How the Right Technology will Simplify Your Life - part 1
: 07 Sep 2016
Operating a CTA is not always the glamorous, flashy career that the uninitiated believe it to be. It involves many tasks that can be tedious and error prone but must be performed flawlessly every day. Add to that, the ever-increasing regulatory burden, and you have something that can wear down the stoutest of traders.
While many, if not all of the tasks related to the operation of a CTA can be made easier and more reliable through the use of technology, there is a big difference between solutions that address procedural issues in a very specific way and ones that are flexible by design and can be configured to accommodate changes as they occur.
In the next two articles, I will discuss the primary problem areas common to every CTA and how they can be addressed in a flexible and reliable manner. In this article, I will look at back office trade issues.
Account Reconciliation
The reconciliation (trades, cash balances, and positions) of a firm’s accounts with its clearing brokers is a daily job that can be one of the most time consuming processes in a CTA’s operation. Yet it doesn’t have to be with the right technology.
The ideal system is able to automatically accept emailed statements (data files or human readable statements) and/or reach out to FTP sites to download them, unzip and/or decrypt them, extract the data while performing translations so the varied statement formats are transformed to the CTA’s standard, and finally, prepare break sheets for trades, balances, positions, and trading commissions. The system should be configurable by the user and be able to accommodate new and changed statement formats without the need for coding changes.
A system with capabilities such as these reduces the time and effort involved with reconciliation to almost none.
End of Day Trade File Production
Any CTA knows that there is no standard format that administrators and broker back offices want for the trade files that must be sent each day. Not only is the layout up for grabs, but the content, symbology and price format can vary as can the transmission method (email, FTP, sFTP …), not to mention file encryption requirements imposed by some (soon to be all) organizations. Manually producing and sending these files is a burden for any but the smallest advisor and developing (and maintaining) software for each new format is not in an advisor’s core competencies.
The best automated system integrate trading and account management as well as incorporating multiple communication modules that allow end-user specification of file layouts per destination, symbology, and price format. It automates the entire trade file production and transfer process and allow those files to automatically be sent without the need for user intervention.
Trade Capture
Trade capture can mean many things. It can mean a direct to the exchange or trading platform FIX connection, it can mean importing trades from a data file, or it can mean the data entry of fills received from a broker via email. In many CTA environments, it is a combination of two or more methods.
It’s important the system used by the CTA is able to capture the trades, convert the symbology and pricing to the CTA’s standards, and process them continuously and reliably, during all trading hours. Equally important is the ability of the system to be configured to adapt to accept additional or changed trade sources with a minimum of time an effort.
A robust and reliable automated trade capture system is the core of an institutional CTA and saves countless hours of effort and minimizes the errors associated with manual or piecemeal approaches.
Trade Allocation
Trade allocation is a term that conjures up one of two meanings: how a number of contracts is to be divided among several accounts when sizing a trade, or, how received quantity/fill price pairs are divided among the accounts that make up a trade. In either case, failure to do it fairly and consistently will land you in a heap of trouble with regulators (and maybe clients).
In the case of sizing trades, the typical method of contracts per million of trading size is pretty straight forward unless accounts within the trade are valued in different currencies, then a currency conversion to the model account currency must occur. For traders that ladder in and out of positions, a useful approach is to base the trade size on a target level of contracts per million after the trade is fully filled. This eliminates the rounding that occurs if each entry is sized in isolation.
For price allocation, many organizations have moved to APS. Unfortunately, not all markets can be APSed and not all clearing brokers APS the same way. Your software should be able to APS the trade in such a way that the approach used by each clearing broker involved in the trade is followed.
Better still, if your trade sizes can support it, use a simulated APS that apportions the actual fill prices in such a way that each account gets a mixed fill that is as close to the trade’s average price as possible.
I have covered the key areas of automation that must exist in the CTA if the firm is to be able to attract funds and maintain a low risk operation. Not only should these areas be automated, but they should be automated in a way that is flexible to ensure the processes can evolve as the needs of the CTA change. In my next article, I will focus on collecting and distributing performance information
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Dana M. Comolli is president of DMAXX (dmaxx.com), a back office software design firm for alternative investment managers. TheBooks software is designed for the trader, and is built to do price, position and order management, reconciliation, trade accounting, performance reporting, risk and data management and act as a gateway to a wide variety of execution platforms. You can reach Dana at: dana@dmaxx.com