VIII International conference
Theory and practice of options trading.
Evolution of market making and algorithmic trading
Christopher Lederer
MD, 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
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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)
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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 years
There 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)
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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
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Automated trading (MM/ARB/gAlgo)
Trader
Trader &
programmer
Algorithmic
trading engine
Financial
markets
 Trading ideas are converted to
 Computer runs millions of calculations per
 A trader gets
a trading
idea.
strategies
understandable
by the
second, reacting to market changes in
computer. LAST POINT FOR
microseconds, implementing strategies
EMOTION!
and sending orders to the exchange
much, much faster than a human could.
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The Key to Success (Technology)
Possibility to rapidly adapt to changing
requirements
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
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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
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Market Making and Volatility Trading
Aggression level
High
Structured
products MM
Competitive
MM
Strategic
MM
Low
None
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Market view
9
Significant
Market Making and Volatility Trading
Aggression level
High
Structured
products MM
Competitive
MM
Volatility
trading
Strategic
MM
Volatility
arbitrage
Low
None
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Market view
10
Significant
High Frequency Trading success factors
Mostly technology
some analysis
µs
Only
technology
Holding period
Technology and
analysis
Some technology
mostly analysis
Only analysis
Days
Complete
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Automation
None
HFT challenges and opportunities
Challenge
Holding
period
Arbitrage
Technology demands
Spread
trading
Opportunities
New liquidity
New instruments types
New regions
New trading strategies
Statistical
arbitrage
Full automation
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12
Manual
Amsterdam HFT firm – 2008
Amsterdam HFT Firm
London Stock
Exchange
Orders
Trading
desk
Orders
Amsterdam
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13
Amsterdam HFT firm – 2010
Amsterdam HFT firm
Co-Location site
London Stock
Exchange
Orc Spreader
Orders
Trading
desk
Orders
Amsterdam
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.
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14
Outlook for Russian
Regulation?
Exchange competition
Technical 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 Products
Local 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.
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Q&A
Thank You!
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