part story" to examine some of the burning issues. Regulatory changes are encouraging new lines of business and new business models, merger and acquisition activity is dominating the headlines, venues are scrambling to come up with products they hope might catch fire.
So Automated Trader decided to take stock of some of the forces which are redefining the trading venue landscape. We've spoken to top executives, analysts and market participants to provide a snapshot of some of the main themes.
- The fragmentation factorMany, though certainly not all, of the recent higher-profile trading glitches have occurred in the fragmented securities market rather than the more liquidity-centric derivatives venues. Jim Overdahl, representing the Futures Industry Association's Principal Traders Group, talks about why responding to the technological challenges can be different for the derivatives industry than for securities venues.
- New kids on the block… againHirander Misra is starting a new exchange. So is Alasdair Haynes. Neither of those plans should be that surprising to many people, since both played important roles in the meteoric rise and sustained popularity of Chi-X Europe, the first venue designed to take advantage of the sweeping changes brought in by MiFID. Automated Trader gets the low-down on the new Aquis and GMEX exchanges.
- Straight Through Workflow with Added AlphaRegulation can dramatically change trading conventions and market structure. One example of this in the ETF market is the Volcker Rule within the Dodd-Frank Wall Street Reform and Consumer Protection Act. This has fractured the ETF market making it hard for traditional buyside investors to tap the ETF liquidity they need on a request for quote (RFQ) basis. Fortunately, as Gary Stone - Chief Strategy Officer Bloomberg Tradebook - explains, there is now a solution.
- Muscle and SpeedYou would think the tech-savvy nation of Japan would be leading the way when it comes to algorithmic trading. In fact, it's decidedly lagging. But things are changing and one of the world's most developed markets is finally getting serious about automation. Mary-Ellen Barker reports.
- Ain't life a glitch?Automated Trader investigates the various responses, both from the industry and regulators, to a spate of technological mishaps. Adam Cox reports.
- Better, faster, stronger?Eurex has poured plenty of development resource into its T7 platform and seems determined to push for more improvements.
In the previous edition of Automated Trader, Ion Asset Architecture's Dennis Lohfert looked at how the new architecture was performing and the results were impressive. He follows up here with a look at the impact of the latest upgrade and considers whether Eurex can maintain its momentum.
- The art of the fast exitIf anyone deserves the label 'market veteran', it may be Jim Moore. Since getting into the business in the late 1960s, he's worked with some of the biggest names around. He also embraced algorithmic trading early on. Adam Cox talks to Jim about his trading techniques and investment philosophy.
- The Underlying Dog and the Option Tail. Which Wags Which?The direction of information flows in markets has long been the subject of academic debate. Automated Trader talks to Dr. Tyler Brough of Utah State University about recent papers he has co-published with colleague Dr. Ben Blau on this subject in the context of options, their underlying securities and market friction.
- Seizing New Trading OpportunitiesMarkets are by their very nature competitive, but the growing prevalence of technology in recent years has only served to intensify this competition. One consequence of this is the way in which long-established trading strategies have become non-viable. However, as Steffen Gemuenden, CEO of RTS Realtime Systems explains, in a global trading environment there are still plenty of profitable opportunities - if you know how to access them.
- Lawyers to the rescue!What's the difference between a lawyer and a mosquito? One's a blood-sucking parasite, the other is an insect.
What's the difference between a lawyer and a liar? Pronunciation.