The Evolution of Executing Futures – Part 2


Part 1 looked at the history of executing futures leading up to the beginning of this century. This part will have a look at some of the technologies that were introduced during my time on the trading floor over the last decade, as well as some advancements that have been presented since I joined Caplin.

Auto Spreaders

As a spread trader, I was required to enter long and short positions on two or more contracts at the same time. The ‘hedged’ positions alleviate the risks of outright positions and allow one to take views on the widening direction of the spread between two or more markets without necessarily having a view on their underlying direction.

Spread trading on regular trading ladders

Spread trading on regular trading ladders

The scenario depicted above shows an attempt to go short of a spread by buying the Bobl with a limit order at 41 in the hope of manually selling the Schatz with a market order for 07 or better. Since these contracts tend to move in the same direction, entering a position this way requires speed and patience. In fast markets missing a leg is extremely common, cluttering trading rooms with screams of “I missed em” (often followed by facetious heckles of “don’t worry, I got them”) and occasionally “I don’t wannem now do I!” as someone gets filled on one leg having already taken a loss on the other.  Spreads requiring more than two contracts such as the Butterfly made execution even fiddlier, let alone the need to have Carol Vorderman-like skills when you get part-filled on one of your legs.

The autospreader allows the user to automate the execution of spreads, and not only manage the entry and exit of legs but also handle the tricky maths around part fills and obscure spread ratios. This technology displays the spread prices in its own trading ladder allowing you to effectively have an order book for the spread. Since the autospreader was essentially doing the same thing as a human, but a lot faster and with more discipline, it is still possible to get legged, i.e. to miss one side of the spread. However the autospreader allows one to automate how to deal with this scenario – e.g. wait for the other leg but take a loss at a given point.

Traders were initially reluctant to take advantage of the autospreader believing that how a spread should be entered or exited is unique to a given situation. Also that the robotic nature in which orders are moved around by the application exposed their strategy, as well as making them susceptible to market manipulators.

Chart Trading

Swing traders and those concentrating more on technical analysis than trading fast markets and negotiating order books from minute to minute, may be attracted by the benefits of chart trading.

Sell orders placed on a Chart Trader

Sell orders placed on a Chart Trader

The Chart Trader allows the user to directly place orders as lines on the chart alongside the indicators upon which they make their trading decisions, rather than having to turn away from their signals to execute their trades in a different window.

Some investors seek support and resistance levels for entry and exit points for trades, others use patterns such as Fibonacci retracement levels or moving averages to assist trading decisions. The ability to place orders by simply right clicking on the chart and selecting an order type will allow these traders to make decisions based on their technical analysis without getting distracted or influenced by order book shenanigans.

Algo Trading

For decades banks have utilised trading algorithms to execute complex trading strategies. The growth of “black boxes” marked the end of many futures traders who spent years taking advantage of arbitrage opportunities due to inefficiencies in short term market movements (I’m not bitter!). The proprietary traders who have survived are now embracing new technologies from vendors such as Bloomberg and Trading Technologies as they offer individuals the chance to join the rise of the machines (ignoring the lessons learned from Terminator 2) with UIs to automate trading strategies without having to write a single line of code.

TTs Algo Design Lab

Trading Technologies’ Algo Design Lab

The Algo Design Lab allows traders to visualise trading programs; dragging and dropping building blocks to construct their algorithms. The newly automated systems for order entry and trade execution, based on a number of data feeds and trade signals, can first be tested out on simulators. The intuitive GUI greatly reduces the time from concept to execution. Traders can maximise their speed to market while at the same time eliminate some of the emotion from their trading strategies.

Recent flash crashes such as that of Knight Capital in 2012 and the US stock markets in 2010, caused by algos going nuts, have made many individual investors reluctant to adopt automation – despite the applications’ failsafe facilities to limit such losses.

What’s Next?

Time will tell whether automated trading facilities will provide a well needed boost for proprietary traders, if so we can certainly expect more development in this area as providers will aim to simplify the user experience while generating automated strategies. A race among vendors to achieve the lowest latency will be further fueled should such applications take off.

There are other areas which could see improvements in futures execution software, such as closer ties to news and economic releases or enhanced order book information including improvements to queue position estimates.

The introduction of regulations has changed the futures industry as new products such as swap futures are introduced. Such changes will also see futures applications adapting to accommodate the newcomers.

Futures trading applications have evolved greatly over the last 20 years, and the pace of evolution is accelerating; providers will either keep up or risk being driven out, leaving a bigger slice of the industry to those who survive.

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