What can your broker do to create a top notch facility for automated trading execution and WHY you should care?

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By: Matthew Zimberg President, CTA

It does not matter if you are a self-directed trader, use an automated system of your own or other vendors; there is one key factor behind it all:

Methodology + Execution=Results

The purpose of this short description is to discuss trade execution which many investors/traders lack information about. Initially, the entire focus is on the Methodology and obviously the profits and/or losses behind any system depend on its methodology, and its logic in analyzing past behavior over a given time-frame.

However, proper execution of a given methodology can be a factor in contributing to improve or worsen a system’s performance. Many brokers and system developers talk about slippage, but there are many other factors that can drive down the performance of a system.

We, at Optimus feel that if a brokerage firm advertises the use of automated trading systems, they should at the very least meet the following criteria:

Personnel:

Anything that is mechanical, software driven and/or relies on any type of technology will experience down-time.  It’s a question of “when” and not “if”. The personnel has to be knowledgeable and ready to either stop the system, and/or switch to manual execution to offset or trigger any positions.  Familiarity of the staff with the different software and trading programs will allow a fast response time and smooth transition while the automation software is once again functional.

Fast and uninterrupted Internet Connection

When a signal is generated and a trade needs to be executed, communication must be transmitted at lightning speed to the exchange. Since most orders are “At the Market”, it needs to get filled ASAP. The difference between where the system should be executed theoretically and where it is executed in real life is called Slippage. The goal is to minimize slippage.

Back Up Internet Connection

Although a home based internet connection is connected via one line, it should be noted that a business should have a minimum of two connections. In the event that one drops, the other will pick up the connection.  We at Optimus have created a “Bonded T1 Lines” where we have two T1 connections in case one drops the other will pick up. In the event that both drop, Optimus has also a cable line to pick. The connectivity throughout the day will alternate between those services that have the highest speeds.

Electricity Backup

It is advised that every computer will have individual back up battery in the event there is an electricity shortage. This would allow alerting the necessary parties that power needs to be restored. Ideally, there should be an offsite trading facility to transfer the entire operation to while the backup provides this temporary solution.

Signal Generation vs. Order Generation

This is something that traders need to grasp. There are platforms that are being used for order generation, but they don’t actually fire off the trade to the exchange.

Why is this important for you? Because communication, speed and interaction between the two sides may have negative consequences on your trading.  The execution machine and the order generation have to communicate at fast speeds for accurate execution while they are both connected at all times.

Why? Trading systems are being written in code, sometimes the code has to be on one machine while an order execution is attached to it. Let’s use an example.

TradeStation (TS) is a highly recognized platform for traders and systems developers because it allows the use of Easy Language which is a very common programming language for traders. However, TS could be used as a brokerage or you can simply use it as a platform to generate signals. You can hook up your TS to an execution machine of your choice. We for example, use NinjaTrader or TradeMaven, which are the execution side to the exchange. Essentially the two machines are “talking” to each other on the same server, while the execution machine fires off trades to the exchange as the methodology dictates.

Data Feed and the Execution Machine

There has to be a data feed coming from the exchange in live stable and streaming manner.  Whatever instrument you choose to trade it must feed both the signal generation machine and also the execution machine. Some data streaming are better than others. We at Optimus use institutional grade quotes such as CQG and Rithmic.

In Summary

We have tried to provide you with the most basic elements that a broker executing systems trading should have at his disposal. At the end of the day, a brokerage in this field also has to be highly forward looking entity seeking the best solutions for its trading clients.

Please call us at your convenience if you have any questions. 800 771 6748 Open a Futures Account for System Trading Here

Best,

Matthew Zimberg