High Frequency Trading Demystifying - Eurex Clearing

INSIDEADVANTAGE
INSIDEADVANTAGE FALL 2011
Are you prepAred?
Business Continuity p.3
Demystifying
High
Frequency
Trading
AdvAnCes in risk
mAnAgement At eurex p.5
new Cme group
dAtA Center p.13

FALL 2011
CONTENTS
5 Advances in Risk Management Technology Bring Safer Markets:
Eurex Group’s Risk Controls Make Markets Safer Without Impacting Latency
6 Demystifying High Frequency Trading
By Rishi K Narang, Founding Principal, Telesis Capital
13 CME Group’s Data Center to Launch in 2012
Q&A with CME Group’s Craig Mohan, Managing Director Colocation and Data Services
15 Single Platform for Trading USD and Euro-denominated Short-Term Interest Rates
Euribor Futures Come to CME Group
17 Things You Need to Know About Trading the VIX ®
18 Advantage Futures Seminar Series
Setting Up Your Blackbox Trading System, Options Trading with Scaled Dynamics, Interest Rate Spread Outlook During and
Exiting Ultra Low Rate Regimes
19 Upcoming Events
Advantage Futures Seminar Series Calendar and Client Events
ABOUT ADVANTAGE FUTURES
Advantage Futures ranks as one of the
highest volume clearing firms in the
industry, exceeding 2 billion contracts
processed in the past eight years.
Emphasizing superior technology, responsive
risk management, customizable back
office operations and highly personalized
client services, Advantage Futures
remains the consummate clearing firm
for its diverse and growing client base.
Skilled, dedicated personnel provide
the most comprehensive, technologydriven
clearing and execution services
to enable successful and efficient trading.
Advantage Futures is a full clearing
member of the CME Group (including
CME, CBOT, NYMEX and COMEX),
NYSE Liffe, NYSE Liffe U.S., NYPC,
ICE Clear U.S., ICE Europe, LCH, The
Clearing Corp., Options Clearing Corp.
and CFE, as well as a foreign approved
participant of the Montreal Exchange.
Trading up to Advantage Futures means
quicker connections, superior service
and competitive pricing. At Advantage,
clients focus on trading while their client
representatives make sure that every
other detail is managed to complete
satisfaction.
Advantage Futures continues to demonstrate
record growth with more than
$524 million in client funds on deposit in
April 2011. Dedication to client service
has lead to this success, and Advantage
is confident this ethic will continue to
fuel its growth.
To learn more about Advantage Futures,
please visit our Web site at
www.advantagefutures.com or contact
one of our client representatives at
312.347.4800.

Safety,
efficiency,
diversity.
Just some of the things
we’re bringing to derivatives.
Eurex Group provides more opportunities across
a growing range of products – from pre- to
post-trading, in major markets around the world.
We help create a safer market where risks
are managed more effectively.
And we offer more efficient processes based
on innovative and proven technology.
For over 10 years, we have been successfully
shaping the future of the derivatives industry.
Today, we have a global liquidity pool trading
about 12 million derivatives contracts every
day. And we offer ground-breaking clearing
services through Europe’s leading central counter-
party for securities and derivatives transactions.
Eurex Group includes Eurex Exchange,
the International Securities Exchange (ISE),
European Energy Exchange (EEX), Eurex
Clearing, Eurex Bonds and Eurex Repo.
Eurex Group is part of Deutsche Börse Group.
Find out more at www.eurexgroup.com.

Advances in Risk Management
Technology Bring Safer Markets:
Eurex Group’s Risk Controls Make Markets Safer Without Impacting Latency
Contributed by Eurex Clearing
Advances in risk management technology have made it possible to
better protect investors. With new safeguards in place, markets are
freed up to perform their main functions of providing price discovery
and transparency.
The major reason behind the push towards greater risk management
functionality was the 2008 financial crisis. As a direct result, the financial
industry as a whole has become cognizant of the need for system-
integrated risk tools to prevent catastrophic scenarios like runaway
algorithms as well as more mundane trade entry errors. In just one
example of the industry’s push for better risk controls, the FIA’s Market
Access Working Group voiced its recommendations for managing the
risks associated with direct access trading 1 .
The goal of the Market Access Working Group was to establish best
practices for the exchanges, as well as other market participants. Best
practices include:
• Preventing the worst case scenario
• Balancing safety and performance
• Knowing how to use the tools available
• Continuing to learn about/deploy next generation tools
• Promote industry debate on risk management
Including the Working Group, most market participants agree that the
responsibility for risk management is shared among all market participants,
whether it is a trading entity, software vendor, clearing house
or an exchange. And for this reason, risk management tools are being
developed and deployed by a number of parties. Determining how to
pick and choose tools that provide control but do not overburden participants
is another challenge as new technologies are continuously
being introduced.
At Eurex Group, our goal is to provide a menu of easy to use, yet powerful
risk management tools that our members can use as part of their
overall risk management strategies. We have built our offering of risk
tools to not only meet, but exceed the industry’s recommendations.
It’s not only low-latency sensitive customers that are concerned that
added risk control will impact profitability. Many users worry that
system-integrated pre-trade risk controls will have a negative impact
on system performance. At Eurex, we share these concerns. For this
reason, we designed a series of pre-trade risk controls at exchange
and clearing house level that have no latency impact.
Our philosophy is to provide users with built-in technology that they
can use to set risk limits that make sense given their individual overall
market exposure.
1 The recommendations can be viewed at: http://www.futuresindustry.org/
downloads/Market_Access-6.pdf.
Our risk management suite includes a variety of tools:
Eurex Risk Tools:
• Eurex Execution Risk Tools
• Fat finger/quantity per order limits
• Positive permissioning
• Intraday limits/Advanced Risk Protection
• Cancel on Disconnect
• Kill button
• Stop button
• Order detail
• Price banding controls
• Market maker protection tools
• Post Trade Risk Checks
• Multiple forms of drop copy
• Co-location Access
• Conformance/certification testing
Proprietary traders can utilize our tools to ensure that they have
responsible limits set to protect themselves. Depending on a particular
trader’s risk profile, limits can be set anywhere from very restrictive to
catastrophic insurance. Eurex works closely with risk managers at our
member firms to ensure that these tools are available to be sensibly
implemented for individual traders.
Moreover, with the wide variety of risk controls that we provide, firms
and/or traders can even implement multi-level risk control by utilizing
our newest offering, the Advanced Risk Protection service.
This service allows clearing members to define up to three individual
risk limits for themselves and their associated trading members, but
trading firms can also set the limits for themselves. The limits are
evaluated against corresponding real-time risk figures calculated by
Eurex Clearing.
To reflect their specific risk management approaches, the feature
permits users to set limits based on exposure, profit & loss, cash and
overall risk profile. What’s more, the service lets users select what
actions they would like to implement when risk limits are breached.
We designed the risk feature to function in three steps: Level one
informs users of a potential problem, level two can be configured to
slow down order entries and in line with our stop button level three
triggers a full stop of a firm’s trading activities until its clearing firm
reactivates it.
The flexibility offered by the Advanced Risk Protection functionality
makes it suitable for all types of trading organizations.
To learn more about Eurex Group risk management tools please visit http://www.eurexclearing.com/services/risk_control_en.html.
For further questions please contact Laurent Partouche at T+ 312 544-1065 or Laurent.Partouche@eurexclearing.com.
INSIDEADVANTAGE FALL 2011 5