05.29.2014

Latency Wanes as Trading Differentiator

05.29.2014
Terry Flanagan

Automated trading is often associated with blinding speed and high-frequency traders, but the reality is that speed and latency are no longer regarded as differentiators.

“Anyone who cares about latency has already co-located,” Roji Oommen, managing director, financial services at CenturyLink Technology Solutions, told Markets Media. “Pure latency is giving way to agility, cost management and taking advantage of new applications.”

Incremental latency improvements carry a high price tag and marginal returns. “To reduce latency by a further nanosecond, the amount of investment required is probably out of scope with the expected return, for most funds anyway,” said Oommen.

The emphasis on speed is giving way to systems that can connect to multiple venues and liquidity pools.

Bell Curve Capital, a quantitative hedge fund with under $10 million in assets, has developed a host of electronic trading systems connecting to major option algo execution engines such as Credit Suisse, Morgan Stanley and Merrill Lynch.

“Over the years, I’ve built a comprehensive system for trading options with a mathematical model, and put the system to test for many years,” said Derek Wang, founder and CEO of Bell Curve Capital. “Along the way, a set of sophisticated risk management and idea discovery tools have been developed.”

The trend is toward consolidation in market making, moving more and more from the floor into the electronic area, he said

Wang has been trading options and volatility for the last fifteen years, starting at Peak6 and Ronin Capital in Chicago, and later at Capstone before founding Bell Curve Capital in 2010. “We started as the proprietary trading firm, and now we are a hedge fund,” he said.

In the U.S. equity options market, there are two groups of people trading volatility, according to Wang: market makers and liquidity takers such as hedge funds.

“We have a very efficient process for building volatility models for every U. S. equity options name,” he said. “Such systematic volatility models and quantitative risk management, combined with experienced traders and electronic execution, allows us to trade and manage the entire U. S. equity options space.”

Featured image via Alexey Klementie/Dollar Photo Club

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