How does one define a previously un-definable topic such as High Frequency Trading (HFT)?

Sources close to the Commodity Futures Trading Commission (CFTC) indicate new thinking may be underway regarding the topic of High Frequency Trading (HFT). Speculation is this thinking could look at the relative market impact HFT may have in a given market move as a legal definition. Such a definition could consider the relative impact of a particular HFT player as a percentage of a market damaging move and could be used for potential CFTC action on the issue. This new thinking could be outlined sometime in March, sources said.

Current US regulation regarding HFT is considered by some market participants to be behind the curve relative to the European Union. In the EU, for instance, algorithm type is used as an identifier to determine market participant behavior during crisis conditions.

“There is significant uneasiness on the speed in markets,” noted Vassilis Vergotis, Executive Vice President, Head of Eurex, Americas.

For the full article, visit the source web site (requires free registration): http://www.uncorrelatedinvestments.com/blog/?p=59

Mark H. Melin is author of several books, including High Performance Managed Futures and taught on the topic at Northwestern University’s Executive Education program

With the rise of new regulations such as the Dodd-Frank Reform Act, the advent of outsourcing and the growth of cloud computing, there is little doubt that the hedge fund industry landscape has evolved significantly in recent years. These changes have forced many firms to re-examine the way they do business, from both an operational and a technology perspective. On a personnel level, what effects have these changes had for the individuals that are responsible for technology at hedge funds and investment firms?

Chief Technology Officers (CTO), or individuals in comparable roles such as Directors of IT, Chief Information Officers, etc., have traditionally been responsible for an organization’s day-to-day IT functions and regular technology upgrades. However, as the industry has experienced drastic change in recent years, so too has the role of the CTO and his or her responsibilities.

Today, a hedge fund CTO is forced to wear many hats and have an understanding of many different technologies. In addition to having a variety of technical skills in such areas as networking, storage, virtualization, telecommunications and resource management, this individual must now also possess business savvy and other non-technical skills to support the organization. These include an understanding of the evolving regulatory environment, knowledge of compliance standards, keen communication skills and an understanding of the newest and most robust security measures.

New Requirements of a Hedge Fund CTO
Understanding Regulatory Requirements
Now that the Dodd-Frank Reform Act has gone into effect, investment firms have a whole new host of requirements to meet. As a result, CTOs at these funds have to take on a number of added responsibilities. They must run reports much more frequently than in the past in order to satisfy new legal requirements, ensure emails and other messages are being stored and archived appropriately, and liaise with legislators on a regular basis to ensure their firms are complying with all pertinent directives.

Knowledge Compliance Standards & Best Practices
In addition to ensuring their firms are in compliance with new and changing legislation, hedge fund CTOs now also have a host of new internal compliance procedures to implement. In today’s post-Madoff era, companies are working hard to develop policies that combat insider trading, prevent data breaches and avert other common securities risks. Mobile device security is another area where CTOs must focus their attention, especially with the recent growth of the BYOD trend.

Strong Communication Skills
In the past, technologists did not require finely tuned communications skills, as they spent the majority of their time focused on working with inanimate objects, such as computers and other hardware. Today, these individuals need to have strong communication skills to support their technical operations. As investors place increased importance on transparency and the due diligence process becomes more intense, many CTOs must now interact directly with investors and other stakeholders on a regular basis. It has become the CTO’s responsibility to educate investors on how technology is being used within the firm to support and safeguard their assets. They must also be able to demonstrate that robust security tools and procedures are in place to ensure all data is protected. Working more frequently with investors and regulators means CTOs need to sharpen their interpersonal communication skills in order to represent their organizations in the best possible manner.

Understanding Security Best Practices
With data breaches becoming more frequent and gaining increased media attention, security has become one of the most important – if not the most important – aspect of an investment management firm’s IT operations. In addition to managing the back end infrastructure, a firm’s CTO may now also be involved in developing internal policies and procedures to enhance security operations throughout the firm. Investors are increasingly seeking the highest standards in security, so technologists should be prepared to face tough requirements on this front.

The Impact of Cloud Computing
While hedge fund CTOs are grappling with increased responsibilities relative to regulations, compliance and due diligence, another phenomenon is also contributing to the evolution of this role: cloud computing. The popularity of the cloud (and outsourcing in general) has prompted many investment firms to reevaluate their technical strategies and change the way they allocate their IT resources. For instance, some firms have opted to reduce or eliminate their internal IT staffs and outsource all technology operations to a third-party provider. Others have chosen to maintain in-house technology resources while also leveraging the cloud for certain systems and applications. This combined approach can improve a fund’s operational effectiveness and efficiency. Many larger firms, in particular, have found it highly beneficial to utilize the cloud while also maintaining an internal IT team dedicated to managing certain aspects of the system and focusing on other technical projects.

Regardless of whether firms choose to embrace the cloud for all or part of their IT operations, the prevalence of cloud computing in the alternative investment industry is driving CTOs to evolve both their technical and non-technical skills. Technical roles are shifting from hands-on work with hardware and installations to resource management, integration, capacity planning and technical architecture management.

A New Era for Hedge Fund Technologists
Every firm has a different dynamic, with unique operational and business requirements. While the traditional role of hedge fund CTOs is ultimately changing, some aspects remain the same. Many firms still maintain that they need an internal expert on-hand for troubleshooting and other technical projects. Some prefer to focus their attention on the newer aspects of technology and operations, such as compliance, due diligence and security, while outsourcing the more fundamental day-to-day IT functions to a third-party provider. The role of the hedge fund CTO has undoubtedly evolved in recent years, and like the technologies they support, it’s safe to say that their job functions will be markedly different in the future as well.

As vice president of client technology, Steve Schoener is responsible for driving technology growth through Eze Castle Integration’s global offices, as well as assisting in product and service evaluations with new and existing hedge fund clients. Steve’s team handles application design and management in the Eze Private Cloud.

When one considers the lack of investigatory zeal in the MF Global scandal, it might raise questions as to the need to make the investigation of MF Global’s top executives – which is occurring some six months after a potential crime was committed – eventually a matter of public record.

MF Global is a story that publicly debuted with a fraud allegation. This is when CMEGroup president Terry Duffy famously proclaimed in Congressional testimony that critical account segregation reports had been falsified by MF Global to regulators during their final week of operation. Further, Mr. Duffy clearly called into question the honesty of MF Global CEO Jon Corzine’s now famous testimony “I simply don’t know where the money went.”

With credible acquisitions of potential fraud highlighting a major pronouncement regarding the eighth largest bankruptcy in the US, one might assume that an investigation, or at least questioning, of MF Global’s top executives might take place. This is particularly the case as reports had surfaced in leading publications quoting those close to the investigation as saying “the case is cold” and “prosecution is unlikely.” With all this, one might assume questioning of the top executives had taken place.

That didn’t happen.

According to the New York Times, MF Global’s inner circle of executives, including CEO Jon Corzine, General Counsel Laurie Ferber, president Bradley Abelow, along with newly employed Henri Steenkamp, Chief Financial Officer, had not been initially questioned after the “loss” of $1.6 billion in customer segregated funds. In Congressional testimony on March 28, 2012 rumors that top MF Global executives had yet to be questioned were confirmed when both Ms. Ferber and Mr. Steenkamp testified they had not yet been directly questioned by investigators. However, in this same testimony it was confirmed that Chicago back office employee Christine Serwinski, chief financial officer for North America, had been questioned twice. Sources have indicated that back office employees have undergone extensive questioning while watching MF Global top executives float freely through the company with impunity. These same sources say that the back office employees who remained at MF Global were sequestered and not allowed to talk to one another about MF Global or its demise, while MF Global’s top executives operated the company that was plundered and had the ability to wire transfer money out of MF Global for up to six weeks after the firm declared bankruptcy.

When it comes to investigations, the type of questions and how they are asked can greatly impact the outcome. Given the fact that an investigation into the top officers might never have taken place without public pressure, and with such un-even investigation of the back office, is it not reasonable to ask that the now long overdue investigation into MF Global’s top executives be made transparent so it can be held to a higher standard?

Transparency need not be immediately made public. It can occur after a trial or when the “case is cold.” The point is known transparency into a situation can alter behavior and operate as a most cost effective regulator.

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To follow the MF Global case in real time, go to www.Twitter.com/MarkMelin or visit www.Go2ManagedFutures.com

All contents Copyright (C) 2012 Mark H. Melin.

By taking over the data center operations, CME Group is acknowledging what we’ve known for a long time: for many, proximity access to the exchange has significant value to some participants. This is obviously paramount to low-latency customers.  With proximity hosting, an ability to get a trade to market faster exists. An understanding of this is also necessary to players not interested in low-latency, and a strategic decision needs to be made on how, or if, to attempt to compete against traders whose orders are arriving first. With the matching engines algorithms set to match some exchange products on a FIFO basis, getting priority in the queue can have an impact on traders, and can mean the difference between getting filled at a price, and losing out on the trade.

Roughly 35 miles from the current point-of-presence for the CME, access to Aurora is now important. The CME’s website lists the providers with access to the facility (http://bit.ly/uTQ3L1) , as well as the services they can provide.  In general, some providers are not offering any connection lower than 1Gb, others offer 100Mb (and possibly lower). On the high end, at least one provider is offering up to 40Gb connections. How they are connecting, route maps and specific latency figures are protected by various NDAs. A wide range of latencies exist in the market, in general, I’ve seen a range of roughly 200 microseconds (us) between the faster and slower connections from the current POP at Cermak to Aurora. Prices also vary significantly, and are not necessarily correlated to the latency figures. I have also heard of some providers

As the facility comes online, we expect to see significant resources pushed to the new facility, complementing existing infrastructure. The debate on where the majority of infrastructure will be located is an interesting one, particularly when firms are trading multiple markets. Each trader will need to evaluate for themselves what makes the most sense for their trading strategy.

Allyn Okun, Born Capital

Allyn is VP, Customer Relationships with Born Capital, focusing on the customer experience throughout the customer life cycle.

Born Capital provides unparalleled technology services to banks, institutions, hedge funds and asset managers.  We service our clients through technical installations in North America, South America, and Europe.

Welcome to Electronic Edge. I’ll be discussing/analyzing/reviewing different aspects and issues facing the electronic trading environment.  My hope is that this will be informational and educational. While the vast majority of all trading is done electronically, there are still some in the industry that have not yet made the switch to “screen trading.” That’s ok. Hopefully, this forum will allow them to learn how trading electronically can enhance their business.

For a new entrant to electronic trading, or someone hesitant, it can seem like there is a new language being spoken. LAN, WAN, router, iLink, Session ID, FIX, 100M, 1G, 10G, data center, algo trading, HFT, circuit and a myriad of other terms can cause many to quit before they ever get started. Then there’s the aspect of dealing with various exchanges, meeting everyone’s requirements and ensuring both internal compliance and the exchange’s compliance offices are happy. Or at least as happy as compliance offices get.

However, as daunting as it can be, electronic execution can increase the opportunities for traders. The ability to trade multiple products on multiple exchanges from one screen allows for an exponential increase in the ability to trade. When algorithms are included (whether for high frequency trading, or other purely for number crunching), the possibilities become endless.  Simply put, an algorithmic trade allows a computer program to analyze a variety of inputs and execute a trade. The algorithm can be as simple or complex as the trading team devise, using as many or as few variables as they like. Execution can occur on any exchange that the system has access to, or trades can incorporate strategies across exchanges.

Data centers are facilities that are designed for computer equipment. In our industry, they generally have high capacity access to exchanges, differentiating them from data centers that Google may have in rural areas. There are also a variety of options for bringing connections in to the data centers; with a server hosted in a prime facility, you’ll still need access to it from outside.  There are many data centers catering to the financial industry throughout the world, and the leading providers are all fairly well known – Equinix, Telx, Savvis among them. Additionally, some exchanges are starting to get involved in having proximity hosting as one of their offerings. Both NYSE/LIFFE and the CME Group have recently gone “online” with their own facilities near their older facilities where they were colocated within a providers facility.

My expectation is to be able to educate and enlighten more as I continue to write here every other week.

- Allyn Okun, Born Capital

Allyn is VP, Customer Relationships with Born Capital. He focuses on the customer experience throughout the customer life cycle.

Born Capital provides unparalleled technology services to banks, institutions, hedge funds and asset managers.  We service our clients through technical installations in North America, South America, and Europe.