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January 2, 2007

ESP Fuels Pairs Trading Strategy

By Michael Scotti

Event stream processing (ESP) has found a fan in Lou Morgan of HG Trading, a $10-million proprietary trading shop. The trader says using the technology to access data quickly is a way to reap big profits in rapid-fire pairs trading.

His Hartland, Wis.-based trading firm relies on Progress Software's Apama trading platform. Morgan says the software is easy to use, allowing a trader to model a strategy, test it and tweak it, without needing programming skills. ESP allows trading shops to monitor fast-moving data streams in the marketplace and to find patterns that provide trading opportunities within a given strategy-all done within milliseconds.

"The advantage is the ability to bring the strategy out to the trader level," Morgan said. The industry veteran was a founding member of the Chicago Board Options Exchange, as well as the founder of data vendor PC Quote. He launched his hedge fund 18 months ago.

Morgan utilizes Apama's processing capabilities to push data through the Apama system to find pairs trading opportunities. It is a faster and more efficient methodology than running the incoming data through a bulkier database, he said. HG's strategies rely on speed to be profitable: "I can get anywhere in 10 milliseconds," Morgan said. The system has 1,000 different pairs trades loaded into the platform, and might execute 20 to 50 trades at a time and then unwind the positions quickly, he said.

The former options market maker described his firm as enormously scalable. "We'll never have 50 people," Morgan said.