VIII International conference Theory and practice of options trading. Evolution of market making and algorithmic trading Christopher Lederer MD, Orc Software

VIII International conferenceTheory and practice of options trading.Evolution of market making and algorithmic trading

Christopher LedererMD, Orc Software BV

VP Sales Continetal Europe ORC AB

2011-06-04

Who am I and why I am here. . .

1991 – 1998 Studied Medicine at University of Bonn / Germany

1998 – 2001 RTS Realtime Systems AG Frankfurt (Head of Support and Projects)

2001 – 2005 RTS Sydney Ltd. Founding Member (Head of IT APAC)

2005 – 2007 Tick-TS AG (Joint Venture of HSBC and Sino (Brokerage) (Key Accountmanager IT)

2007 - 2008 ORC Software Frankfurt, Found and establish ORC Office in Amsterdam

2008 – 2009 MD Orc Software BV

2009 – now VP Sales Continental Europe

© Orc Software AB, All Rights Reserved. Proprietary and Confidential . | 2

Evolution ? Survival of the fittest

1998 Amsterdam Trading Firm˃ MM on Eurex (Options) / Xetra (Stock)

–2 Series with 1 Trader and one Assitant (8hours)–ISDN Lines 64kb/s max 128kB for MM

2004 same Amsterdam Trading Firm˃ MM on Eurex/Xetra

–15 Stock all Options Series one Trader (12 – 14 hours)–10Mbit

2001 – 2005 Market Makers in Sydney˃ Initial 24 Market Makers registered (2001)

˃ 14 left (IMC, TH and Optiver dominated the landscape after 24 month)


Evolution - lead the race?

Latency comes at the price of lower flexibility

Conditions are usualy „same“ for all.Leading MM companies have a very static approach to markets˃ Leaving them exposed if conditions change beyond the expectd˃ Global players educate and train staff themself – very strikt approach towards market

conditions caused by that.˃ If conditions are as expected 10+ years expiriance are executed on a market

MM has suffered under small spreads, low volume and volatility.Algo traders suffer under high TCO with lower revenues – investments have to be justified. 2008 – 2010 have been hard yearsThere is thirst for new markets – main European markets are already at a technology level where more is hardly possible.. Quote „Every millisecond we save we see in revenue increase next day“˃ Developer Amsterdam Market Maker 2009

Quote „We hire Operators not Market Makers“˃ MD Market Making Company (globally connected)


OFT Technology Vision (basic requirements)

Segment Independence˃ Allow Independent Segment Development – deploy to new markets

Redundancy Minimization – one does all.Open Architecture˃ Ability for segment solutions to only pick the components they need˃ Ability to only pick the components they want˃ Ability to build their own market gateways˃ Ability to customize different components from parameters to plugin-code

–Market Maker–Limit Management –Compliance

Consistently Low Latency˃ Market Access layer can be accessed directly from customers without

going through service layer (unless enrich functionality is desired or needed)

˃ Not lowest possible latency whatever the cost


Automated trading (MM/ARB/gAlgo)

© Orc Software AB, All Rights Reserved. Proprietary and Confidential | 6

Trader Trader & programmer

Financial markets

A trader gets a trading idea. Trading ideas are converted to

strategies understandable by the computer. LAST POINT FOR EMOTION!

Computer runs millions of calculations per second, reacting to market changes in microseconds, implementing strategies and sending orders to the exchange much, much faster than a human could.

Algorithmic trading engine

The Key to Success (Technology)

Technology is key in MM and Algo˃ Well-defined and well-tested connectivity

˃ New product can be as simple as combining a set of existing building blocks in a new way

Continously strive towards shorter time to market˃ Remove unnecessary overhead (releasing process time)

˃ Focus on minimal transactions approach–Fire and Forget (Mifid helps in Europe)–Better diagnostics for latency and bottelnecks


Possibility to rapidly adapt to changing requirements

Competitive challenges (service a market)

Low-latency: Constant push to be faster and process data more quickly

Scalability: Increasing competition within markets requires that underlying technology is highly scalable (handle more exchanges and more instruments simultaneously) to be able to grow business and stay ahead.

Quality/up-time: Continuous push to build solutions that have greater up-time – especially at peak periods like market opening and closing where maximum trading profits are made

Market access – market connections to worldwide exchanges

Global presence – regional knowledge


Market Making and Volatility Trading


High

LowNone Significant

Structuredproducts MM

CompetitiveMM

StrategicMM

Ag

gre

ssio

n le

vel

Market view

Market Making and Volatility Trading


High

LowNone Significant

Structuredproducts MM

CompetitiveMM

StrategicMM

Ag

gre

ssio

n le

vel

Market view

Volatilitytrading

Volatilityarbitrage

High Frequency Trading success factors


Mostly technologysome analysis

Only technology

Technology andanalysis

Only analysis

Some technology mostly analysis

None

Ho

ldin

g p

eri

od

µs

Complete Automation

Days

HFT challenges and opportunities

Challenge

Technology demands

Opportunities

New liquidity

New instruments types

New regions

New trading strategies


Full automation

Holding period

Arbitrage

Statistical arbitrage

Spread trading

Manual

Amsterdam HFT firm – 2008


Orders

London Stock Exchange

Amsterdam

Amsterdam HFT Firm

Trading desk

Orders

Amsterdam HFT firm – 2010


Orders

London Stock Exchange

Amsterdam

Amsterdam HFT firm

Trading desk

Orders

Co-Location site

Orc Spreader

TCO +50%, Revenues stay the same – competitive effects that can change landscape of markets – only the one that can invest can survive. 2009 MM Amsterdam reported 90% lees EBITA due to crisis.

Outlook for Russian

Regulation?Exchange competitionTechnical Infrastructure (TCO)˃ When do costs block expansion? – Investments are drastic in

competitive markets. Return of investments have to materilize quickly before others follow and competitive factors have effects on revenues.

Products –ETF, Strutured Products . . . Education on ProductsLocal Economy and Conditions have to there . . .Russia has show stable grows in all measurable conditions as well as emotional.˃ Language and cultural differences will adjust within time

Pragmatic and smart approaches can make the difference!˃ Being smart is not necessarily linked to measuarble parameters and

therfore can not be ordered, forced or bought.


Q & A


Thank You!

Documents

VIII International conference Theory and practice of options trading. Evolution of market making and algorithmic trading Christopher Lederer MD, Orc Software