Hedge funds turning to the middle office to recapture outperformance

It’s been a tough couple of years for hedge funds. The industry was built on delivering eye-popping returns, but recently, hedge funds as a whole have underperformed the market. Over the same period the hedge fund industry has been tarred with the brush of politically unpopular high-frequency trading which has had a “baby with the bathwater” effect. The reality is only a small fraction of hedge funds even participate in HFT, and those that do have been scaling back.

So what’s a hedge fund to do to improve performance and re-attract investors?

Many are investing in middle office improvements to elevate investment performance visibility and automate trade reporting, risk and regulatory efforts. While they continue to obsess over the front office (and probably always will), they’re paying more attention to the middle office as a path to more market insights and better customers results. At the end of the day, the majority of hedge funds are differentiated on their ability to develop a unique macro market philosophy and execute that strategy to achieve outsized returns.… Read the rest

Reason 3: Appliances deliver huge performance gains

This is part 3 in a 10 part series: 10 reasons for the growth in middleware appliances. The series summarizes what we’ve learned from our clients about what they value in appliances and why they selected Solace.

So far I’ve talked about saving money and making life easier. The third leg in the stool of commonly recognized advantages of appliances is higher performance. There is no one definition for “kick-ass performance” – it has to be defined in context of some set of rules or objectives. Sprinter Usain Bolt is the fastest man in history over 100 and 200 meters, but at 400 meters the edge goes to Michael Johnston. And neither could hold a candle to Haile Gebrselassie in a marathon. Of course, any of these three elite athletes would be schooled playing one-on-one hoops against LeBron James.

General purpose-ness vs. performance

General purpose computers are remarkably flexible—you can use a high-end server (with the right OS and software) to run a powerful database, perform high-end 3-D modeling or execute real-time trade order management.… Read the rest

Hardware vs. software solutions – the parasite drag analogy

Stephen Hoogasian is a former US Air Force pilot with extensive experience in application of C2 information systems.  He has reviewed the utility of hardware routers such as Solace’s application within the Department of Homeland Security and Department of Defense. Mr. Hoogasian flew aircraft including the U-2 high-altitude reconnaissance aircraft and T-38 jet shown here.

What is the potential benefit of using hardware-based solutions vs. a software solution to solve the problem of routing information? Speed—the maximum speed at which a system can process a given volume of information. That’s where the difference shows dramatically.

As an aviator, I cast the problem set into a vein I was more familiar with—that of aerodynamics. In aviation, induced drag (the drag due to lift generation) tends to be greater at lower speeds because a high angle of attack is required to maintain lift. As speed increases this induced drag becomes much less, but parasitic drag increases because the fluid (air) is flowing faster around protruding objects.… Read the rest

RBC Capital Markets bets on Solace and Arista

rbc-capital-marketsSell-Side Technology, a publication of Waters Technology, just published an article that describes how RBC Capital Markets is bolstering their services in the global equities trading business with a new low latency trading system based on technology including our message routers and Ethernet switches from Arista Networks.

Seth Gelberg, CTO of global equities and futures, discussed the strategic approach they take when designing and building their infrastructure:

“We build in the business layer to differentiate the product. We buy best-of-breed infrastructure and we partner with firms like Solace and Arista to move performance-sensitive business layer components to the infrastructure.”

Bruce Macdonald, global head of electronic trading and commodities, described what the platform will do for them beyond pure performance gains:

“We build what gives us a competitive advantage and purchase where it makes sense. Initiating key technology gets us to the table stakes when it comes to the race to zero [latency].

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Lindsay Lohan, Sigmund Freud and back office acceleration

I read a news story yesterday about nobel laureate Mario Vargas Llosa, who claims that the internet has made us a less serious and deep thinking people. The thrust of the claim by the Peruvian-born winner of this year’s prize for literature is that the internet is driving everyone to a shorter attention span focused on entertainment, at the expense of advancing deeper and more philosophical topics that drive the evolution of culture.

Fast forward a day and I was pleased to see A-Team Group publish a thoughtful article on how FPGAs and hardware, which have long been accepted in the front office, are making headway in risk management and order processing. This is inline with our own observation that projects and budgets in the mid- and back-office are getting increased priority.

If you draw a parallel between his point and capital markets IT, high-frequency trading has been the Lindsay Lohan of Wall Street tech for the last few years — when it comes to driving traffic to your publication/site, focusing on high frequency trading is a favorite tactic among editors and analysts.… Read the rest

Kernel bypass – revving up linux networking

In Formula One racing, all cars must comply with a defined set of rules (the formula) and find ways to differentiate with a car, driver and support team that all follow the basic guidelines.

The same is true of automated trading systems. The formula is simple: each trading system consumes market data and produces orders. What happens in between is how each firm differentiates themselves. Just like in F1, anything that can be improved is up for evaluation when it comes to achieving fast, consistent performance.

Today we announced a partnership with Solarflare Communications to accelerate linux-based networking of high performance messaging. Let me take a minute to lay out what this partnership does for our customers.

It is well understood that in the software world trading performance is negatively impacted by “context switching”. This is an operating system issue, where the OS needs to manage state as control is passed from “kernel space” where the network drivers reside, to “user space” where the application runs.… Read the rest

Latest financial meme: consistent latency

I can has consistent latency?Let’s face it, if you want to get attention on the Internet, you have to fall in line with the concept of memes. These are the ideas that take on a life of their own, such as the dramatic prairie dog or the VP dropping an F-bomb. Twitter’s version of memes is the concept of trending topics based on frequently tweeted keywords. This lets you see what topics people are talking about at a glance.

If dialog in the low latency finance community had that concept, it appears that “consistent latency” would be moving up the charts. For the majority of 2009, the focus was just on making everything faster. Lower the latency, shave a microsecond here and there, and so on.  This year, it seems that people have figured out that the harder thing to achieve is predictable latency. If you’re going to turn decision making over to algos, you need to be confident that the information that feeds them is current.… Read the rest

Trading microseconds for nanoseconds

The co-location of market data systems near or inside exchanges is becoming big business. The ultra-low latency high frequency trading systems that you find in these facilities are niche applications to be sure, but what a niche! NYSE Euronext recently committed to build a 400,000 square foot co-location facility in New Jersey. That’s a big investment to make in something NYSE Euronext CEO Steve Rubinow describes as being for “only the most obsessive traders.”

How obsessive? Architects building these systems measure latency in microseconds, and the best applications exhibit just tens of microseconds of end-to-end latency. Shaving microseconds is like dropping weight before your prize fight weigh-in—whatever it takes, get it down.

To help these latency obsessed traders develop even faster trading systems, Solace has extended its Unified Messaging API to include a shared-memory transport based on inter-process communication (IPC). This capability lets two applications share information using Solace’s API with less than 700 nanoseconds of average latency in a shared memory environment.… Read the rest

Listen all y'all it's an arbitrage…

Beastie Boys SabotageArbitrage is back, that is, if it ever really went away. Rob Curran recently wrote a piece in the Wall Street Journal’s MarketBeat blog on how the 10-15 millisecond gap between the National Best Bid and Offer (NBBO) and the pricing algorithms in most dark pools of liquidity is making money for technologically advanced traders using latency arbitrage. Basically if you can calculate the NBBO a handful of milliseconds before the market does, you know where the market will be before it gets there. Easy money, and not violating any current laws.

In fact, the current economic downturn ensures that this strategy will remain valid for years to come, since many of the sources of liquidity are experiencing budget freezes and will inevitably experience new regulatory distractions as the recovery begins. This locks them into current (comparatively slow) latencies for several years. Meanwhile, many of the smaller, more nimble hedge funds and private equity firms are aggressively investing in high-volume, ultra-low-latency infrastructure that measure decision making, order routing and order execution in 10s of microseconds or less.… Read the rest

Spotlight on Risk Management

There is a good story Advanced Trading this week about the challenges of applying yesterday’s risk management solutions to today’s market requirements. The whole article is a good read, but you can cut to the chase and just read the summary:

There are three specific data pitfalls that can obscure risk analysis at the portfolio manager and risk officer levels, according to Adam Sussman, director of research at TABB Group:

1. Out-of-Sync. The frequency of the risk data updates lags behind the fast- moving markets. Similarly, the time horizon of the analysis can be misaligned with the investment objective of the portfolio.

2. Opacity: Unfamiliarity with the model behind the analytics puts people at greater risk of making bad decisions.

3. Rigidity: By looking at the same data in the same way, funds are more likely to be negatively impacted by one another. Similarly, approaching risk from a too narrow or rigid viewpoint can obscure vital changes to the risk of a portfolio.

Read the rest