Would My Trading Job Of 1994 Exist Today?

How tech has replaced much of what I did when trading for a CTA

My first real trading experience came in 1994 when I was hired to trade for a CTA in Chicago. The firm was new and had a chunky allocation of ~ $1.5 billion allocated to overlay strategies in FX, fixed income and equities.

An overlay strategy hedges underlying risk. Our primary customer was a pension fund with investment exposure in the three categories listed. FX exposure came from international investments in equities, while fixed income and equities came from domestic exposure. My job was to manage exposure. Our models dictated when to be short, or hedge, in each of these markets. The models also told us how much of hedge to maintain…ie should we be 100% short, 70% short, 50% short, etc.

Much of our exposure was maintained through short options. We wrote a great deal of premium. We shorted futures as well but the bulk of our exposure, particularly in FX, was attained through selling calls. With an FX portfolio of ~ $650 million, this kept me busy. As the underlying markets…Japanese Yen, Deutsche Marks (remember those!), British Pounds…pretty much all of the currencies at CME moved, I’d adjust our portfolio to keep our hedge ratios aligned. As the deltas of our short calls decayed and grew, it was my job to figure out how to get our exposure back inline. I could sell more of the same options contract, buy some of them back, roll them to a different strike with the same expiry, roll them to a different expiration month…I had a lot of options with options. Futures, not as much although I would go through the exercise of deciding if exposure was best kept in futures or options. I’d certainly look at the optimal way to roll futures exposure as well. Should I join the market on the exchange listed spread? Should I leg leg the spread myself? Should I have our executing brokers on the CME floor or other execution desks do the roll for us? Lot’s of decisions. Lots of trading.

Many years ago, after joining Trading Technologies, I realized the bulk of my work on the trade desk at a CTA could have been automated. Much of my sorting and sifting to find the best options contract to sell could be done with an algo. Rolling of contracts could certainly be done via Autospeader. ADL could find the best contract to roll to…best strike and best expiration month…much more efficiently, timely at least, than I ever could.

I’m not going to say that software would have replaced me as a CTA trader back in the 90’s. What I do know is it would have saved me a tremendous amount of mental capital. I’ll freely admit that software likely would have performed better than I did. The CTA that I traded for likely would have had better returns than the returns I mustered as a manual trader.

Thinking through all of this led to the following blog that we published at TT. The blog covers trade automation and in particular, driving Autospreader with ADL. In my past life, I spent a tremendous amount of time working through spreads. Rolling contracts. Adjusting exposure. Finding the best opportunity. What we have at TT today, with DIY algos driving advanced spreading logic, would have been a very welcome addition to my trade desk of the 90’s.

Optimize Your Autospreader® Experience with ADL®

TT’s Autospreader has long been a favorite tool among the proprietary trading and order desk communities. Automating hedge leg execution opens the door for superior hedge price execution and adds to the bottom line. The paradox we see now is why use a client—a front-end that can never compete with the execution speed and efficiency of server-side logic—for the quote-side execution? When striving for optional spread execution, why not automate the entire process? This is where the TT platform’s ADL DIY algo design tool comes in to improve your performance. 

We’ve asked two representatives from TT’s automated trading team, Andrew Renalds and Russell Tromans, to share their thoughts on how ADL can be used to optimize your spread trading experiences. Their feedback centered on two key areas. Through the use of ADL logic, traders may attain even greater execution speed and efficiency. Let’s take a look at how ADL will improve your overall performance when executing Autospreader logic.

EXECUTION SPEED

Naturally, Autospreader has always provided better execution speed on a hedge leg. When a quote leg is filled or partially filled, Autospreader begins to run and manage logic to hedge or offset the trader’s risk. But what about the move to enter the synthetic spread position in the first place? What’s driving that decision? Does the decision to enter the order involve monitoring other markets? Are you waiting for a particular market event? Regardless, you’ll never react as quickly as an algo will. Using ADL to start Autospreader gets your quote leg to market faster. 

EXECUTION RISK

Ever fat-finger a trade and enter the wrong quantity? How about executing at the wrong price? Wrong contract? Maybe execute at the wrong time? All of this goes away with automated order entry. 

SET IT AND FORGET IT 

How valuable is your time? Valuable enough that you’re willing to spend it all watching a market in hopes of getting a trade signal that may not evolve?

*** you may read the rest of this blog entry on TT’s website…