Max Slippage

Excellent article on execution slippage from Max Dama here. He’s writing from a prop trading perspective. Nice diagrams and charts in the piece as Max breaks slippage down into two components: liquidity impact and alpha loss. If we look at the problem from a Euro rates market making perspective we would consider slippage for hedge order execution on Eurex. We’d still have the liqudity impact component Max describes. Instead of alpha loss we’d have market risk for the time we carry an unhedged position. Of course, it’s a matter of market maker discretion how much risk to carry and for how long…

Leinweber’s Nerds

I had high hopes for David Leinweber’s Nerds on Wall St, but have been disappointed. It’s just a collection of trade press articles, with no deep insight offered anywhere. I suppose it highlights the fact that there still isn’t a definitive financial technology book, in the way there are classic sales and trading books like Liars Poker, Fooled by Randomness, Education of a Speculator or Trading and Exchanges.

I guess Leinweber has a lot of good industry contacts and influence: I can see no other explanation for the glowing testimonials cited here.

MicroMen

My first computer was a ZX81, so MicroMen on BBC4 was a powerful blast of nostalgia for the early 80s. Funny, sad and exhilarating – the Acorn hack against the clock to build the BBC prototype was fantastic, and the Clive Sinclair Mensa sequence is hysterical. I was an undergrad at Cambridge in the late eighties, so I was pleased to see them get loads of detail right: the Baron of Beef pub, the Computer lab. I used to see Sinclair jogging on the Madingley Road on the rare occasions I was out and about before midday…

I built my ZX81 from a kit. I later added all kinds of peripherals, including a real keyboard and 16K RAM pack. Another great point of detail in MicroMen was the reference to the dreaded RAM pack wobble that afflicted ZX81s. After the ZX81, I went on to a Camputers Lynx, also mentioned in MicroMen, and then an Atari 520 that I took to college in 86.

OpenGamma

I’m almost tempted to send my CV to Kirk – his OpenGamma startup sounds very exciting. I’ve got ticks in most of the boxes Kirk lists, except the pricing stuff, where I’m a bit short. If Kirk’s after a credit pricing coder, maybe he should talk to Noel.

Kirk’s coyness on his funding is intriguing too. Could it be Sean, Ken or FTV ?

Visual Studio 2005 property bolding

VS dev trivia: if entries in your C++ project property pages show up as bold it means they have been given explicit overrides in the .vcproj XML. This broke my build today as the overrides stopped inherited values from .rules and .vsprops files being pulled in.

Joel on duct tape developers

As usual Joel hits the nail on the head in contrasting pragmatic, delivery focused “duct tape programmers” with perfection obsessed abstraction astronauts who never ship because they can’t stop polishing and honing. It’s those duct tape devs we’re always looking to hire for front office trading systems, cos time to market is everything in our game…

Bloomberg and TradeWeb cover prices

I got an email query on cover prices for RFQs after my last post, so I went back to some old analysis of RFQs I did in 2006 to check. My code was getting the cover price from ION MarketView’s trading chain for the RFQs that traded with us on Bloomberg and TradeWeb. If the client traded away, with another dealer, or rejected, we would see a cover price of zero. This asymmetry allows a dealer to calculate excess winning margins for RFQs won, but not to see how far off the best price the dealer is for RFQs that trade away.

The excess winning margin is the difference between a winning price and the cover price. If the gap is too great, then maybe the dealer is suffering from a form of the winners curse. The obvious response is to make pricing less aggressive. But the fact that losing dealers in an RFQ don’t see the winning price deters that. In the face of that asymmetry the right solution is probably to have real time feedback between hit ratios and pricing aggression…

Cover price & RFM

Neat doc here from TradeWeb on protocols for CDS execution. From it you can imply the definition of “cover price”: the next best price that didn’t execute. As you can see in the doc, or in a TradeWeb or Bloomberg terminal, a client can see competitive quotes from up to 5 dealers. But while an RFQ is in flight, the dealers can’t see each others quotes. When the RFQ ends with an execution, as opposed to a client rejection, then the winning dealer gets to see the cover price – the price they beat. But the losing dealers don’t get to see the winning price, so there’s a fundamental asymmetry there.

So what are the reasons for that asymmetry ?  That’s an interesting question. I’m guessing that it’s motivated by restricting the amount of information that dealers have about each others pricing. Dealers are paranoid about other dealers figuring out their pricing. Another motivation is to keep the dealer pricing keen. If dealers could see each others prices, then they would slack off on aggressive prices, making them only just good enough to win a trade. In the face of those two powerful motivations, I do wonder why ECNs show the cover price to the winning dealer at all.

The RFM model outlined in the TradeWeb doc is interesting too. The RFQ and RFS models operated by Bloomberg and TradeWeb for fixed income trading require the client to declare whether they’re buying or selling up front. RFM is a break with that. If it were applied to the rates markets I wonder whether it would lead to keener pricing or not ?

Sterling closes

The UK’s debt management office publishes closing prices calculated as an average of Gilt dealer prices here. One application of the prices is dealer execution of fund manager orders for execution at the close. The dealer and real money manager don’t know what the execution price will be when the order is placed, but that’s not a problem as the fund manager trusts the DMO price.

The Netflix values

Picked this one up from ParkParadigm. Anyone who’s experienced the more stifling aspect of bank culture will relate to a lot of it. In particular…

• Slide 6: the difference between real and declared values
• Slide 11: listen instead of reacting
• Slide 48: process focus drives talent out !
• Slide 60: preventing error is not cheaper than fixing it !