Recently I had a thought-provoking email exchange with a reader of this blog.  It was with a fellow who wanted to startup an algorithmic trading business and was seeking my advice.  Its arrival was timely for me and I hope the advice I provided the aspiring entrepreneur was helpful.

The conversation forced me to reconsider familiar terrain from a different perspective, so I share it along with some further thoughts in the hope that it might act as something of a counter-weight to articles and blogs entreating you to “learn algo-trading!” (as though it were a fun! weekend hobby) or “make a million % trading the xyz” and more nefarious advertisements selling the trading equivalents of male-enhancement pills & potions (“I turned a used bus ticket and some pocket change into $7M in 2 months trading the e-mini!”).

I’ve changed the writer’s name and all identifying characteristics for obvious reasons.  He wrote:

Hi Tito,

First of all I want to say I really enjoy your blog.  I particularly like your latest portfolio of strategies that updates itself intraday while running a host of strategies in simulation.

I saw that you left Wall Street back in 2005; I am currently at [a 'money-center' bank in] London and am contemplating a similiar move.  Was wondering if you have any advice or words of thought, particularly in this market/economic environment?  My dream has always been to work at a small hf or high freq shop or to start one of my own.  After several years, I finally think I have enough strategies and angles to go forward.

Btw, you are not at Tower Research, are you?  They have t-shirts which read “Hack Wall Street”

Regards,

[Sean]

Not knowing ‘Sean’ from Adam, I replied aiming to be helpful but with a characteristic dose of snark:

Hi [Sean],

Thanks for your kind words – they’re appreciated.

I always have advice.  Quality is the issue.  That said, even my ordinarily low standards can’t be met w/o more info about you.  (e.g., what kind of work have you been doing?, what kind of money do you have salted away (that you are willing to lose!)? etc etc).

But I can still make a few observations.  My first is general:

If you haven’t been working, directly, in a hedge fund or a hft shop, I wouldn’t recommend trying to start one on your own.  Join one, understand all aspects of the business, build a track record and contacts and only then (if at all) attempt your own gig.

Regarding: “particularly in this market/economic environment”  and “HFT”:

HFT is (wrongly, imo) currently under serious attack.  Off-market derivatives and bought politicians were used to wreck economies, but HFT has become the scapegoat.  I believe that [the bank you work at] has shut down their prop HFT biz and I know that [another bank] has.  Many others go under every day.  Whatever else this might mean, it certainly means that there will be fewer jobs and more qualified people on the street competing for them.

It also means there is a possibility (probably a small one) that some kind of regulatory action literally kills the field.  A tobin tax or the like would mean the end of HFT.  Which would make HFT an unfortunate business to be in…

Also, HFT is a *very* specialized field.  You need to have very specialized skills to really add value.  Only you can answer if you do or not.

Finally, a wise wall st old-timer once told me: “there are years to make a killing on your bonus and there are years to keep your job…”

Regarding: “a small hf”

Hedge funds are (mostly) a very different business from HFT shops.  The successful hf mgrs I know all aver that the game is all about raising money – managing it is very secondary (unless you’re seriously foolish or a fraud).   It also raises the question:

Most of all: What do you really want to do with your life?

Good luck to you.  Best,

Tito.

ps – I’m not sure that I’ve ever even heard of tower research…

This probably wasn’t what he wanted to hear and he came back a bit piqued at my necessarily ill-targeted advice:

Same clarifications if I may:1)  When I said my dream was to start my own small hf or high freq shop, I should have stated that is my long-term goal.  In the short term, I see myself working for a hedge fund first while also trading my own PA in respectable size (quant strategies, fully systematic).

2) I should state that I have run a $50M systematic book successfully at [London bank] albeit only on low frequency strategies.  I have also worked at a very large prominent electronic market making desk at [London Bank].  So while this is not the same as have direct experience at a hedge fund, I dont consider myself a novice either.  However, I agree that I am not ready to start my own hf or hf shop.  My issue at the moment is I would like to focus more on the medium-to-high frequency end at the spectrum, but it appears this is not going to be possible at [London Bank].

3)  I agree with many of the the things you stated about HF.  Just curious, do you consider yourself a HF trader?   I honestly consider myself more of a medium frequency/intraday with no overnight risk trader.  I am definitely not ultra high frequency or doing any latency arb and I think “medium frequency” is a good place to be.

4) Question for you:  do you consider a 6 figure PA account large enough to establish a track record in terms of hashing out if something indeed has an _actual_ out-of-sample edge?  Granted this is not alot of money, but my assertion is that this is enough to “go live” with several systems _in very small size_ with strict money management. [ie no more than 2% risk per trade, absolute max 10:1 leverage, etc]  And I am not starting from scratch; I have been in quant strategy for over 2 1/2 years and have several systems ready to go.

Where I am at now is that I am ready to do #4 full-time while continuing to interview with hedge funds and high freq shops.  I have the right background Electrical and Computer Engineering from [top-tier American University], graduate work in time series analysis and econometrics from [top-tier UK biz school], [more impressive sounding experience] but it is taking longer than I had hoped to make the jump to the buy side.

I realize you are probably thinking “hold on to your job on the sell side at all costs etc..” as it is really bad at there and may likely get worse, and while I dont disagree, at some point a person has to move towards what they want instead of living in fear forever.  Let’s just say the past couple of years in banking have not been enjoyable.

Sorry for ranting but hope you can understand where I am coming from…would appreciate any advice you may still have…

Regards,

Sean had provided some useful information with which we could do some simple math. He had a good background and some hundreds of thousands of dollars he was willing to risk on the venture. Not bad, right?… I responded:

It all sounds reasonable and none of it sounds like a rant.

1,2  Sound good to me.

3 Definitely not ultra high.  Many hundreds of trades per day at most for any given strategy.

4  Yes, but for what?   Your (excellent) background is certainly no handicap (though many or most places require a phd for a quant position with p&l), so the question as to whether you can land the job you desire is an empirical one.  Go for it!  Certainly I wouldn’t recommend that you quit your job and start trading as that immediately puts you at a very substantial disadvantage from the perspective of employers.  I empathize with the “past couple of years in banking have not been enjoyable,” but 6 figures of savings aren’t a ton if you’re used to living a banker’s lifestyle in an expensive financial center like nyc or the city.  Going to the buy-side sounds like a great idea; quitting your job? – not so much.

Your decision will also depend on your position in life.  If you have a family (or want to), a partner who enjoys spending money, a desire to travel, etc etc.  Quitting your job to trade your own account is certainly ballsy and if you are successful then shazam!  If not, then you may have irrevocably pushed yourself off the (successful if not enjoyable) path you’ve worked so hard to obtain; if economies really go down the tubes or bigger wars become fashionable, you could find yourself in a really funky spot.  Or you could be wildly successful and build a giant sailboat that kick’s larry ellison’s butt…

New Holder of the America's Cup!

Let me ask you a few questions.  What platform(s) do you intend to use?  Where will you get your data?  How will you store it?  Manage it?  For me, back in 2005 I thought I’d just head on out there, buy some spiffy product and be off and trading.  I was profoundly wrong about that.  Retail level platforms are crap.  Seriously unusable.  (My info on this may be dated, I admit – hence my questions to you )  I don’t think you can afford an institutional platform with 6figures in the bank unless you are *immediately* profitable and burning through half your wad in a few months will impose stress that’s altogether more serious than whatever ridiculous nonsense I imagine you have to put up with at [London bank] these days.  Building your own platform isn’t so easy and is quite time-consuming.  Worse than that, it causes you to have to focus on a lot of things that are *not* central to your primary aim.

Let’s look at numbers.  Say you have ~$500K in hand and a requirement of ~$100K to live.  20% seems plausible.  But you will actually need to do rather better than 20%.  Insurance costs are a mother (maybe not in the uk), but they’re a good deal less than usable office space, bandwidth and lots of other oddments you’ll find yourself paying (eg, accountants aren’t free, lawyers aren’t cheap, and programmers mostly suck).  So, your real expenses aren’t 100K/year, but more like say 150K or worse.  Oh yeah, there’s taxes, too.  So, in reality starting from a 6figure base, you need to make ~30% or rather better to *break*even*.  If you have a year in which you make less than your break-even point, then the numbers get really grim.  On the other hand, you need to have a serious blowout year to make a significant difference in these basic numbers.  There’s no margin for error or, worse, misfortune.  Don’t get sick, don’t break an arm, don’t have a loved-one need anything from you and don’t lose any money!  In spite of all of your experience, intelligence and hard work, a bit of bad luck can put you into an untenable position.  There’s a good reason the Greeks believed that the only thing more powerful and less controllable than their rich pantheon of powerful Gods were The Fates.

All of this said, who the heck am I?  Sounds like you have a great background and some passionate ideas about what you want to do.  I don’t want to be negative or dissuade you from pursuing a dream.  But I assume you’ve got all the up-side worked out and have thus focused on the (potential) down-side!  ;^>

Best,

I haven’t heard back from Sean and at this point don’t expect to though I gave him as direct and honest advice as I was capable of providing.

a cautionary tale

This exchange resonated with me because, almost exactly five years ago I had a ’serious’ conversation with my then-fiancée (and now wife and mother of our beautiful son).  I had been working hard for years and had lived very frugally (would you believe a $900/month 1-bedroom apartment in manhattan two blocks east of union sq?), saving my money to one day pursue a long-held dream.  I said to her, “I can buy you a house with cash today or I can start a business and, most likely, lose everything and have to start all over again.”

(This was my own version of David Einhorn’s memorable ‘Greenlight moment’ as recounted in his “Fooling Some of the People All of the Time.”)

She assented and not too many weeks later I walked away from my steadily ascending career and Puppetmaster Trading was formed.  I was then in a similar circumstance to what my erstwhile pen-pal Sean is in today.

Around the time that I had this email exchange, I was being forced to face the fact that Puppetmaster Trading was in just such an untenable position as I’d described.

Someday I might write a post-mortem along the lines of the courageous and revealing post Roger Ehrenberg wrote describing the errors he’d made in one of his startups.  But today isn’t that day; I need some distance and perspective to adequately compose my thoughts and identify the key errors I’ve made along the way.

So, to Sean and others like him, view this as a cautionary tale.  Don’t view it as ‘proof’ that starting your company is a bad idea.  Even given constraints like Sean’s, I’m 100% certain that success was possible but for a few costly errors of judgment I personally made.  After the first year and a half, our trading returns were always positive.  In 2008 we had a real blowout year which could have been a game-changer had I not elected to pursue an ill-fated partnership (which hinted beguilingly at an outright sale) rather than sticking to what was working.  There were other mistakes, too – some of them possibly worse.  Interestingly, all of them were about running a business and not about algorithmic trading per se.

Selecting a business model and focus, funding issues, partnership dynamics, effective team-building and the like are where the game is won or lost.

the funny business (models) of algorithmic trading

As far as business models go, algorithmic trading can be taken in quite a few directions, the simplest of which is proprietary trading which is where we ultimately settled.  If you’re building a platform you can try to be a product company, but then I don’t think you’d really qualify as an algo-trading concern.  One can also form one of many varieties of funds or advisories to bring in external funding and all of these have their strengths and drawbacks.  And all require the track record, marketing savvy and connections to bring in the commitments.  We’ve looked at almost all of these options and pursued a few.

If you’re building your own platform with the intent of trading it, it’s a bit of a funny situation, because no-one wants to bear the cost of building a system you won’t sell.  Buying systems and then integrating them such that they’re practically usable is such an expensive proposition that one is essentially forced to bring in external money unless they happen to have a few spare millions of dollars lying about that they don’t mind spending. Actually, in retrospect, this is nearly as true if you’re building instead of buying.

Perhaps the most interesting models that we explored were those in which algorithms backed structured products or ETF-like vehicles.  I think there will be many such products in the future with good reason.  But to do this, you need to partner with a bigger financial firm.  Here, again, you need connections (and probably will be better served by a firm name a bit more sober than our own!) and at least some heft of your own as established investment houses aren’t in the business of working with the proverbial two guys in a garage.

All of these are viable models, and all present unique challenges and opportunities.  The bottom-line is that to startup successfully you need to select one and then either obtain funding early on or you need to be lucky *and* commit no errors.

to build or buy…

As for the platform we built, Stratbox, I can only view it as a success – many tens of thousands of trades have passed through it and only once, very early on in (I think) december’05 (before it had even a rudimentary GUI), did we lose any money from it on account of a coding error.  Although I haven’t looked carefully at algo platforms in years, I’m told it has features that even well-established companies haven’t put into their commercial products and there’s no doubt that having full source code enables degrees of freedom that are impossible with off-the-shelf products.

The fact that Stratbox isn’t a commercial product has real drawbacks, especially in terms of the ‘fit and finish’ one expects from established software.   But it also brings considerable  benefits in that you can really drive development based on immediate needs.  In very short time frames, you can build the 90% of functionality that you need *now*.   It’s just not possible for an established vendor to implement, test, and roll-out new features with the requisite solidity and 100% finish anywhere near as fast as can an ‘agile’ team with skin (and maybe an organ or two) in the game.  Thus, if I were to start all over again, while I would look at the various vendor offerings (and might well change my mind based on that review), I’m still inclined to think that I’d continue to “roll my own”.

the evolution will be blogged

I started this blog as a means of composing my thoughts and sharing my ‘algorithmic trading experiences’  and in that light it’s been a quiet success.  Although it has been a minor time- and cash-sink, I enjoy it and have benefited from the people I’ve met through its pages.   I also always view writing as its own reward.  I send a sincere “thank you” to all who have read and all who have shared their own insights and experiences.  At some point – not too soon – I may try my hand at a constructive post-mortem.  In the meanwhile, I’ll continue as I have and write when I have something to say.  The longer-term fate of the blog remains to be seen and will likely depend on what I end up doing next.

I’ve been saving the above image in a stubbed-out blog post I’ve wanted to write since a conversation I’d had in Jerusalem last fall.  The recent attention to high frequency trading and all of its attendant evils has reminded me that the topic is relevant and so I relate various thoughts at the risk of jumping on a cacophonous bandwagon of rumbling misinformation.

First of all, the conversation.  It was with a talented guy who acted as the CFO for a variety of companies including a small startup hedge fund which traded US equities at a high frequency.   Although he was a part-time cfo, he seemed pretty plugged-into their trading operations and noted that they use an agency-only brokerage service for automated traders I’m familiar with and that they were “looking at full data for many” hundred stocks concurrently. He remarked that their trading was going well but that their hit rate was something like 4% and dropping.  By hit rate, he meant that they were placing limits frequently and generally pulling the orders if they didn’t get hit immediately.  He didn’t specify, but I imagine that “immediately” might range from milliseconds out to a second or twenty.  If the market is composed of makers and takers, then these guys were definitely makers of liquidity in the strict sense that they were placing limits and making markets.

At the time I thought it was interesting because it seemed that so many people were focused on the very, very short term trade that the frequency was becoming saturated.  It looked like a reminder that trading frequencies populate a spectrum; in this case, this part of the spectrum was becoming so saturated that returns were becoming increasingly difficult to obtain as more players crowded into it.  I’m not sure how this hedge fund has fared, but at the time I remember thinking that they were going to have a tough time competing if they were only geared for high-frequency trading as the space becomes increasingly expensive to play in as the inevitable talent and technology arms race marches on.

Lo and Khandani provide the below image illustrating this phenomenon happening to a class of contrarian strategies Lo & MacKinlay had described in 1990.  The strategies stop working as people squeeze out the alpha.

My conversation in Jerusalem mostly made me think that we were seeing a similar phenomenon amongst HF strategies.

What does it mean for a strategy to be high-frequency?  First of all, it’s a large class of strategies which probably shouldn’t be treated uniformly.  What they have in common is an intention to trade in and out of positions on a frequent basis where frequent will range from sub-seconds out to perhaps several seconds or even minutes in particularly felicitous cases.

Aside from the fact that one can trade at various frequencies, one can mix them and one might even be only peripherally aware of doing so.  A long-only, fundamentally-driven mutual fund (ie, not an algo or high-frequency trader) might call/fax/email/ftp/fix etc their trades into their brokers who might then execute the trades with their in-house or outsourced/white-labeled execution-quality algos.  Those algos might use some very clever close-to-the-market analytics to provide great execution for the client.  Or they might be traded profitably against.  Or both.

In any case, to me it seems clear that there is nothing intrinsically wrong about high-frequency trading itself.  People will always try to react to information as quickly as possible.  Why wouldn’t or shouldn’t they?  They also like to be clever.  Again, why wouldn’t this be expected and good?  I remember Lefevre recounting the use of personal teletypes by big speculators at the turn of the (prior) century.  Not your everyday household item at the time.  I also remember him recounting strategies for moving large positions which involved both buying and selling to hide one’s hand.  Why wouldn’t algos do the same and more?

That the loudest critics have been old-style execution traders “talking their book” to me tells the story here.

One other thing that my conversation evinces is the kinds of biz models being employed by brokers.  Like I said, this little hf hedge fund used an agency-only brokerage that caters to algo/hf traders.  Why is it important to note that it’s “agency only”?  Because, as the Goldman/Aleynikov story illustrates, strategies are organizationally porous in the sense that their value drips away as the human capital behind them moves from organization to organization and understanding of the strat’s internals become understood more broadly outside the organization.  This is likely the dynamic that drove Lo’s example above – more and more traders were employing similar strategies as the knowledge of the strategy leaked further and further from its original source(s).  Likewise, if I see all of your trading activity in sufficient detail, I might be able to reverse-engineer your strategy and work to steal your alpha.

Thus, traders are happy not to advertise their strategies’ behaviors.  So an agency-only broker – a broker who doesn’t engage in prop trading themselves – should inspire trust in a potential client.

Great!  What an honest business model!  But there’s an irony here and it points to the real kinds of problems we should be bugging our regulators to be addressing.  The specific agency-only broker I mention wasn’t self-clearing.  That is, they were using another broker (Goldman in this case) to handle their backoffice duties.  And guess what?  Goldman is anything but agency only.  So, clients who feel warm and fuzzy that they are dealing with an agency-only shop are actually exposing all of their activities with a particularly sophisticated and arguably predatorial prop trader.  It’s like the Guiness ads.

It’s funny to me that while there sits a multi-trillion dollar hole in our fed’s balance sheet which such hippies as fox news and bloomberg (suing to find out) and our US congress (asking politely) can’t seem to tease an explanation for out of the relevant authorities, the blogosphere and regulators seem to focus their invective on short sellers, hedge funds and high-frequency traders.

secret meeting at 85 broad?

A reader of this blog (hey – I’m as surprised as you are!) sent me an email recently detailing a strategy they’d developed.  While the details of that strategy aren’t relevant here, they sounded good and they got me to thinking about the process of selling a trading strategy.  This is an activity that I’ve spent some time on and have decided just isn’t for me.

There are a lot of difficulties with selling a trading strategy.  One of them is a consequence of the foundational problem of back-testing about which I first started posting on this blog.  For any given period of time (that has already elapsed!), it’s not difficult to generate a good number of pretty impressive strategies.  All you have to do is try a good enough number of random strategies and some of them will prove to be too good to be true.

Presumably, any credible person who might be listening to your pitch will be at least intuitively aware of this fact and will thus be highly suspicious of any back-tested results you might present.  For this reason, it’s impossible to sell a strategy on the basis of back-tested results.  Only auditable, real-world returns will be considered valid by any serious person.  Of course, you might find someone who’s less particular, but then you’re flirting with fraud rather than a legitimate sale.

So let’s say you have impressive, verifiable results.  You still have to answer the question:

If this strategy is so good, why are you selling it?  Why not just trade it yourself?

I suppose one answer might be that you have insufficient capital, but I just don’t think it’s a very satisfying answer.  It’s hard not to think that everyone can borrow money somewhere or run up credit cards or somesuch.  Another, possibly better, answer might be that the strategy requires more favorable commissions than you can obtain, thus you’re looking for an organization that’s either an exchange member or just trades in sufficient volume to have significantly lower costs than you can muster.  Again, not totally satisfying, particularly given that you really need a track-record to have gotten to this point.

Another impediment to selling a trading strategy is that it’s just an idea and ideas can be stolen.  You have to somehow give enough information to make your story credible, without giving away the strategy itself.  This can be harder than it sounds as the person listening to you presumably knows something about the relevant markets and might have some good understanding about the kinds of strategies that can be effectively deployed.  As a minimum, you have to convey the relevant performance characteristics of the system in good detail.  Even this can be revealing as the returns will often tell a tale about the strategy that generated them.  Additionally, most will want to hear a compelling “story” about how/why the strategy works.  What inefficiencies are the strategy capitalizing on?  This can be even more revealing as it will be in the form of a free-form discussion followed up with questions etc.  In the end, you might find that you’ve told a number of people revealing characteristics about your strategy – enough at least for them to do some digging of their own – without getting any closer to your aim.

But let’s say that you’ve managed to find someone who is interested.  Now the real difficulties begin!  How do you structure the deal?  I suppose you could sell the signals if the system trades sufficiently infrequently, but this obviates the entire class of higher frequency strategies.  It’s also a bit of an asymmetric deal in the sense that you presumably sell the signals on some kind of a fixed subscription basis whereas the purchaser can use an arbitrary amount of capital on the strategy.  In spite of these difficulties, this seems the cleanest kind of deal and I’ve seen it done in institutional contexts, so it’s not beyond the realm of possibility.

Another option, particularly for high-frequency systems or in cases where commission structures or trading infrastructure are a key element of the viability of the deal, is to partner in some concrete way through a partnership or a formalized joint venture.  This, too, is something that I’ve seen and have even engaged in, so it’s not too fanciful, but at the end of the day it ends up being like any other partnership or business: it fundamentally requires a deep level of trust.

(Another possibility, of course, is to wrap the strategy into a hedge fund, etf, structured product or other salable instrument and market it in a normal way.  But that’s another discussion as it requires significant capital upfront which means you could, if you chose, monetize your strategy directly by trading it.  So, it’s really a different issue entirely…)

Thus, if one can overcome the myriad difficulties, it is possible to sell a trading strategy.

That said, I wouldn’t recommend doing it and it’s not something that I’m interested in as a business model.  Why not?  Ultimately, it’s about what interests you and how you want to spend your time. Do you want to be a salesperson and spend your time preparing and smoothly delivering presentations, networking and glad-handing &tc?

Or do you want to research, develop and trade your algorithms?

ultimately, it's about what you want to do...

And Shazam is one of those rare beasts.

I don’t know how they do what they do, but what they do is really something else.  Install a free iPhone application (I think there are other implementations available as well), start it up and point the phone’s mic at the source of some music.  In a few seconds, the software will identify the song, download its album cover and assorted info, and point you to where you can purchase the song.  It’s not perfect – it couldn’t identify the beginning of Beethoven’s 5th, but it was able to identify Carmina Burana and had no problems with any popular music I pointed it at.

I’m certain that if you had a contest between this system and your favorite neighborhood audiophile, Shazam would win hands down for speed and accuracy.  It’s really something else.

Just after the dot.com craze, a brilliant friend of mine (who had just sold his web consulting startup) decided to write a book.  The premise was glorious.  A bunch of clever college-age kids formed a startup to predict the stock market.  The method they used was to constantly comb the web with ultra-sophisticated algorithms which would run across giant server farms overnight and ultimately generate tomorrow’s headlines.  Based on the headlines that their system generated, they would place trades that would take advantage of these predicted events.

Sadly, my friend never went on to complete his book, so I don’t know how it all turned out.  (Instead, he went on to start another successful company, this time in the field of robotics.)  While he was writing it, I loved getting new drafts as they were filled with clever ideas.  But the core idea of predicting headlines and then using those headlines to trade always struck me as especially cute.

For those of us without access to news-predicting algos, writing strategies based on the news is rather less straight forward, though there are a growing variety of products and services aiming to fill the gaps.  Today must have been trading-the-news-day as I found a few articles on the topic in my mailbox and even received a cold call from a vendor, Need to Know News, with just such an offering.  Below I’ll look at some of these offerings and consider some of the issues involved in writing trading strategies based on the news.

The idea of trading the news resonates with me as it was one of the first things I tried to automate.  In particular, I spent some time looking to trade crude and natural gas futures based on their respective weekly EIA reports.  This experience led me to a couple conclusions.

The market knows before the news wires do. This is a big problem for two reasons.  The first is just plain-Jane latency, and I know that vendors are now effectively reducing latency to the sub-second level, but the market still knows first.  The second issue is deeper and is captured nicely by a quote I heard (sorry – I don’t remember where) which went something like:

“capital markets are the original social networks”

Which suggests that markets have their own internal languages and understandings.  Thus, translating a market-impacting event, like an EIA report, into a human-readable form to reason about it (even if there’s no human doing the reasoning) and then action it back into the market struck me as a necessarily lossy transformation.

Another way of seeing this is just to consider: what to do based on the news?  Sell a build of inventory?  Maybe with your money.  Compare the number against expectations?  Whose?  The semantic content that exists in the market seems to be intrinsically richer than that one might extract from a news wire.  But this problem of actioning a news item brings up the next issue.

The problem of history.  One of the wonderful and horrible things about market data is that there is a lot of it going back a long ways.  This is an expensive pickle to manage, but it at least means that you have the ability to look back almost arbitrarily far into the past to see how markets responded to various conditions.  This isn’t so true with most news wires.

To some degree, these issues are being addressed by vendors.  And some of them will be addressed by how people utilize the news feeds.  If, instead of trying to write a strategy based wholly on the news, I try to improve an existing strategy by annotating its model with data gleaned from a feed, I might wind up with much better results.

Indeed, one of the papers I came across today is a research report from Securities Industry News (incidentally, my first tip-off that Citi was going down the toilet was when my management told me I could no longer keep my subscription to that fine periodical).  In it, market participants indicate that they expect to improve existing algos more than create brand-new ones.  But they also failed to complain about the lack of back-testable feed histories, so…

The other paper is a much more detailed quantitative exposition on how to build a news reading algo and some statistical analysis on how well it annotated the market.  This one is the work of Andrew Lo’s AlphaSimplex Group and as such is required reading for anyone who really wants to implement such systems.

Ever since my first experiences with trying to trade energy commodities based on the EIA report via news feed, I’ve been pretty skeptical of the utility of trying to algorithmically trade the news.  That said, like everything else in this space, there’s an incredible amount of innovation going on and an incredible number of seriously smart and motivated folks working to ensure that this will be a productive path for those with the ability to tackle the formidable complexities presented.

–

Updated: added link to Need to Know News’ site

Normally I spend my design-oriented thoughts on object models – when I’m working on StratBox  – or about volatility, latency, executions, &tc – when I’m working on a trading strategy.  But a recent trip abroad has inspired me to consider more fanciful design horizons.

After more than a year of blogging I’ve finally decided to refresh the look of the site and you’re looking at the first iteration of this effort.  Blogging software is pretty remarkable as it allowed me to essentially change the “skin” of the blog without affecting its content.  This is like Kirill Grouchnikov’s lovely open source “Substance” Look&Feel for Java which does the same trick for swing-based applications: just include his magic code and your system automagically looks a lot better!

More substantively, my recent trip to Israel and the subsequent agreement to open a Tel Aviv office to take advantage of a felicitous new partnership and Israeli algorithmic talent, has led to a broadening of our mission.  This in turn led to the foray into graphic design I describe below.

While we still haven’t gotten around to updating our main site, I have had the opportunity to work again with Erica Green, the talented designer who brought the Puppetmaster Trading bull puppet into existence…

Origins of the bull puppet

The name “Puppetmaster Trading” came about following a discussion I’d had with a friend in spring 2005 shortly before I’d left my job to try my luck with this startup.  After stating that I wanted to become an algorithmic trader and receiving the now familiar blank stare in response, I had explained to him that I explicitly didn’t want to trade myself, but instead wanted to write little autonomous software agents which would themselves trade on my behalf.  He immediately got it and said, “Oh!  So you’d be like a puppetmaster managing your cast of trading marionettes…” and I knew the startup had found its name.

"the bull puppet"

Erica had developed the original logo based on my wife’s loose vision of a trading puppetmaster, but this was long before I knew we’d have to write the algorithmic trading platform itself.  I had hoped to use an off-the-shelf product so I could focus on the algorithms themselves. That didn’t turn out to be feasible…

Between developing the platform, devising algorithms, overseeing the trading “marionettes” that implemented those algorithms and making most of the many mistakes startups make (and possibly a few of our own invention), I never got a chance to go beyond the bull puppet… until now.

Now that StratBox is a reality, and with a new vision for an exchange-colocated, cloud-computing version of the platform, it seemed a good opportunity to renew the collaboration with Erica.  I like her design for StratBox so much that I’ve lassooed it into service on this blog.

At the head of this post, you’ll see my favorite design for our nascent StratCloud offering, though the one below remains in contention.  (I’d love to hear your opinion!)

As it was three years ago, the experience has been very positive.   If you have some challenging graphic design opportunity I encourage you to see if Erica can’t help you realize your vision.

Although we’ve been in business since 2005, we’re still something of a start-up and certainly an entrepreneurial entity, so when a VC friend of mine suggested checking-out meetup.com’s technology and business groups I was open to the idea. This past week I attended my second meeting of the “ny tech” group and was as impressed the second time around as the first. It’s quite a production – from the venue, to the organization, to the ideas, people and products being presented – all for $5! (Though they sadly announced a price increase to $10 starting next meeting.) If you have even a small inclination towards entrepreneurial ventures or emerging technologies, it’s well worth a look-see.

The venue is the enormous lobby of the IAC building which is right on manhattan’s west side highway. So, as you sit watching the presentations, to your back you have giant windows overlooking the murderously speeding commuters hurtling to bedroom communities for 100 miles in every direction. In front of you is the single largest and coolest high definition monitor you have ever seen. Seriously. It’s about 30-odd feet high and maybe 120 feet long. It’s absurd.

Five or so presenters are each given 5-10 minutes to show their technology and tout their business model or idea. Almost all of them are good or interesting in some fashion but fear not! good, bad or otherwise, no presenter will consume more than 10 min.s of your life. The format is extremely crisp; presenters are briefly introduced after which they have 5 min.s to speak their piece. Afterwards, they get no more than 3 minutes to field questions. If you’re particularly interested in a particular speaker, each speaker is made available at one of the building’s structural columns at the end of all presentations. After too many years of interminable corporate meetings, the experience of such a crisp and efficient and knowledge-yielding format is really a revelation. Mayhaps there is something to this whole startup thing after all…(!)

The technologies are all pretty much of the web2.0 / social-networking varieties, so they’re not intrinsically of particular interest to me but they are interesting. The format is also prohibitive for showcasing sophisticated “vertical” technologies like our own, but the cleverness and innovation of people is evidently unbounded and it’s in that spirit that I find the presentations compelling.

The businesses ranged from a pretty well established (and excellent!) charity to an enthusiastic web hacker who’d put together a simple site “just because” and it had taken off, leaving him blinking in the light and delighted to learn that he’d hit on something people liked (and might even pay for!) This guy’s site, muxtape.com was actually my favorite of the bunch despite being by far the simplest. It evokes the time when friends would give each other mixed tapes of carefully selected, personally targeted tracks of music. Very fun – I’ve been listening to it ever since. His elegant use of amazon’s ludicrously cool ec2 infrastructure as his back-end is the only hint that nothing is as simple as it first appears..

Anyways, this is a pretty off-topic post and I don’t want to belabor the point, but you might want to check it out or find another interesting meetup near you…

The booths we checked out included a few of the big sell-side firms shilling their creatively-named execution quality algos and their white-labeled oms/ems offerings. They had, by far, the best shwag (I should thank Merrill for their nice umbrella and commend citi for the very knowledgeable lady at their booth) but their algo offerings weren’t very interesting to me as they aren’t of the alpha-seeking variety.

My favorite exhibit from an innovation perspective was actually a hardware offering from a firm named tervela which makes, essentially, a complex-event-processing (CEP) engine implemented in hardware. Very cool. I can’t imagine why any big shop would use any other sort of CEP solution. I had heard of them before as a guy I knew had joined them before their product had been delivered, so they were already on my radar, but seeing the hardware running was a big next step. Given the nature of their offering, it actually seems to me to have a bigger market in military than trading applications, but in both spaces it looks pretty compelling.

We looked at a few of the ems/algorithmic trading vendors and they didn’t offer any surprises but still had points of interest for us. The three systems we looked at were portware, tethys, and flextrade, and they can all credit themselves with knowledgeable, engaging and enthusiastic presenters in their respective booths. The platforms each had their own personalities and strengths. Portware had a very pleasant looking user interface and was, to me, most intuitively laid-out. The tethys platform seemed to have a real affinity for options and had sophisticated analytics to support that inclination. And flextrade just seemed like the most solid and mature of the platforms, but it’s hard to know such things from a trade show drive-by.

I was very interested to see that each platform offered user-interface level programmability via scripting of the sort I’d spoken of here but with a big difference. Instead of providing a scripting language, portware and flextrade offer users the ability to bring up an editor and add columns to tables via the platform’s native programming language – java and c++ respectively. Whew – can you imagine your average end-user whipping out some c++ to add a column. Mutant super users, maybe!

Overall we were very impressed by these trading systems. In particular we were happy to note that their strengths aren’t ours. If you want to use, say, lehman’s super-ginsu execution strategy (I’m making up that name), all of the platforms have the order available as a custom FIX order type which you can easily select from a pull-down menu. So their integration with a multitude of sell-side execution-quality algorithms is very complete and seems well-done. But their offerings are very limited compared to our own when it comes to the development and analysis of alpha-seeking strategies. They’re really not even close and it seems clear that their emphasis on the resource-intensive efforts of connectivity and broker integration has allowed us to create the class-leading platform for alpha-seeking strategy development.

So it was good to see the state of the industry and it was especially good to see our niche persisting at trade tech.