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January 1, 2005

Trading Strategies Made Easy

By Editorial Staff

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A San Francisco start-up is betting that hedge funds and prop desks need a faster way to bring their trading strategies to market. The company, known as 4th Story, has built a trio of servers that find, test and operate trading strategies across all asset classes. Founded a little over a year ago by two technology veterans, the vendor is achieving some success in the U.S. and abroad. The clients so far include Sofaer Global Research, one of the world's oldest hedge funds, and investment bank Barclays Capital.

The technology reduces the time and hassle of building strategies by traditional means, according to 4th Story. It relieves traders of the need to install the "plumbing" every time they design a new strategy, freeing them to focus on the strategy itself.

Currently, the most popular software used by traders to write strategies is Excel by Microsoft and Matlab by Mathworks. The use of Excel is so ubiquitous that an entire industry of "add-ins" has formed around it.

4th Story is not the only player offering strategy testing and operating software. At the institutional level, hedge funds can also turn to vendor Neovest, for instance. At the retail level, daytraders can access software from broker TradeStation.

4th Story, which employs six people, was co-founded by CEO Steve Smith, an IT veteran with Hambrecht and Quist and Charles Schwab & Co. Co-founder Philip Clem, formerly with vendor Longview International, is chief technology officer.

Traders Magazine Technology Editor Peter Chapman spoke with Smith about his firm's technology.

Traders: Your first product was 4S.Yellowstone. What does it do? Why bring it to market?

Smith: We were trying to build an open-ended platform for arbitrarily complex trading strategies. Order content' or alpha strategies. We differentiate strategies between those which tell you what to do and those which help you get the job done. Yellowstone hosts these very complex trading strategies, tests them and helps the trader to optimize them. Mostly what we saw was people working in Excel and MatLab.

Traders: What do you mean by "arbitrarily complex?"

Smith: We want to enable them to handle as complex a strategy as they can come up with. We can even integrate Matlab into a strategy. If there is some routine in MatLab that is so complex, that you want to call that routine,' we can do that. A lot of the other products we saw were unable to get very complex. How complex is your decision to invest? If you are doing an order handling or execution strategy, how complex is your decision how to trade?

Traders: Why was Yellowstone needed?

Smith: With MatLab and Excel, you are redesigning the plumbing every time you [write a strategy] instead of just focusing on the business logic behind the strategies. There's traders out there with a lot of brilliant ideas. They need to be able to test and go through a lot of ideas quickly to find ones that work. So, they really can't afford to be sitting there doing the plumbing every time. We wanted to put a system together where all they are really writing is the business logic and not the plumbing.

Traders: What do you mean by plumbing?'