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Quant Fund Uses CEP for Smart Order Routing, Data Feeds

PhDs on staff at hedge fund PhaseCapital build smart order routing, data feeds, trading algorithms using templates and tools from StreamBase.

[This article has been updated to include new details about PhaseCapital's vendor selection process.]

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Unlike most small hedge funds, which tend to outsource IT or use hosted solutions, technology is a centerpiece at Boston-based PhaseCapital, according to the quant hedge fund’s CEO, Eric Pritchett. “We’re not classical stock pickers,” he says. “We use algorithms commonly used in the fields of physics and information theory to evaluate and back-test market data. Our 16-person team is largely Ph.D.-level scientists working alongside professional engineers.”

PhaseCapital was looking for a software development platform that would provide some basic trading tools and templates, allowing engineers to focus on core work, such as creating algorithms and signals for low-latency smart order routing. “The process is our strategy, and the code we develop to build our process is the product itself,” notes Geoffrey Goodell, PhaseCapital’s technology director. “As such, we need tools that enable us to build our product and focus on the business problems without having to worry so much about the implementation details.”

In 2007, PhaseCapital looked at order management and execution management systems and determined that a black-box OMS or EMS was not "close to the metal" enough to allow them the flexibility and performance they would need to implement their quantitative trading strategies.

Last summer, the quant fund began evaluating major complex event processing venders by attending trade shows, checking general market acceptance and investigating research on CEP. “We don’t claim we’ve seen every CEP vendor,” Goodell notes. During the fall, the firm drilled down on CEP vendors by meeting with representatives, checking product references (blind and vendor provided), downloading publicly available products, and reading white papers. “Some products appeared to be more flexible than others, and that was a large part of our evaluation process,” Goodell notes. “While we wanted to make sure the product would integrate well with our environment and that it was rich enough to allow us the control we needed to implement our algorithms, we also wanted to make sure it was enough of a high-level platform that we did not need to worry about data management issues.”

In the final head-to-head CEP selection process (also in fall 2008), PhaseCapital installed its final two candidates — StreamBase and Aleri — and evaluated their development tools, architectural fit, connectivity, performance and scalability. “Architectural fit was really important,” Goodell says. “This end-user development paradigm is important to us because we are a team of utility players; the people who come up with strategies are the people who write the code. We need to make sure the platform can enable us to focus on strategies and not so much database optimization, since that’s not our value-add.”

PhaseCapital is using StreamBase to handle incoming data feeds with low latency, including real-time scrubbing of production data and normalization to enable historical and real-time data to be queried in a common way, Pritchett reports, noting that the normalization is critical to PhaseCapital’s work. “You have a development environment that has your historic tick plant, then you have a live environment with a live tick feed,” he explains.

“StreamBase allows us to load our historic tick plant into the StreamBase framework and play that historic data through the data normalization filters so that we know that the data our algorithms see in development will be subjected to the same normalization as the live data,” Pritchett continues. “The crucial thing is to make sure you don’t develop an algorithm on historic data and then unleash it in an environment where the data’s not normalized the same way.”

PhaseCapital also leverages StreamBase at its colocation facility to manage exchange data feeds and to manage quotes and depth of book. In addition, the firm based its smart order router on StreamBase’s SOR framework and runs its FIX engine (which actually is its order book) in the CEP solution.

The hedge fund uses QuickFIX — a set of open source Java libraries maintained by QuickFIXengine.org — for its FIX engine, Pritchett explains, adding that StreamBase already had an adaptor for the QuickFIX engine as well as adaptors for the data streams provide by Lime Brokerage, PhaseCapital’s execution broker. “The building blocks were very complementary to what we’re ultimately trying to deploy,” he says.

Portfolio and risk management are not implemented directly in StreamBase, Pritchett says. But PhaseCapital does have a StreamBase feed powering real-time P&L and portfolio holdings, which are the starting point for most in-house risk apps, he notes.

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