Saturday, May 25, 2013

Algorithms for the Masses

Quantitative, computer-based trading is speeding its way toward individual investors. Some sites where you can learn more.

Algorithmic trading is frequently portrayed as an evil tool that is used against the retail investor by quantitative analysts, also known as “quants,” who use supercomputers to derive an edge in trading. But there’s a democratic move afoot, bringing professional-grade tools to any trader with a working knowledge of technical analysis.

A relative newcomer to the online investing scene, Boston-based Quantopian last week launched paper (simulated) and live (real money) trading features at the Finovate spring conference in San Francisco. The confab is a showcase for new financial services and banking technology. Quantopian’s ( live alternative is only available to a pilot group, which will execute its trades through Interactive Brokers.

Founded in 2011, Quantopian has created an online community for those who want to write and test trading algorithms, and develop their skills further by sharing ideas, code, and data with others. The algorithms are written in a language called Python, which takes some time to learn, though you don’t have to start from scratch. You can look at algorithms written by other members who make them public in the site’s community area. By clicking on the “Clone Algorithm” button, you can create a copy to play with and test. The sample that’s available to everyone has been extensively commented on, so you can see how the functions work.

Paper trading lets you run an algorithm on live data (delayed 15 minutes) using pretend money. It generates updates every minute, and you can monitor the returns and risk metrics live.

The current data available on the site, which is free for developing and testing algorithms, cover just U.S. stocks, but the firm plans to add other markets. Quantopian has several levels of security built in, and assures its members that they own their algorithms. As the company says on the site: “Ideas are some of the most valuable assets anyone has. We take this responsibility to our members extremely seriously.”

Perusing the posts in the community section, you’re bound to be impressed about how open Quantopian’s management is about the technology they’re building, including their concerns about data costs. They also freely discuss member suggestions and the likelihood of their implementation. It’s a good site to check out if you’re interested in writing your own algorithms, and don’t want to part with a wad of cash while doing so.

The ability to write trading algorithms has been a big part of online broker TradeStation’s platform since its launch. This is a sophisticated offering meant for serious traders and involves a serious financial investment to take full advantage of the tools. Quantopian gives you a look at the world of algorithmic trading without charge (for now), though its view of the world is limited to U.S. stocks (for now).

There are numerous subscription-based newsletters and analysis sites that develop algorithms. Customers can see the trade triggers and even get the trade done automatically in some cases. For instance, Collective2, which lists over 21,000 trading systems, lets customers of a number of online brokers, including tradeMonster, Interactive Brokers, and TradeStation, subscribe to a trading system that will automatically execute orders on your behalf. The systems usually have free trials for 7 to 14 days, then a fee of $50-400 per month kicks in. Quite a few systems charge no fee unless profits are generated. You can find Collective2 on a Website ( or through an online broker partner.

Collective2 developers have generated systems for stocks, options, futures, and foreign exchange, which you can search to find one that fits your specifications, such as length of time a position is held and number of trades per month. When a system creator trades using his or her own program, a special badge is displayed that includes statistics about the average amount of money at risk. That’s the kind of information that could make a potential subscriber more comfortable about the system.

THERE ARE MANY TRIBUTES to Alan Abelson in this week’s Barron’s. My interactions with him were probably similar to those of many subscribers—opening my copy to his Up and Down Wall Street column, and reading his brilliant prose. Since I’m on the West Coast, my face-to-face meetings with him were rare, but always entertaining. The first time I met him, he said, “I sure enjoy your column, but I have no idea what you’re talking about.” He admitted to absolutely no personal interest in using an online broker, but added that he appreciated our annual review that screens them for individual investors.

I will miss his observations, his wit, and the way he could link seemingly disparate topics. I learned a great deal from him over my 18 years with Barron’s. May he rest in peace.

Published in Barron’s, May 20, 2013. 

Posted by twcarey on 05/25 at 03:09 PM
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Saturday, May 11, 2013

A Boutique for Sophisticated Options Traders

An upstart brokerage recently launched some tools of interest to sophisticated options traders. TradingBlock Professional bills itself as the “ultimate boutique options and equity trading offering specifically designed for high frequency traders, proprietary trading firms, and active money managers.”

The Pro offering ( is aimed at equity and options traders who execute 20-200 trades per month. “Our goal is to provide active traders with customizable tools so they can get an edge on the market,” says Tom Heffernan, who heads online broker TradingBlock, an affiliate run by the same team. TradingBlock also emphasizes education and tools, but for a broader group of traders.

TradingBlock Pro’s order-routing capabilities are unique: there are 11 standard routes, plus another 11 proprietary smart-routing algorithms that can help an options trader find opportunities across multiple exchanges as well as the so-called dark pools that operate outside the exchanges.

One of the routes is called TB Swipe, which is useful for traders going after large numbers of contracts in a single order. A similar routing algorithm, TB SmartSweep, routes orders only to exchanges that don’t tack on additional fees. (Most execution venues charge a small fee per contract or block of shares traded, which can add to the cost of a trade.) The TB SmartSweep algorithm will either fill the order immediately, or cancel it if there’s no quantity available at a no-charge exchange. Another routing engine, TB PIP, is designed to seek out and maximize price improvement.

TradingBlock Pro’s order routers now include the fully electronic Miami Options Exchange (MIAX), which launched in December. This new exchange’s technology center is located in Princeton, N.J., but there are training, meeting, and conference facilities in Miami. (I suppose the Princeton Options Exchange doesn’t sound as snappy.) According to TradingBlock executives, not many routing engines take advantage of this new exchange yet. Mark Patel, director of sales for Trading Block Pro, estimates that only 10% of brokers are routing orders there at this time, but he believes its technology and pricing make it a very attractive venue.

TradingBlock Pro also offers a customizable real-time scanner, Edge Finder, to its customers for $199 per month and up, depending on the number of bells and whistles you choose to attach. The new scanner’s filter operates in real-time across a wide variety of fields that include price, exchange, trading volume, open interest, and options greeks. There are over 30 different variables from which to choose, including a proprietary calculation called Edge, which calculates whether a particular contract is trading above or below the bid or offer. According to Patel, Edge tells you whether another trader is willing to give up some price advantage in order to get into or out of a particular position. “This can add up for helping professional traders find opportunities, and act on them,” says Patel.

You can also set up the scanner to find mispriced contracts, which can result in more profitable trades. Though $199 per month sounds pricey, during a demo session Patel was able to point out a roughly $9,000 trade that could generate an additional $4,000 in profits due to mispriced contracts. The scans are for options trading only, which is the core customer base that TradingBlock Pro is pursuing.

The brokerage doesn’t publish a commission schedule, as the rates are negotiated with each trader based on activity. One of the reports available to customers on the site’s statistics page shows how much the exchange fees are costing each month, which can help frequent traders manage their expenses. TradingBlock Pro customers can qualify for portfolio margining as well.

ANOTHER OPTION PLAY. tradeMonster customers with funded accounts can now access a daily Webinar called “Market Action” every day at 12:15 p.m. Central Time. Host David Russell will discuss the day’s winners and losers with Jon and Pete Najarian of optionMonster, plus a variety of regulars and guests. The aim is to give customers actionable ideas for trading stocks and options, with expert commentary and screens produced by tradeMonster’s researchLAB tool.

Customers with funded accounts will be alerted to the start of the daily Webinar after logging in. You can opt out of receiving the Webinar alerts if you so choose.

Published in Barron’s Online, 5/4/2013. 

Posted by twcarey on 05/11 at 11:12 AM
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