The persistent volatility that hangs over the global marketplace continues to generate dire headlines, confound regulators and spook investors. But it also represents an opportunity for companies such as HTG Capital Partners, a Chicago-based proprietary trading firm. HTG chief executive Chris Hehmeyer explains why his firm benefits from market volatility, how he optimizes trade executions, and how HTG expects to operate when the new Dodd-Frank regulations take effect.
What is HTG's business model?
Hehmeyer: HTG is a proprietary trading company that some might call an aggregator of traders and trading groups. We're members of the exchanges, and we get financing from the banks.
How does the firm execute trades?
Hehmeyer: We have a very diverse way of executing trades. We have colocated servers at the exchanges, at the facilities in Chicago, New York and London. We do high-frequency, automated FX trading. We have people that do OTC trades over the phone. We have people still in the trading pit and we have people who make trades with a click of the mouse. We also have people who do everything in between. We execute in a whole variety of ways, depending on the market.
What asset classes do you trade?
Hehmeyer: We do very little equity securities. We trade a lot of different futures. In futures, we trade stock indexes, interest rates, commodities, crude oil, gold, silver, copper, cattle, soybeans, corn, sugar and cotton -- we trade a lot of different commodities. We don't trade a lot of futures options, but we certainly trade some, particularly interest rates, crude oil, metals, energy and FX options. So we trade a lot of different products. We even have U.S. government securities -- that's where we arbitrage the futures.
What are your assets under management?
Hehmeyer: Our model is different than a hedge fund. We do proprietary trading -- we're trading our own capital, which is much different than a hedge fund model or a CTA model. We don't measure the notional amount that we trade. We have about 85 traders and we trade probably 5 million futures a month. So it's small compared to a lot of shops and big compared to others.
How has HTG performed in the current, volatile market?
Hehmeyer: Most of our trading is negatively correlated with the stock market and probably pretty closely correlated to the VIX (the Chicago Board Options Exchange Volatility Index). So in the first six months of 2011, when there was a slowly rising stock market and all the endowment portfolios were doing great, it was hard for us. When the VIX goes above about 20 or 25, that's a good market for us. When it's above 50, it gets to be to crazy. So the more-volatile markets in late July, August and September were opportunities for us.
What major technology projects have you undertaken in the past year?
Hehmeyer: HTG is a collection of three trading companies: the old GH Traders, the old Harrison Trading and the old Kingstree Trading. In the past year we consolidated those three companies, which meant consolidating space. We had way too much space, so we had to sublet space, move traders and consolidate those networks. Over the past year the 900-pound gorilla was getting all of those things consolidated into a more efficient space and doing the same thing with our technology.
How have you been impacted by the Dodd-Frank Act, and what are you doing to prepare for the coming rules?
Hehmeyer: We haven't really been impacted yet, but the best I can see, the Commodity Futures Trading Commission plans on coming out with many definitions in the fall. The hard part for the Commission is about to take place.
Defining swap dealers, defining swap execution facilities, even defining a swap -- that's the difficult part, making a final decision and then putting it out there and saying, "OK, in 60 days it's going to happen." I tend to think registrations, the regulatory infrastructure and people building systems -- that all is going to take place over the first half of 2012.
During next year's third quarter, that's when some of these swap execution facilities are going to truly trade over-the-counter products, and we'd like to participate when that happens. We make markets in energy products where we can get clearing, which is through ClearPort and ICE (IntercontinentalExchange). So if we can get credit, then we can play in those OTC products. We hope to do that when this market opens up in other products, such as interest rates and commodities. We can trade natural gas with a company such as British Petroleum, for instance, and then put the trade into CME ClearPort because we have credit on the platform.
If I tried to trade interest rate swaps with some big bank in Europe, they'd look at me and laugh: "You're tiny, and we only deal with big institutions like AIG." But if we can get credit, we can play. We want to be able to play, so hopefully we'll be able to do that next year when this gets truly defined.
Do you currently operate in any overseas markets, or do you plan to do so?
Hehmeyer: There's a trading company that has been going through a difficult period. They run an Asian unit -- which is in Singapore and Sydney -- and a European unit, which is in London. We are in advanced stages of moving that business over here. It's a complicated and expensive move. But we believe we're going to do this merger -- it's about 17 traders. If that happens it's going to give us offices in those time zones, which is what we're interested in. And it gets us ready to be in this OTC business because we've got to find a way to be around-the-clock. So that's what we're talking about.
Do your traders use transaction cost analysis tools?
Hehmeyer: Not to the degree that a lot of the high- frequency guys do -- they make or take markets where they get paid for that. It's not to that degree, but we're in a number of programs with the exchanges in which we get rebates or market maker incentives. That's a never-ending thing for us, and it's a lot of back-office work to make sure we get the rebates correctly. We're certainly involved in TCA, but it's really a more important area in the equity space because they get paid for the margin of the difference. But we do have some of that in futures.
What percentage of your trades are executed in dark pools?
Hehmeyer: For the most part we don't use dark pools. Some of the dark pools available to us would be in cash bonds and FX. But in the futures world, there really are no dark pools because everything needs to be exchange-traded and cleared.
What order management and execution management systems does HTG use?
Hehmeyer: As a part of our business model we have a diversity of execution venues and we have a diversity of order management systems. We have our own, and we use a number of commercial, off-the-shelf plans. One of the OMS platforms that we use is Onyx. We also use data services from NYSE Technologies. As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio