TRADERS: What are you hearing about your clients’ use of big data? Is this marketing hot air, or is Big Data an established resource they’re actively exploiting in their day-to-day trading?
IRENE ALDRIDGE: Oh, yes, absolutely. I think there are three major trends when it comes to big data. The first remains just information gathering. There’s a ton of information that is generated by everyone, and basically everything is now tradable. There’s tradable news; there is information provided by Bloomberg, Reuters and Dow Jones; and there are news feeds. There’s also the Internet, which is like a data mine of information-there’s unlimited numbers of stuff.
The number one trend is really to synthesize and gain an edge by having some custom understanding of how the news is incorporated into the market and being the first to synthesize the news from the global universe of news.
TRADERS: What is the second trend?
ALDRIDGE: Trend number two is more traditional. It’s really how you gain alpha. It’s more of the high-frequency trading, and high-frequency trading portfolio management is “how do you respond to new market developments in a very fast time and so intra-day definitely?”
TRADERS: What’s the third trend?
ALDRIDGE: The third trend is really optimal execution in a sense that many buyside clients are now questioning whether they need a broker or whether they should rely on the broker as much as they did before. The reason for this is, they can hire very talented personnel who can develop quantitative models that are, frankly, superior to models many of the brokers have.
It used to be that brokers had an oligopoly, essentially, where they would control the access to the markets, and they didn’t really need superior technology to compete, because all they needed to do was just stay on par with the other guys. So there was always a look left, look left and look right and see what everybody else is doing, so they would have to have the same thing at least that everybody else is having, and that was sufficient.
TRADERS: Are your buyside clients moving away from the broker model?
ALDRIDGE: The clients that I’m dealing with will often say, “Well, it’s not good for us because it doesn’t give us enough edge.” So they’re developing in-house what are essentially optimal execution models, where if they need to run through a billion-dollar transaction, they’re not going to give a block to the broker anymore. They’re going to break it up into 100-share little pieces or 200-share pieces and give it to all of their seven brokers that they have relationships with in such a way that not one broker can reconstruct what they’re doing.
I used to work for the sellside, and often what happens on the sellside is, at least in our case, the broker would receive a block trade from some firm, and they would immediately start calling all their clients trying to generate business and saying, “OK, this guy’s buying this, so you must be buying that too, because these guys always know what they’re doing and they’re buying, so, therefore, you all have to do that.” And it dilutes the profitability of the original person who gave the block trade.
It’s an additional reason why people are now doing optimal execution in-house; at least they’re building optimal execution capabilities. We’re talking about the largest hedge funds in the U.S., in the world.
TRADERS: They’re acting as their own brokers?
ALDRIDGE: In many cases, they still have direct market access, so under the direct market rules, some of them have an affiliated brokerage so that they do it themselves. They have the main operation, and then they have a separate company, which is a brokerage, which they control.
In some cases they do that. In some cases, they just have relationships with 10 brokers.
TRADERS: Is there a big-picture trend to big-data use on the buyside?
ALDRIDGE: I think the overarching trend above all else is secrecy. People are trying to protect their ideas like never before, and because the competition is extremely fast and I think this is a “you snooze, you lose” kind of environment, but on an even faster scale. People’s desire for absolute secrecy of what they’re doing is underlying all of this.
TRADERS: You say that the big-data sources are everything from Bloomberg to Reuters to other market data feeds to the Internet, and I’m assuming social media like Twitter as well. How are these small hedge funds able to turn on a dime and react very quickly to this data? How do they find a drop of water coming out of this fire hose?
ALDRIDGE: Well, this is where the edge comes in. So everyone develops their own models; most people do not use any commercial software.
The reason for that is because when you buy and bring IT in-house, when your deal is trading millions and billions of dollars and all in a second-even a minute, even an hour-and you bring in some enterprise platform, you don’t know what’s inside it. If you don’t know what’s inside it, there’s a high probability that when something goes wrong, it’s going to go wrong at the very worst possible moment, and basically you will lose money.
So most people rely on open-source solutions. They don’t use anything off-the-shelf unless it’s extremely trusted and it’s been there for a long time. But when you talk about the complex event processing firms, most of them are not built for fast trading applications. They never have [been]. They come out of these legacy of systems and legacy events, and they’re just not responsive enough. They’re not fast enough. They’re these bulky things that are, frankly, just too cumbersome. They just take too much memory. They take too much of everything, of computer power, so they’re not something people rely on.
In most cases, what people do is they identify some little phenomenon, and this is all it takes. You don’t need to process the universe of events to come up with a trading signal, right? You just need to identify some name that no one else has identified.
TRADERS: What about asset classes beyond equities? Is the big-data phenomenon also reaching other asset classes, such as fixed income?
ALDRIDGE: Absolutely. I think fixed income is very ahead, in many cases, as far as optimal execution is concerned. Most hedge funds that are trading fixed income have built their proprietary execution already. The same hedge funds may still have broker relationships in equities, for example, but they already have house-filled fixed-income executions and institution capabilities simply because the brokers were so far behind in that space. So they’re doing their own stuff completely from scratch to trading.
Futures is still kind of halfway here and there. The reason for that is, futures is still very much manually traded. Not the large hedge funds-large hedge funds are almost purely automated as far as futures are concerned. But there’s still a lot of people who actually trade futures manually. So they trade in reduced frequencies that don’t need to be that fast, for example, because the futures market just moves slowly, except for certain instruments that they’re almost purely electronic.
TRADERS: I was under the impression that fixed income was always like the slowest asset class. That was really hands on, people used fax machines, people had to get somebody on the phone and say I’m going to sell this to you or I’m going to buy this for you, etc.
ALDRIDGE: No, it’s not voice over the phone, but there’s still a lot of people making decisions manually, what to buy and to sell. And it’s particularly evident, like if you go into like commodities futures, if you go to say corn futures, you can track how the market reacts to news. And it’s painfully slow.
TRADERS: Still manually?
ALDRIDGE: They read the news over the computer screen, and they put the news-but your point about bond trading is absolutely correct. I think brokers underestimate it, the brokerage industry as a whole underestimated how much demand there would be for a fast execution in the fixed income, and so they get completely sidelined.
TRADERS: Tell me a little bit about Able Alpha Trading.
ALDRIDGE: Well, I do a bunch of stuff. I don’t build trading tools per se. What I build is completely custom trading signals that I write off, and the contracts that I have with people, it’s not that I only cannot disclose, but they also own all the intellectual property. Whatever I develop for them, it’s theirs.
Able Alpha is more consulting. I have a separate business, which is Able Markets, where I provide canned tools that are sold to hedge funds on a subscription basis. These include fees for identifying various events, like I have some that process Internet news and they deliver signals based on that, as well as, like, predicting flash crashes and a bunch of other stuff.
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