VIII International conference Theory and practice of options trading. Evolution of market making and algorithmic trading

1. VIII International conferenceTheory and practice of options trading.Evolution of market making and algorithmic trading Christopher Lederer MD, Orc Software BV VP Sales Continetal Europe ORC AB 2011-06-04

2. Who am I and why I am here. . . • 1991 – 1998 Studied Medicine at University of Bonn / Germany • 1998 – 2001 RTS Realtime Systems AG Frankfurt (Head of Support and Projects) • 2001 – 2005 RTS Sydney Ltd. Founding Member (Head of IT APAC) • 2005 – 2007 Tick-TS AG (Joint Venture of HSBC and Sino (Brokerage) (Key Accountmanager IT) • 2007 - 2008 ORC Software Frankfurt, Found and establish ORC Office in Amsterdam • 2008 – 2009 MD Orc Software BV • 2009 – now VP Sales Continental Europe © Orc Software AB, All Rights Reserved. Proprietary and Confidential . |

3. Evolution ? Survival of the fittest • 1998 Amsterdam Trading Firm • MM on Eurex (Options) / Xetra (Stock) • 2 Series with 1 Trader and one Assitant (8hours) • ISDN Lines 64kb/s max 128kB for MM • 2004 same Amsterdam Trading Firm • MM on Eurex/Xetra • 15 Stock all Options Series one Trader (12 – 14 hours) • 10Mbit • 2001 – 2005 Market Makers in Sydney • Initial 24 Market Makers registered (2001) • 14 left (IMC, TH and Optiver dominated the landscape after 24 month) © Orc Software AB, All Rights Reserved. Proprietary and Confidential . |

4. Evolution - lead the race? • Latency comes at the price of lower flexibility • Conditions are usualy „same“ for all. • Leading MM companies have a very static approach to markets • Leaving them exposed if conditions change beyond the expectd • Global players educate and train staff themself – very strikt approach towards market conditions caused by that. • If conditions are as expected 10+ years expiriance are executed on a market • MM has suffered under small spreads, low volume and volatility. • Algo traders suffer under high TCO with lower revenues – investments have to be justified. 2008 – 2010 have been hard years • There is thirst for new markets – main European markets are already at a technology level where more is hardly possible.. • Quote „Every millisecond we save we see in revenue increase next day“ • Developer Amsterdam Market Maker 2009 • Quote „We hire Operators not Market Makers“ • MD Market Making Company (globally connected) © Orc Software AB, All Rights Reserved. Proprietary and Confidential . |

5. OFT Technology Vision (basic requirements) • Segment Independence • Allow Independent Segment Development – deploy to new markets • Redundancy Minimization – one does all. • Open Architecture • Ability for segment solutions to only pick the components they need • Ability to only pick the components they want • Ability to build their own market gateways • Ability to customize different components from parameters to plugin-code • Market Maker • Limit Management • Compliance • Consistently Low Latency • Market Access layer can be accessed directly from customers without going through service layer (unless enrich functionality is desired or needed) • Not lowest possible latency whatever the cost © Orc Software AB, All Rights Reserved. Proprietary and Confidential . |

6. Automated trading (MM/ARB/gAlgo) Trader Trader & programmer Algorithmic trading engine Financial markets • Trading ideas are converted to strategies understandable by the computer. LAST POINT FOR EMOTION! • Computer runs millions of calculations per second, reacting to market changes in microseconds, implementing strategies and sending orders to the exchange much, much faster than a human could. • A trader gets a trading idea. © Orc Software AB, All Rights Reserved. Proprietary and Confidential |

7. The Key to Success (Technology) Possibility to rapidly adapt to changing requirements • Technology is key in MM and Algo • Well-defined and well-tested connectivity • New product can be as simple as combining a set of existing building blocks in a new way • Continously strive towards shorter time to market • Remove unnecessary overhead (releasing process time) • Focus on minimal transactions approach • Fire and Forget (Mifid helps in Europe) • Better diagnostics for latency and bottelnecks © Orc Software AB, All Rights Reserved. Proprietary and Confidential . |

8. Competitive challenges (service a market) • Low-latency: Constant push to be faster and process data more quickly • Scalability: Increasing competition within markets requires that underlying technology is highly scalable (handle more exchanges and more instruments simultaneously) to be able to grow business and stay ahead. • Quality/up-time: Continuous push to build solutions that have greater up-time – especially at peak periods like market opening and closing where maximum trading profits are made • Market access – market connections to worldwide exchanges • Global presence – regional knowledge © Orc Software AB, All Rights Reserved. Proprietary and Confidential |

9. Market Making and Volatility Trading High Competitive MM Structured products MM Aggression level Strategic MM Low None Market view Significant © Orc Software AB, All Rights Reserved. Proprietary and Confidential |

10. Market Making and Volatility Trading High Competitive MM Structured products MM Aggression level Volatility trading Volatility arbitrage Strategic MM Low None Market view Significant © Orc Software AB, All Rights Reserved. Proprietary and Confidential |

11. High Frequency Trading success factors Mostly technology some analysis µs Only technology Technology and analysis Some technology mostly analysis Holding period Only analysis Days Complete Automation None © Orc Software AB, All Rights Reserved. Proprietary and Confidential |

12. HFT challenges and opportunities Challenge • Technology demands Opportunities • New liquidity • New instruments types • New regions • New trading strategies Holding period Arbitrage Spread trading Statistical arbitrage Full automation Manual © Orc Software AB, All Rights Reserved. Proprietary and Confidential |

13. Amsterdam HFT firm – 2008 Amsterdam HFT Firm London Stock Exchange Orders Trading desk Amsterdam Orders © Orc Software AB, All Rights Reserved. Proprietary and Confidential |

14. Amsterdam HFT firm – 2010 Amsterdam HFT firm Co-Location site London Stock Exchange Orc Spreader Orders Trading desk Amsterdam Orders TCO +50%, Revenues stay the same – competitive effects that can change landscape of markets – only the one that can invest can survive. 2009 MM Amsterdam reported 90% lees EBITA due to crisis. © Orc Software AB, All Rights Reserved. Proprietary and Confidential |

15. Outlook for Russian • Regulation? • Exchange competition • Technical Infrastructure (TCO) • When do costs block expansion? – Investments are drastic in competitive markets. Return of investments have to materilize quickly before others follow and competitive factors have effects on revenues. • Products –ETF, Strutured Products . . . • Education on Products • Local Economy and Conditions have to there . . . • Russia has show stable grows in all measurable conditions as well as emotional. • Language and cultural differences will adjust within time • Pragmatic and smart approaches can make the difference! • Being smart is not necessarily linked to measuarble parameters and therfore can not be ordered, forced or bought. © Orc Software AB, All Rights Reserved. Proprietary and Confidential . |

16. Q & A Thank You! © Orc Software AB, All Rights Reserved. Proprietary and Confidential . |