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New Skill Set for Trade Execution

Jonathan Kleisner, managing director of investment strategies at Rex Capital Partners, a commodity trading advisor, discusses the opportunities created by innovations in trading technology and the challenge of getting the most benefit.

Mr. Kleisner began his career at age 17 as a floor clerk on the old NY Futures Exchange and started to trade commodity index futures in 1991.

It is essential for a CTA to have as robust a trading technology as possible. There are two broad issues that managers and investors should be aware of.

One is the speed of the data flow. If your information lines suffer from slowness or latency, that is a major problem. Setting up your own dedicated lines has become almost part and parcel of the CTA business. If you don't have fast flow and don't get the data quickly, trading suffers.

The second issue is the efficiency of the execution. You want to avoid leaving an imprint on the market that will cause prices to move against you—the slippage problem. There's the risk that as you try to place a large order, other traders will move away in order to force you to accept a higher price if you're buying and a lower price if you're selling.

A critical goal is to keep your trades anonymous, the so-called “ghosting” to hide your foot print in the market as you get in and out of trades. For instance, there's the iceberg strategy—showing the marketplace only a small piece of the position you're trying to put on. With little tricks you can add to the trading system, you're able to put a shadow on your orders so that people don't see what you're doing.

This is particularly important for CTAs. Certain commodity futures, like the soft agricultural commodities we trade, are small markets. The punch of a large order is significant and learning how to disguise those punches has become an essential part of the business. The danger not just when you place orders but also when you liquidate trades. If others realize you have to get out, they can make it more difficult.

Sea Change

There is a growing choice of trading software, including auto-trading software, algorithmic trading software and certain enhancements. After futures trading went electronic, just in the past couple of years, new systems have been introduced. There has been a race among vendors to come up with the most robust and trader-friendly technologies. These types of products did not exist before.

The sea change in trading technology is continuing. We hear about new enhancements all the time, whether a specialized feature for a certain type of contract or a change that makes possible large-scale integration with exchanges. Many are internet based, so you can access your trade information from wherever you are.

The right tools can enhance your efficiency tremendously. You can set up software to search for the conditions you want, while you do other things. Auto-spreader software looks in the market for certain spreads and automatically trades those spreads when it gets the right parameters. You can have 16 auto-traders working for you while you concentrate on one.

New systems are expensive. But for us it is a net cost saving because the improvement in efficiency of execution saves probably three to five times as much as what we pay.

Old-fashioned pit traders were very resistant to entering the technology age. CTAs tried to continue the old ways, getting on the phone with a broker. But the world has changed and to trade successfully in today's markets, you need to be technology savvy.

Investors doing due diligence should make sure that a CTA is knowledgeable about internet service vendors and software choices. I'd push traders toward more efficient technologies. If I were an investor looking for a CTA, I'd put technical expertise on the top of the list of requirements.

People often ask us which systems we use and how we like certain products. Investors are concerned about the robustness of systems and disaster recovery. Where are the redundancies in your trading technology software? That's a top question we get. Clearly, every aspect of trade technology is important and the standard CTA skill set needs to contain the requisite knowledge.