Let other brokers have sexy and fierce names for their algorithms – Dagger, Guerilla and Sniper come to mind – but the folks at Euclidean Trading are focusing on what traders need, not what would look awesome painted on the gas tank of a motorcycle.
Euclidean Trading is the U.S. arm of RV Assets, a U.K. brokerage firm that focuses on trading U.S. dollar interest rates. Under the directorship of Thomas Fitch, the brokerage is releasing a self-named options algorithm that trades U.S. dollars and Treasury interest rates in a sector that isn’t exactly algo-savvy or curious. The only question is whether old-school traders in Chicago and the rest of the interest-rate options world are ready to trade via an algorithm. After all, these traders are more likely to pick up the phone or shout an order into an openoutcry pit than fire up a formula.
But this is where Fitch and his team are setting their sights. “We threw away the principles from the last 15 to 20 years and started with a clean slate,” he told Traders. “We set up two new businesses with the correct intellectual property rights in terms of the application of the technology. We have done that for the last 18 months.”
The U.K. brokerage launched last November, and the U.S. arm went live in late January. While he claimed that a few U.S. buyside firms have signed on to use the eponymous algorithm and the firm’s brokerage services, Fitch declined to name them or provide the precise number of clients.
Because Euclidean is focusing on a specific sector, it feels it is making life easier for traders. “On a day-to-day basis, we are pricing and executing business, which is almost impossible to do the old-fashioned way.” Fitch said. “If you did the open outcry pit of Chicago, or picked up the telephone and spent 20 minutes trying to negotiate a trade, the rates being charged would be exorbitant.”
Fitch cites the current rates in this sector at around 70 cents per dollar. “If you do 100,000 contracts on a trade, thats an enormous amount of money,” he said. Fitch claims to charge half that amount.
Fitch is also inspired to deliver greater efficiency to one of the last vestiges of hands-on human trading in the U.S. and European options markets. “This is an electronic solution, and we all know that electronic solutions are more efficient, more precise and faster than the human equivalents,” he said. “This has always been the case with other market environments.”
According to Fitch, the features of the Euclidean Options Aglo are aimed at traders who are “very price sensitive.” They are trading a large portion of the market size, and … there are enormous numbers of participants in all options markets, said Fitch, citing retail and big market participants in the dollar interest rates, FX and commodities rates space.
“One of the benefits of what we are doing is having a machine that does not cope with 1, 2 or 3 clients but with thousands of inquiries and transactions per day. [Right now,] there are probably a dozen big trades per day but this market will develop from being a relatively slow and cumbersome open outcry market into one that sees thousands of trades per minute and potentially per second.” he said.
That said, Fitch does not foresee this sector resembling the HFT equities space, for example.
As for the Euclidean algos themselves, Fitch said that theyre not rocket science, around 10,000 lines of code give or take. That said, he does have plans to branch out to other asset classes such as equity and foreign exchange options.
In the meantime, convincing interest-rate traders to adopt algo trading can resemble convincing your grandparents to connect on Snapchat just after they got the hang of Facebook. The clients can be confused, according to Fitch. “We end up trying to explain what we are doing despite being complex. Unfortunately its one of those areas; it’s an outlier. It’s an area with an awful lot of humans involved in the business while all the other markets are generally developed,” he said.
But the initial confusion does inspire a few old dogs who are curious to learn new tricks from Euclidean.
Said Fitch, “It gives us a tremendous opportunity to get face time with some of the big participants.”
