Wed, Dec 7, 2016
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Opalesque Futures Intelligence

Manager Profile: Building a new algorithmic system poses challenges. How one research team went about a two-year project.

Thursday, May 27, 2010

Overcoming Challenges in Building a System

 Quantitative trading continues to attract people from technical fields. Often these newcomers develop their own systematic approach to markets. Here is an insightful account of one such enterprise.

 Jean-Marc Molina worked for information technology start-ups and BMC Software – an international software company – after getting a degree in computer science from the Ecole Nationale Supérieure de Techniques Avancées.  In the mid-1990s, he became interested in financial markets and started to trade. In February 2008 he founded a firm, IT-LYSE, to do algorithmic trading research.

 The IT-LYSE team includes Bernard Prats Desclaux, an experienced trader and author of a book about trading futures contracts, published and well received in France. Another partner is Arnaud le Déault, an aircraft engineer who worked for Air France from 1999 to 2009. He brings an understanding of risk management honed in aeronautics.

 After back testing showed promise, IT-LYSE started to trade with real money this January. The program trades DJ Eurostoxx50 futures. Below Mr. Molina discusses the pitfalls and opportunities in developing an algorithmic system.

 

  "The 2000-2008 back tests gave excellent results, but perhaps the toughest test is 2009."

 When I started to trade for myself in the 1990s, I used fundamental analysis. I examined company balance sheets and earnings forecasts to find value or growth prospects, mainly investing in the sector I know very well, IT.  At that time I did not believe there was real value in technical analysis.  But when the mortgage crisis erupted in 2007, I felt the market was going to be shaky and I could not continue investing in the same way. 

 At this time my friend Arnaud le Déault came up with an interesting algorithm. But when we used it to trade, there was a big loss. We investigated why the algorithm failed and quickly found out that the model was over-fitted to historical data. We had built an algorithm that contained many parameters and worked perfectly in the past. This is a common error. Fortunately, I had not put much money into it!

 That was not the most promising beginning, but I decided that algorithmic trading held promise. At the beginning of 2008 I founded IT-LYSE and built a research team to work with me. We've received equity capital from two external investors.

 

Parallel Opportunities

Our approach is not to try to predict market moves but to model what a good proprietary trader would do-to try to find the main patterns that a prop trader would use and put those into the program.

 We wanted to build a model as close as possible to the psychological patterns found in markets. The idea is not to have one algorithm that will do everything but to have algorithms that go after specific market psychologies like greed, panic or profit taking.

 It took about two years to build the system we call the Parallel Opportunity Trading System.  It contains eight strategies, diversified to catch returns in both bull and bear markets on European equity index futures. Six are intra-day strategies where positions typically last for a few hours, including a contrarian strategy as well as several trend-following algorithms.

 We are not  high-frequency traders-the average time in market is about 3.5 hours. The  risk taken on each trade depends on market volatility and is generally below 1% of the trading capital.

 The other two strategies are swing strategies that typically last for a few days. One is a contrarian short strategy and the other a long-term trend-following algorithm. We find that swing algorithms gives you better performance  in bull markets, where it is harder to catch big gains with intraday trading because there is generally less volatility.  

 To make sure we're not trapped into over-fitting, we did the back tests on out-of-sample data-that is, data not used to build the algorithms. The 2000-2008 back tests gave excellent results, but perhaps the toughest test is 2009, when most commodity trading advisors lost money.

 In the back test on 2009 out-of -sample data, while not all the intraday strategies performed well, the long swing strategy had excellent results and the complete Parallel Opportunity Trading System's performance was consistent with what we observed for previous years.

 This year we started trading with real money. Our system returned about 2.3% as of April. That is not a very high return but it is what we expected in these market conditions. We hope performance will continue as expected while we plan our next step, which will probably be to register as a CTA. We may also consider the opportunity of joining a hedge fund.



 
This article was published in Opalesque Futures Intelligence.
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. M&A - AllianzGI to acquire Sound Harbor Partners, SS&C completes acquisition of Wells Fargo's Global Fund Services business[more]

    AllianzGI to acquire Sound Harbor Partners Allianz Global Investors (AllianzGI), an active investment manager, announced that Sound Harbor Partners, a US private credit manager led by Michael Zupon and Dean Criares, have agreed to join its fast-growing Private Debt Platform. Under the te

  2. People - Nectar Financial hires senior investment team, Texas A&M replaces retiring foundation investment chief, Ex-Cadwalader partner Woolery makes another sudden exit, How to become a Python coder at a top hedge fund, by the co-CTO of Man AHL[more]

    Nectar Financial hires senior investment team Nectar Financial AG, a Swiss financial technology company for wealth and asset management, has announced that it has hired two key senior leaders to spearhead its digital asset management efforts. The company also announced that it has entere

  3. Activist News - Cognizant has introductory discussion with activist investor Elliott; to review letter, Starboard Value makes huge investment in Hewlett Packard, Hedge fund calls for removal of First NBC Bank CEO[more]

    Cognizant has introductory discussion with activist investor Elliott; to review letter From Indiatimes.com: Cognizant said it had an introductory discussion with Elliott Management after receiving the activist hedge fund's letter asking for a board shakeup, a buyback, a dividend and chan

  4. Opalesque Exclusive: Ireland relaxes treatment of direct lending funds[more]

    Bailey McCann, Opalesque New York: The Irish Central Bank has relaxed its treatment of direct lending funds, according to a recently released

  5. Institutions - Texas County & District culls 5 hedge funds, reallocates to existing managers, Kentucky board gives final approval to halve hedge fund portfolio, $38bn Finnish fund moves assets to U.S. as Europe flounders, South Korea’s National Pension Fund holds 5% stake in 62 listed companies[more]

    Texas County & District culls 5 hedge funds, reallocates to existing managers Texas County & District Retirement System, Austin, continues to reduce the number of hedge funds, but not the size of its $6.2 billion hedge fund portfolio. It will redeem a total of $760 million from five hedg