How RSJ Securities Trades
A short overview of our activities in the global markets: what is algorithmic trading and market making, how does RSJ Securities activity function and which professions collaborate in order for us to deliver the best possible services to our clients.
RSJ Securities focuses on algorithmic trading, where a part (but by no means all) of the trades are handled by computer programs. Our market strategy lies in what is called market making, which means that we simultaneously offer other market participants the option to both purchase and sell assets with us. This makes exchange trading significantly easier (in professional language we talk about increasing market liquidity).
Sophisticated mathematical models are used in developing the algorithms. Analysts, developers and traders working for RSJ Securities therefore need to have an excellent command of both mathematics and statistics. A wide range of measures are in place in order to prevent damage to the markets and losses in case these programs malfunction (risk management). Modern financial markets are fast and speed is also very important to us, although it is not our most important priority.
Currently, RSJ Securities mainly trades in futures contracts, thanks to which traders can protect themselves from future price fluctuations. We are active in global derivatives exchanges in the USA, Great Britain and Germany.
In algorithmic trading, the actual execution of the trade is handled by a computer (algorithmic execution). Our purpose is to achieve the best possible prices. Computers are better equipped to evaluate market fluctuations and, based on pre-programmed criteria, adjust the course of the sale or purchase. For example, algorithms enable us to distribute our purchase over time are these tools are readily available even to individual investors.
A sub-group of algorithmic trading is algorithmic decision-making. Here, the algorithm, based on predefined one, five, or even a hundred instructions, evaluates the market situation and trades in that market in accordance with a targeted strategy. There are two differences as opposed to the previous scenario: first, the operations within the market are determined by algorithms. Algorithmic execution has a human determining them. Second, it is not possible to foresee the position a trade will have beyond a certain period of time (aside from various limits as to the size of the open position). Under previous circumstances, a human would decide, for example, that they will buy 1,000 shares of Microsoft. The algorithm executes this purchase and, with the exception of an extreme situation (market crash), at the end of the trading day the trader will have the requested shares in their account. In the case of algorithmic decision-making, the final position of the trader is determined by market conditions and the strategy determined within the instructions of the trading program. But even these algorithms can be easily adjusted (as an example, if the S&P 500 index drops by 2% or more, sell shares X and buy gold in the volume of Y).
High-frequency trading (HTF) falls under algorithmic decision-making, while the frequency of instructions sent to the exchange (including their cancellation) is very high. Even in HFT the computers don’t take over all activities of the trader. Planning a strategy (in the case of RSJ Securities market making) and evaluating its effectiveness still remains in the hands of humans, along with constant control, calibration and development of trading programs.
Read a longer text regarding high-frequency algorithmic trading here.
A study on high-frequency algorithmic trading in Czech Vymezení, přínosy a rizika vysokofrekvenčního obchodování
(Definitions, Benefits and Risks of High-Frequency Trading; Jakub Kučera, ACTA OECONOMICA PRAGENSIA 5/2013)
Definition of Algorithmic Trading
Definition of High-Frequency Trading
The trading strategy followed by RSJ Securities in the derivatives markets is called market making. The trader simultaneously offers to both buy and sell the given asset. Market making functions similarly to a regular currency exchange office – whoever want to exchange (buy/sell a financial asset), comes to the exchange office (sends instructions) and does so at the offered rate (exchange price). Their instruction is paired with a corresponding offer from the market maker. Thanks to the activities of market makers, trading is easier, because it’s less difficult to find a seller or a buyer for the given security. Market makers must, at the same time, offer the most attractive possible prices to other market participants, which is in practice reflected in the fact that they trade with very low spreads (differences between purchase and sale prices).
Exchanges welcome the activities of market makers and closely collaborate with them. Market makers essentially ensure that there will always be sufficient liquidity in the market and markets don’t ‘dry up.’
RSJ Securities success is built upon the confluence of three different groups of employees. The results of their collaboration are computer programs that handle certain trading activities on behalf of investors.
Overall market research begins the journey to sophisticated programs. The strategy lies in discovering those markets where RSJ Securities can best apply its know-how. Our traders specifically contribute to this effort by monitoring individual market participants, as well as the patterns according to which they behave as a whole. This knowledge is then passed on to our analysts who formulate trading strategies to systematically achieve profits. These strategies are subsequently transposed into mathematical models and algorithms. Their settings are fine-tuned using historic data.
The specifications of these trading models are then passed on to our developers, who build trading platforms reflecting that information. This is software that enables communication between the trading program and the exchange. This determines the design and installation of hardware that ensures a reliable connection with the exchange. This hardware is located directly in the exchange data centers.
When everything is set up, the computer program is introduced to the exchange. At this point, traders return to the scene, constantly monitoring and evaluating our trades. They simultaneously monitor whether specific market conditions correspond to the expectations upon which those trading models were based. This particularly relates to events when some fundamental information appears in the market (an extreme example would be a terrorist attack) and established patterns of behavior are no longer valid (a panic in the markets, etc.). RSJ Securities traders compile information for developers and analysts, so they can either adjust the settings or improve the program design.
Of course, this description is much simplified. It primarily omits the ongoing communication and collaboration between our individual departments on practically all levels of the process. For example, developers evaluate whether the trading strategy proposed by the traders is achievable from a technical point of view.
Markets change rapidly and omissions or underestimations can cost dearly. Therefore, our trading models are carefully designed and even more thoroughly tested. Subsequently, their activity at the exchange is constantly monitored by our traders. At the same time, all valid parameters are regularly updated in order to correspond to changing market environments.
A deep knowledge of mathematics and statistics is necessary for many reasons, including risk management. For example, models able to surely predict market development are created based on historic data as well as new information, using both basic and very advanced mathematical and statistical processes.
Speed and Technology
If we aim to offer the best possible prices (which we must, otherwise no one would do business with us) and, at the same time protect profits, we must be sufficiently flexible. We achieve this by the ongoing improvement of our algorithms, as well as by using a trading infrastructure that enables us to quickly respond to market fluctuations. Without that, we might easily become the prey of merciless arbitrageurs (speculators) who would quickly discover that our prices fail to correspond with the market conditions and we would begin to lose money.
One technique that decreases response time in the trading models is called co-location. Our servers with trading programs are placed directly within data centers near the actual markets, significantly increasing their response speed to market fluctuations. Our traders remain in control of the situation from Prague because, in this case, a delay due to distance from the exchange is no longer a factor.
Where We Are Active
RSJ Securities is active in the largest worldwide financial centers: London, Chicago and Frankfurt am Main. RSJ Securities trades in futures contracts in all these markets.
London’s derivative exchange ICE Futures Europe (formerly known under the abbreviation LIFFE) is the trading platform where RSJ Securities has been active for the longest time. RSJ Securities executed its first algorithmic trade here in 2002 and became an official market maker for the first time in 2004.
ICE Futures Europe is the second largest derivatives exchange in Europe and, together with the other ICE exchanges, the second largest group in the world (in 2013 this group traded 2.5 billion derivative contracts). In London, RSJ Securities trades Euribor interest-rate futures contracts, Euroswiss and specifically Sterling Futures, as well as British government bond futures.
Chicago is the seat of CME Group, the second largest derivatives exchange group in the world. In 2013, the group traded a total of 2.7 billion tradable contracts. The group is in charge of three large exchanges – CME (Chicago Mercantile Exchange), NYMEX (New York Mercantile Exchange) and CBOT (Chicago Board of Trade) – the oldest exchange of its kind in the world. RSJ Securities is active in all three of them and primarily trades in Eurodollar interest rate futures contracts (the most traded interest-rate derivative worldwide), as well as American government bonds futures, and stock indexes.
Frankfurt am Main
This German financial center hosts the Eurex derivatives exchange, belonging to Deutsche Börse, the largest German stock exchange. RSJ Securities became a member in 2009 as its very first Czech company. Eurex is a clear European number-one in derivatives, with over 1.3 billion contracts traded in 2013 (together with its subsidiary company, ISE, they are number four worldwide). Considering its volume of open positions as of August, 2013, Eurex is actually the largest worldwide derivatives exchange. In Frankfurt am Main, RSJ Securities trades in German government bond futures contracts, Bund, Bobl and Schatz, as well as stock indexes DAX and Euro Stoxx 50. RSJ Securities’s Bronislav Kandrík was elected a Member of the Eurex Exchange Council in 2013.
RSJ Securities specializes in trading futures contracts. These can be simply described as agreements between two parties concerning the purchase/sale of a financial asset or a commodity at a predetermined price as of a given future date. For example, if you know today that you will control a million dollars in three months, but will need it in Euros, you can ensure that exchange rate today – relieving the risk that the rate will change.
Futures contracts are frequently used by banks, insurance companies, service providers, importers and exporters of goods and industrial companies. By use of these contracts, they are able to prevent various risks: changes in exchange rates, risk of changes in interest rates, risk of price changes of shares and/or government bonds, as well as the risk of a change of a commodity price (such as oil or wheat). RSJ Securities focuses on futures contracts for interest rates, government bonds and stock indexes.
We primarily trade in the following futures contracts:
- Interest rate futures contracts: Eurodollar (Chicago), Euribor, Euroswiss and Short Sterling (London)
- Government bond interest rates: Bobl, Schatz, Bund (Frankfurt am Main), US Treasury Bond/Notes (Chicago) and Long Gilt (London)
- Stock index futures contracts: DAX, Euro Stoxx 50 (Frankfurt am Main), E-mini Nasdaq 100/S&P 500 (Chicago) and FTSE 100 (London)
- Commodity futures contracts: crude oil (Chicago), natural gas (Chicago)
- Currency exchange rate futures contracts: EUR/USD, GBO/USD, JPY/USD (Chicago)
More about futures contracts, including examples here.