Transaction Level Analysis (TLA) - The Blog

IMHO, this story is mostly noise.  Sergey Aleynikov took some source code home from the office one day ...and got caught.

Sergey should get a fair trial and if convicted, do very hard time as stealing Intellectual Property is abhorrent and repugnant, but his crime is not that of being a global criminal mastermind, it is of being a schmuck and a common thief.

Here's the deal...the source code in question, is in all likelihood, useless.

Here's why:

Goldman Sachs can be thought of as one big global grid of computers.

This massive grid of computers is run on a Category 5 Hurricane of software that takes an army of engineers, traders, quants, statisticians and the like build and maintain...It is one of the world's largest ongoing engineering efforts.

Goldman, in its unique market position, has lots of proprietary information flowing about that they analyze in real-time to make trading decisions which make them a lot of money.

Here's the catch...Sergey only has some of the source code that once compiled runs the Goldman Sachs grid....and you need most, if not all of it, to make real-time decisions.

I am not privy to the details of what is in the source code that Sergey stole, but even if it is Goldman's 'Crown Jewels' it won't work very well, and likely not at all, without all of the myriad of proprietary data feeds that Goldman is updating with almost every clock cycle on almost every processor in their grid.

Did Sergey steal all of this too?  Can the code that he stole be installed and run in real-time?  To do this, he would have to hack into every nook and cranny of the Goldman Grid to replicate this torrent of information that feeds the algorithmic decision making engine that only Goldman has access to.

Furthermore, if Sergey could replicate the entire Goldman Grid, does he have the capital needed to fire off these programs?  Never mind all of the direct connections needed to all of the exchanges.

Lemme know if I am off base here.

The Good News

Today you can readily port your current quantitative, algorithmic and automated trade platforms over to The Cloud.

The Bad News

Your trading platform's current architecture will not automatically allow you to take advantage of the massive processing power that The Cloud avails of itself.

The biggest challenge is that proprietary strategies or algorithms will require an additional translation to be executed so that your algorithmic instructions can be parsed out to multiple processors simultaneously.

Your current platform does not have this instruction set embedded in it....Bummer.

We will be publishing a post shortly on this and will give you an overview of two different approaches to solving this problem either via an ad hoc overlay of parsing services or from a code base that was built from the ground up with parallel processing in mind.

More Bad News

Cloud Based Historical Tick Data Stores for back-testing are not yet online.

The first offerings will be offered not by data vendors, or the exchanges, but as a service available only by proprietary Cloud based algo/quant trading platforms - with access to the Historical Tick Data store only by their own platform using their own API.

What's Next?

We are currently speaking with trading software vendors, data vendors and exchanges about their intended Cloud Tick Data Store offerings and will be publishing a post on the state of their upcoming offerings and their pros and cons.

Where's the Sunshine?

Though the infrastructure and the technology to enable The Cloud today is here today the Algo/Quant tool-kits and their supporting services are not yet in place....But the first offerings are entering Beta as we speak.

So now is the time to start rolling up your sleeves, to start figuring out how best to lean into The Cloud to improve your trading organization and have some fun with a new technology.

If you have any facet of a Cloud Trading offering, either in development, beta or production, please feel free to ping us to chat.

carl at algofutures 

Some folks have written me saying that The Cloud does not have application in the Trading Industry because of latency issues.

Some of you may already be familiar with my thoughts on The Latency Hype so I won't delve into them here.

For this blog post, let's put Trade Execution Services within The Cloud aside for the time being and focus solely on the R&D side of your trading business.

The Cloud harmonizes the intrinsic elasticity of the Demand for Processing Cycles with the inelasticity of the Supply of Processing Cycles

One of the great advantages of The Cloud is that you can ramp up processing power without having to provision and/or commit to servers.  Once you are done with your calculations you release your leased processing cycles back into the pool of The Cloud and forget about them.

All of the hardware, software, rack space, electricity, etc. that it took to run your calculations are now offered on a pay-as-you-go model via The Cloud.

Gone are the days of provisioning your data processing resources for your projected peak load.

With The Cloud's real-time scalable pay-as-you-go model you can spin up 1,000 servers and run them for an hour for the same cost as spinning up 1 server and running it for 1,000 hours.

How cool is that?

...and the cycle time is cheap.  Below are cycle costs from Amazon's Web Offering (EC2):

Note - we are Vendor Neutral and are only quoting Amazon's pricing as an example,  not an endorsement.

There are different types of Cloud offerings and depending upon the type of number crunching that you do, or would like to do, and the composure of your current Intellectual Property code base, Amazon may not be the best offering for you.

In our next post about Algo and Quant Trading in The Cloud, Tim Kraska will document a Logical Design for Cloud Services that will enable you to port your current IP to The Cloud.

Every once in a while my spider senses pick up a familiar signal...that is, The Herd is moving in lock-step and picking up speed.

This time around it's about the obsession of shaving latency.

Shaving latency seems to have become the biggest cottage industry in trading.

Every day I get more and more spam about latency....and you know that things are out of hand when the spammers are on to it.

How about this one:

Dear Friend,

I am a Nigerian Prince who has been exiled from my country.  My father has deposited $420,000,000(US) in a trading account in Zurich.

If you give me your latency shaving algos, in return, I will share our increased profits with you 50-50.

Please e-mail your source code, router IPs, passwords, etc to:

honey-I-found-an-answer-to-our-prayers@lagos.net

I agree that speed is important, but is it the whole ball of wax?

Could it be that the latency shaving stuff is just another arms race? 

A contest where no one is the clear winner?

Won't we all continue to have pretty much the same speed as the technology continues to evolve and leak out?

Wouldn't it be better to spend your time working on algos that are just plain smarter at analyzing and digesting all of the true market data that is currently available than simply playing the same old card over and over again of trying to be faster?

I was chatting with developer friend at a prop shop in Chicago and he told me that their in-house programming bench consisted of 6 guys and that each and every one of them was only working on shaving latency.

If a shop's algos can only thrive with that extra n^th of second in their pocket then perhaps it's time to focus a little more of energy developing cleverer setups and entries....Just a thought.

Anyone care to comment?  Am I off base here?

When the S&P 500 e-mini where beginning to get some traction we used to S&P 500 pit Squawk Box all day long.

You wouldn't need to look at the screen all day long...you could go about your work, ours being software, and the Squawk would let you know when to focus on the market.

For me, my ears would pique when the frequency of the barks increased and the action switched from bid to ask, and vice versa.

You could also hear the muscles in the announcer's neck tighten and his pitch rise a bit.

Hearing that audio pattern was what moved my focus from the monitors where I was working on software to monitors that were plotting the e-mini.

Though we have yet to throw audio into the Nano-Trading mix, I am sure that  patterns are in there that can be manifested aurally, and that any trader who had the inclination could keep the market on in the background and within a couple of day's start to hear patterns.

If we do this test here, the first pass will be kept simple, and we will use pleasant sounding tones (I never understood why rings of telephones can't be substantially more pleasant and soothing).

Perhaps, with a filter on lot sizes, each time a market transacts at Bid then Ask then Bid then Ask then Ask a wind chime could play for ½ second and follow with a soft Pop for each consecutive upward Price tick.  

Simultaneously we would plot these movements on a chart and write the data out to a log file.

Within this entire approach there is no mention of a Technical Analysis indicator, such as MACD, or Stochastics.  They do not apply here as these Minor Price Events don't lend themselves to being averaged. 

But they do lend themselves to indicating where Price may be going in the next few milliseconds.

My gut tells me that if someone did this in an iterative fashion for a week or so they would find patterns that they could profit from.

I think that the patterns that will dominate and offer the most lucrative rewards will be when a series of Program Trades start to fire and chew up the available inventory in the book.

From our experience, Program Trades tend to fire off simultaneously.  Traders still herd, though today, most of it is done programmatically.

This is one of the benefits of focusing on Transaction Level Analysis as opposed to Technical Analysis.  It may take a little more programming work and fast infrastructure the payoff is in this information.

Currently, we do most of this pattern recognition discovery work programmatically, but I miss listening to 'my buddy' from the pit on the Squawk so maybe this little project will be ratcheted up the priority list.

Hope this helps.

May be we can explain what Nano-Trading is by explaining what it is not.

What Nano-Trading is Not:

·         Nano-Trading does not use Technical Analysis indicators (MACD, RSI, Stochastics, etc).

·         Nano-Trading is not about 'fast' or 'high frequency' trading yet it still needs a massive amount of processing power, custom software and low latency to succeed.

A little more on what Nano-Trading is:

·         Nano-Trading is more like Morse Code....Dot, Dot, Dash, Dash, Dot, Dash, Dash

o   Where the Dot's and the Dash's are discrete Price movements....kinda like:

§  Price Up, Price Up, Price Down, Price Down, Price Down, Price Up

·         Feel free to make up your own 'Morse Code' algos.

·         Nano-Trading offers setups that are consistent for a particular market across all market environments.

·         Increased volatility does not alter a Nano-Trading system, it only provides more setups.

Hope this helps clarify some things and sets you pondering the possibilities.