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Trading Technology

11:15 AM
Andy Webb
Andy Webb
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Trading the New-Fashioned Way

Autotrading may allow financial-services firms to reduce headcount and execute on advanced trading strategies. But is the technology ready to be trusted?

Has sitting chained to a workstation all day while managing trades lost its appeal? Many traders are saying yes, and, as a result, they're trying autotrading. Autotrading allows a trader to design and test trade entry and exit conditions, plug them into an autotrading platform and walk away. Whenever the entry/exit conditions are met, the trading platform automatically executes the appropriate electronic trade.

But convenience is only part of the story. Some claim autotrading offers other benefits over normal electronic trading to all classes of market participants, including improved execution consistency, reduced cost and a new class of high-frequency trading strategies. It's also argued that autotrading is a natural fit with the mechanical-trading models popular among commodity trading advisers and hedge funds.

In the case of retail traders, the consistency of trade execution that autotrading may offer is seen as a major attraction.

In the professional space, one major attraction to automated trading is reduced cost, since the human trader is no longer needed. In practice, it isn't as simple as that, since an important part of the professional trader's skill set lies in finessing large orders to minimize slippage (being filled at a different price to that prevailing at the time the order is entered).

However, Dmitry Bourtov, manager of the hedge fund Solaris, has found autotrading works well in replacing human expertise. "We have our own proprietary technology that we are using to autotrade a test account across several markets prior to using it within the fund," he says. "In some of those markets there is liquidity, but not in great size, which could cause us slippage problems. However, we have found that by running multiple versions of the same trading model, each with slightly different parameter sets, the autotrader can achieve a similar effect to that of a human trader finessing a large order."

Autotrading also appeals to traders by opening up a new world of high-frequency trading. The physical limit to the number of positions a human trader can open and monitor don't apply to an autotrader, so it becomes possible to enter and exit multiple positions quickly.

The trading model being tested by Bourtov's Solaris Fund generates up to 200 trades a day across multiple markets. However, Bourtov sees the potential for automated trading models of far higher frequency than that.

"There is one trading model we have developed that generates about 10 orders per minute," he says. "However, although the model would be profitable we cannot actually trade it, as there is currently too much latency in the path and systems between ourselves and the exchanges."

Automated trading can also breathe new life into existing trading models, as One World Futures Fund LP, a commodity pool based in North Carolina discovered. "We were originally trading on a medium-term-position basis," says Mike Chalek, who developed the original trading model used by the pool. "Though it had produced good results over more than 20 years, we found that increased overnight volatility post-Sept. 11 was proving problematic. However, although we were confident that day trading the model would address this, the volume of trades generated would be unmanageable for a human trader."

After an extensive search, One World decided to use the autotrading platform produced by Tel Aviv-based Strategy Runner. The technology is installed on a server at the customer's broker. Strategy Runner and the broker's clearing firm assume the responsibility of monitoring the software and hardware. For example, if an exchange goes down, this will skew the price data that feed most mechanical trading models, so in the event of an outage, Strategy Runner will automatically pull all outstanding auto trade orders and close any open positions.

This approach seems to have found favor with One World. "We don't have to worry about redundant power and backup lines, which is great," says Chalek.

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