Institutional Investor's Alpha Magazine - October 2007 - (Page 79)

Futures Exchanges programs that break up large trades into multiple small orders to help managers execute trades without signaling the market — execution speed has become more important than ever. In August, ICE lowered execution times on its trading platform to an average of 7 milliseconds, from its previous 27 milliseconds. Similarly, the CME has spent the past five years improving the speed of Globex; execution there now takes 27 milliseconds, from 127 milliseconds in 2002. And those numbers promise to improve even more in the coming months, as new gateway technologies — which allow orders to ﬂow in and out of the trading platform — are implemented. The CME is currently rolling out FIX FAST, datacompression technology that could reduce bandwidth usage by 70 percent, allowing ﬁrms to process ever-increasing amounts of data without sacriﬁcing speed. This new technology comes on top of the exchange’s efforts over the past three years to increase the size of its data lines from 1 megabyte to its current 100 megabytes. “FIX FAST is the basis for a new industry standard for market data, and I think more exchanges will start to embrace it,” says Tina Lemieux, managing director of CME Group’s hedge funds and brokerage services. “We have invested a lot in technology because we realize that people are going to trade more and more using it.” Adds the CME’s Brown, “The statistical-arbitrage funds are sort of our sweet spot.” Like the CME, Frankfurt-based Eurex, the world’s second-biggest derivatives exchange, is pushing the execution envelope. Eurex recently lowered its execution times and increased the range of its customized bandwidth sizes — the capacity range customers can choose from — to 50 megabytes, from 10 megabytes. Exchanges have also been trying to use pricing to win business. The CME, says Brown, has gotten a boost from its “inactive clearing membership” program, which offers fee reductions of up to 90 percent. Through the program, hedge funds pay just 95 cents a contract to trade the CME’s E-mini S&P 500 futures, versus the $1.14 per contract nonmembers pay, and clearing fees are capped at $50 per day. The next frontier for exchanges is co-location services — the opportunity for hedge fund firms to physically place their servers in immediate proximity to exchanges’ own trading platforms. For high-speed traders, for whom every millisecond counts, this is a major breakthrough. Eurex and the CME are the first to offer co-location services; firms around the world can trade on their exchanges with virtually no latency (the time it takes a trade to be processed and executed). Using co-location services, trades on Eurex can be executed in less than 10 milliseconds, well below the average trade turnaround of 42 milliseconds for off-site trades done on the exchange. Eurex led the industry with its co-location program last year and now has more than 40 ﬁrms using the service. The CME launched its co-location service at the beginning of the year and now has more than 35 ﬁrms using it. “Clients want to reduce the amount of lag on their models and be as close as possible to exchanges,” says Russell Abramson, global head of electronic client solutions for JPMorgan Futures & Options, which connects hedge funds and other institutional customers to various exchanges through JPMorgan’s networks. Because many hedge fund strategies require back-office processing involving massive quantities of data exchange, managers of such funds have been showing particular interest. In fact, Abramson says that even hedge funds whose trading strategies involve long time horizons are exploring co-location setups, helping attract more business to the futures exchanges, which he says were three or four years behind the equity markets until recently. With huge volumes of trades being executed within tiny fractions of a second, the futures exchanges are also ramping up the risk management tools they — KEVIN PILARSKI, PARTNER, provide the clearing firms serKILKENNY CAPITAL MANAGEMENT vicing the hedge fund community. Eurex recently introduced technology that allows clearing members to monitor the pretrade risk of nonclearing customers and to manage customer trades by order size, type and frequency. “The discussion on algorithmic trading is often narrowed to the trading side only, but we think there is a lot to be improved in clearing and risk management,” says Michael Peters, a member of Eurex’s board of directors. “If you upgrade your car with a race engine, you also need to think about how to upgrade your brakes. It’s absolutely crucial to synchronize trading performance and latency with appropriate risk management measures.” And with the trading volumes generated by algorithmic trading programs continuing to rise, Eurex is also gearing up to provide real-time trade conﬁrmations to its clearing members, as opposed to its current system, through which traders receive updates every 15 minutes. At the moment, Eurex leads the pack in providing clearing services. But as U.S. regulators push for greater oversight of the over-the-counter markets (a handful of proposals currently in Congress would give oversight of the OTC markets to the Commodity Futures Trading Commission), it is likely the U.S. exchanges will soon follow suit. One opportunity for exchanges will be to offer more OTC clearing services — an area where exchanges such as Nymex and the ICE have excelled. In March, CME Group began offering FXMarketSpace, the first OTC forex futures platform for clearing. As the technology — and the services it makes possible — continues to evolve, hedge fund managers like Solaris’ Harris could be big beneficiaries. “When you break down those barriers and allow access, it will create liquidity, which will push hedge funds in,” he says. “Exchanges realize that hedge funds are in many cases the lion’s share of their business.” OCTOBER 2007 • INSTITUTIONAL INVESTOR’S ALPHA • 79

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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