There is a workshop on the 25th of February titled "Market turbulence; monetization; and universality" by Mike Lipkin at Columbia University that promises to be interesting to those traders who have a physics background. Mike is a former colleague of mine at Cornell's Laboratory of Atomic and Solid State Physics, and I fondly remember the good old days when we all hunched over the theory group's computers while day-dreaming of our future. Mike has since gone on to become an options market-maker at the American Stock Exchange and an Adjunct Associate Professor at Columbia. He published some very interesting research on the "stock pinning" phenomenon near options expirations, i.e. stock prices often converge to the nearest strike prices of their options just before expirations.
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If we want to trade directly on various FX ECNs such as HotspotFX or EBS, perhaps because we want to run some HFT strategies, we will need to be sponsored by a prime broker. However, since the Dodd-Frank act has been in full force, no prime brokers that I know of are willing to take on customers with less than $10M assets. (I often feel that the CFTC's primary goal is to prevent small players like myself from ever competing with bigger institutions. Of course, their stated goal is to "protect" us from financial harm ....) The only exception may be CitiFX TradeStream ECN. Has any reader ever traded on this market? Any reviews or comments will be most welcome.
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I am now offering an online workshop "Quantitative Momentum Strategies” to a select number of traders and portfolio managers. It will be conducted in real-time through Skype, and the number of attendees will be limited to 4. See here for more information.
46 comments:
"(I often feel that the CFTC's primary goal is to prevent small players like myself from ever competing with bigger institutions. Of course, their stated goal is to "protect" us from financial harm)"
Yes, ironically it was Lenin who coined the term "monopoly capitalism".
Although I will say this, the SEC is even worse. At least you do not have the payment-for-order-flow racket in the futures market. Whereas retail traders in futures can easily obtain direct access to futures markets and easily purchase professional platforms like cqg and xtrader, it is a completely different situation in the retail equities market. Most retail brokers simply sell their order flow to the likes of Knight/Citadel and Getco in exchange for kickbacks. Ironically, it was Bernie Madoff who originally defended the legality of this phenomenon as chairman of the NASDAQ, so professional platforms are hard to come by since demand is artificially limited.
EBS/Reuters are OTC market centers. You will be screened and in order to be cleared for trading, you need to establish counter-party relationships, and many institutions will simply refuse to deal with smaller accounts (say $15-25 million AUM). So, even if you have a 'decently sized' account, you may not get access to all of the liquidity you are looking for. These services were basically designed for mega-banks.
Traditionally, people use bloomberg to trade ebs for discretionary trading, or they use fix for algo trading.
The alternative is to use the ECNs:
FXall does not have anonymity, so counterparties there may simply refuse to trade with you if you keep beating them.
HotSpotFX, has 'last look', so certified market makers can trade on your bid to their advantage, of course. Although, you still might find liquidity with Hotspot, in spite of being aware of the disadvantages.
Given the limitations of the other services, currenex seems to be popular among hedge funds and independent traders.
LCG and Marex have access to all the above mentioned ECNs. The minimum account sizes for the aforementioned brokers are 20k-100k USD.
In addition, Currenex is also available at the retail level; there are brokers like Alpari and FXDD who will give you full access to the currenex platform and the fix api (Which includes market data over fix) for 2k-10k minimum accounts.
With Citifx, I suppose you would be trading against a single bank? That does not sound like a pleasant position to be in.
Anon,
Thanks for your excellent survey of the pros and cons of different FX markets.
Though LCG and other London-based prime brokers are willing to take on US customers, a US-regulated entity such as a commodity pool with less than $10M AUM is not allowed to deal with them due to Dodd-Frank.
Marex, however, does seem a good candidate as they are regulated by CFTC.
Though Alpari, FXDD, FXCM, and possibly other FX brokers offer access to Currenex, their commissions are quite high compared to prime brokers.
CitiFX's TradeStream is not the same as Citi's FX dealing desk. It accepts liquidity from 3rd party market makers. However, I do not know whether liquidity or execution quality is good, which is why I solicit reviews here.
Have you tried DukasCopy; they claim to be an ECN; and have FIX API; and comms rates are attractive.
Hi Anon,
Thanks for the tip about Dukascopy Bank. But the trouble is that it is also not NFA registered, so US entities are not permitted to deal with them.
Ernie
FCStone is another US-based broker. The account minimums are 100-250. They offer access to Currenex.
One thing to keep in mind about Citifx Tradestream is that they have 'last look'. With Hotspot, market makers, at least have to compete for your bid, whereas here you are at the mercy of citi. Furthermore, you'll only be granted access to a selected subset of the liquidity providers that citi actually trades through. Citi, itself uses reuters. This particular product is basically a proprietary in-house limited transparency otc network, where citi is in charge instead of a neutral third party. At least with an ecn, it's a level playing field.
Anon,
Thanks for the tip about FCStone.
Also appreciate your comments about CitiFX Tradestream. From what you described, it doesn't sound very different from Interactive Brokers?
Ernie
IB is an ECN like Dukascopy (the later is actually pretty popular outside the US). Tradestream is technically not an ECN, since you cannot be a price maker. All your trades will go through citi.
"Dukascopy Bank has a unique technology to hedge instantly any clients' trades directly with other Liquidity Providers. Dukascopy Bank is currently connected to Bank Of America, Commerzbank, Nomura, Barclays, Currenex, SEB, Deutsche Bank, JP Morgan, Societe Generale, UBS, Goldman Sachs, Citibank, BNP Paribas, HSBC Bank, EBS, Cantor Fitzgerald, HotstpotFXI, Lava - FX All Morgan Stanley and other liquidity providers. "
Another point about ebs and reuters. These platforms were basically created in the pre-pc era. Large institutions needed a centralized market center in which to trade fx, so they licensed the custom technologies of these particular platforms and integrated them into their own proprietary infrastructures. With the rise of low-cost ecns and open standards like fix, they are actually becoming less relevant slowly, but surely. Even many banks are using hotspot to trade now, to evade the high licensing costs related to using these platforms (something like 20-30k per month per x number of users).
Citi actually used to maintain their own ecn called LAVA, however they have since shutdown that service and transferred the client base for that product over to fxall.
*pre-internet, or pre-windows 95 era
They basically had their own custom networks, whereas the internet/ecns/fix are based on open standards.
Reuters initially had the monopoly for a couple of decades, since they had introduced terminal-based trading in the early 70s. EBS came out in 1990 to compete with reuters, first allowing integration with in-house platforms and later teaming up with bloomberg.
Before that people used telegraphs/telex.
Anon,
I think TradeStream allows us to send limit orders. Don't you think that means we are allowed to be price makers?
Ernie
The pricing is determined by the proprietary otc network, on which there are multiple liquidity providers. To the counterparties, your orders will be seen as citi orders for liability reasons.
So, the actual pricing is set by citi and the counterparties of citi. The difference with an otc network like ebs/reuters is that there is credit screening and direct clearing with the platform, whereas here citi is offering you pre-cleared/pre-screened access to various specific liquidity providers under their name, so citi will act as the price maker.
With ECNs, of course, you can avoid all of these counterparty issues.
Anon,
Very good point.
Ernie
Dukascopy is crap. they claim to be an ECN but they are NOT. just watch the spread of EURUSD in their website; and you will see for yourself. There is no difference between them and Oanda; except honesty.
Oanda comes clean and declare themselves as Market Maker. Dukas all lies.
Ernie, have you thought about trading on the FX Futures @CME? at least that is a pure exchange; a level playing field.
I believe the FX Spot market is full of thieves.
From what I understand, Dukascopy offers two different tiers of service.
With the retail-oriented 'Jforex' platform, you only get access to a limited amount of market depth, however with the institutional-oriented (account minimum of $100,000) FIX API, you get access to the full market depth.
Alpha,
Yes, we will consider trading FX futures on CME.
Our strategies were originally developed on IB's spot FX markets, and since they have worked well so far, we were reluctant to change venue.
Ernie
hi Anon;
regarding Dukas; the problem is not just the feed and number of levels; it is rather the execution of orders.
regardless of what level I see; when the market order is sent; it is executed the same way; whether you are a JForex client or a FIX client.
trust me; they are NOT ECN.
Maybe their execution is better with fix? Either way, I would say that neither IB nor Dukascopy should be used on an institutional high-frequency scale.
However, for retail traders, it is supposedly relatively better than the likes of other retail brokers.
Currenex seems to be the only popular ecn that is both anonymous and capable of filtering out 'last look' liquidity providers.
With CME futures, you may run into liquidity problems on non-usd pairs.
*Technically, HotspotFX also offers non-last look liquidity providers, however it is much more limited, relative to currenex. So, it seems that there are proportionally more market makers/banks and relatively less independent traders/funds on hotspot.
Hi Ernie,
Off the topic here, but I have been very curious about HFT. I am just an outsider with curiosity of a 10-year old :)
I looked at video on youtube, which cnn interviews Manoj N.
http://www.youtube.com/watch?v=WyPPaiZEYO4
On minute 0:48, he has an interesting chart with scatter plot. My best guest is that it is a linear regression line in the middle of the scattered data.
Do you have any take what this data represent? I can guess Y-axis is price... but X-axis? and what is this chart about and why he said this is one of his most profitable trade by moving his finger up and down?
Thanks for any feedback.
Hi sg,
It looks to me like a plot of the order book as a function of time. But of course, one can't really tell.
Ernie
Hi all,
Just a clarification for those readers who don't know what "last look" is on a FX ECN: it means that a bank market-maker on that exchange can cancel a quote instead of having it filled by an incoming marketable order.
For example, I have heard that on HotspotFX, when sent a marketable order, a bank has 250ms to decide whether to fill it, or to cancel that quote.
This means that a retail trader can get a worse fill price than was advertised in the order book just before she submits an order.
Ernie
last look = stealing
where the heck is the regulators; why they dont take these Madoffs to jail
Hi Ernie
Off the topic here,
Do you know where I can get an updated future pos for different currency pair (eg, daily updated report), the CFTC COT report is always a week late
Thx
Hi Anon,
It seems to me cmegroup.com has that information.
Ernie
In terms of historical market data for fx, here is something to keep in mind. Currenex does not sell historical market data. Hotspot does, and Hotspot data is available via Morningstar, DTN Nxcore, and IQfeed among other data vendors.
Hotspot historical data includes trade volume. Bloomberg, Reuters and Interactive Data(esignal) do not publish volume data. What they have is 'contributor volume', which is different from actual market volume. However, if you have an account with ebs or 'reuters trading for fx' (different from the eikon service) you can get real volume data, but again unless you have been cleared through all available counterparties you may not be able to trade that volume.
An interesting fact about Dukascopy. Deltix offers execution to Dukascopy through their trading platform. I don't think that they can be called a bucket-shop.
Hi Ernie,
I have a question about the Sharpe ratio.
It is always true that the Sharpe ratio is unaffected by leverage?
Is it ok to use the Sharpe ratio for a non-zero investment strategy (still long-short)?
I have a non-zero investment strategy and when I increase the leverage, the Sharpe ratio increases. I am bit puzzled about this as I thought the Sharpe ratio should be unaffected by leverage (for example in the form of simply doubling the portfolio weights).
Thanks!
Hi Anon,
Sharpe ratio is unaffected by leverage because both the numerator (average excess returns) and denominator (stddev of excess returns) will be proportional to the same leverage multiplier.
Ernie
Thanks. Do you know if the leverage-invariant property of Sharpe ratios only hold for zero-investment strategies?
Even if your strategy has a net exposure, the leverage will increase both the strategy returns and the financing cost by the same multiples, so the excess returns will also be multiplied by the same number. Again, Sharpe ratio won't be affected by leverage.
Ernie
Hi Ernie,
Thanks for putting up this blog. Wish i had started reading it years ago when I traded my strategies free of restrictions. Your book and blog are fun read, cant wait for the new book.
Thanks.
Hi Ernie,
I use IB as broker.
Recently I test strategy in my paper account.
It happens rarely, but it seems TWS could send a lot orders itself not via my API.
Do you meet this problem in paper or real account?
All the best
Hi Anon,
Just because one program is connecting to the API doesn't mean that other systems cannot connect to the TWS concurrently, so it is quite possible that other programs are sending trades to TWS.
Ernie
Hi Ernie,
I understand that this a site dedicated to quant trading which utilizes mathematical tools; however, I was wondering if you ever use technical analysis indicators (such as RSI,MACD, Moving Averages) in your backtests or systems for signals?
I appreciate any input on this!
Hi Anon,
Sure, as you may see from the examples I gave in my book, I often use Bollinger bands. I have also tried some of the simpler indicators you mentioned, and they occasionally work.
Ernie
Hi Ernie,
I typically assume a 10bps roundtrip cost when trading Russell 1000 stocks via IB.
How can I reduce my costs? You mentioned Lime trading before. What is your realised tcosts using them?
Thanks
Hi Anon,
The major part of transaction cost is not commissions, but slippage. It depends on whether you are using limit or market orders. The former will incur opportunity cost (can be huge due to HFT), the latter bid-ask spread, and can also be large if top-of-book liquidity is low (again due to HFT).
Using Lime may allow you to reduce latency. But it typically requires a $500K-$1M account, and a monthly colo cost of $2K.
Ernie
Hi Ernie,
What are your thoughts on post-earnings announcement drift these days?
My experience is that a lot of the effect has gone away in recent years.
Hi Anon,
I haven't traded it in the last 3 years. Have you tried shorting the holding period for the trade?
Ernie
Ernie,
Yes, I have shorten it all the way down to one day but results post tcosts are not encouraging.
Another question: Do you know where to find a good web crawler written in Matlab? A script that I can build on.
Anon,
1 day is not necessarily short enough.
I did write such a webcrawler, but it is available only as part of the package of my yet-to-be-published book, or to participants of my workshops.
Ernie
Hi Ernie,
Assuming you want to target the closing price, what execution strategy do you follow besides simply submitting MOC orders which must be sent in 15min before the close.
Sometimes you need price information between 345 and 400 which means MOC is not possible.
Have you used any of IB's algos for minimizing price impact etc during the last minutes of trading for example?
Cheers
Hi Anon,
I have not used any of the IB special orders.
However, in my experience, sending MKT orders just a few seconds before close usually will not result in slippage of more than one cent for SP500 stocks, unless your order size is much bigger than the typical closing volume.
Ernie
Hi Ernie,
For the longest time I have been doing all of my backtesting manually and it has become pretty annoying going to yahoo finance and manually pulling sets and sets of data. I am looking to make some data bases where I can further conduct analysis on this data; however, I don't know what to go with... I know you are a big fan of Matlab but i'm not sure if matlabs the best thing for this tool (or maybe it is, i'd love your input) but I was thinking either excel/vba, python or mysql. I'm not a programmer by training so I really want to keep this simple. Any advice you could provide on this is extremely appreciated!
Hi Anon,
csidata.com provides historical data in text or Excel formats, so there won't be any need for manual downloads.
Ernie
Worth nothing, one former equities HFT trader, who's name I can't find off the bad, revealed (to the public) that all the HFT trading in equities is based on cheats.
According to this insider, equities HFT strategies strongly rely on market locking events in order to implement an order type that can jump the queue position. These are called hide and slide, if I recall.
According to this insider, they were only able to be profitable when using these order types that allow them to game the order book during specific market locking conditions.
I imagine that the HFT strategies in equities differs quite a bit then those being used in futures market.
Curtis,
I agree that many HFT strategies are like that. Others are bluffs and counter-bluffs.
Perhaps strategies in the >10ms range have more "decency" to them.
Ernie
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