From successful retail to... less retail

Quote from garachen:

and with some effort Bovespa (Brasil)
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Curious to hear how this works out if you pursue it. IB has been dragging their feet on this for years. Huge window of opportunity they're blowing IMO...
 
Many thanks for your post. it is really helpful.

when you say trading shanghai under institutional account, what instruments do you mean? shanghai equity index? is that available from IB or other brokers?

besides, I have no idea what you mean when you say institutional trader has access to liquidity provider that retail trader does not have. can you give an example that a liquidity source is only open to institutional trader?

many thanks. this is a great post. please share more information.

Quote from garachen:

Main benefit is lower fees. Manifest in many ways. Commission is only part of it. There are a lot of daytrade and liquidity provider programs that are available that people on a retail platform cannot use which can reduce exchange fees significantly.

Second is connectivity. I can easily trade LME and TOCOM and with some effort Bovespa (Brasil) and Shanghai. Unlike the easily accessible US markets, these foreign markets have much less automation so it pays to get in early. By the time a retail broker offers a foreign market a lot of the easy money has disappeared.
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Hi, one more question:

in the post, you talked a lot about connection to the clearing firms, and the comparison of different clearing firms.

Does that mean when you moves to institutional account, you become your own broker? Since IB offer institutional account, why not use IB instead? when you use institutional account with IB, you would still have these hassles?


Quote from garachen:

I wish that years ago when I was making this transition that somebody would have laid out all the necessary steps and potential roadblocks for beforehand.

Suppose you are a reasonably profitable single trader. You are on Interactive Brokers and do 400-600 contracts a day making 100-200K/year. You think about hiring other traders but you fear being able to retain them after training and you're not sure you really want to complicate your life.

I'm save how to handle hiring people for another time.

What I want to focus on is that transition from a retail platform like IB or other Broker to an Institutional Platform. How to know when you are ready and the potential pitfalls.

There are 2 reasons to make the move. Speed and fees. If you need access to fast spreaders then speed is super important. If fees are important to you make sure you would be saving at least $10,000 a year by making the move else the headache is probably not worth it.


A retail platform bundles services. They clear your trades as well as provide software for execution and probably charting. They also track your position intraday. This is all usually bundled into a single fee that probably averages to around 50-60c for doing 500ish contracts a day. That's about $250-$300 fees per day (not counting exchange fees).

When you move off the retail platform every becomes unbundled and you start to have more fixed costs. Clearing fees go down to average around 25c (much less when you start doing high volume) but you usually have to pay $500-$1500/month for an execution platform which might or might not track your intraday position. Next you might want to rent or buy a seat on the exchange for the products you trade the most - your clearing company should help with that - and you might want to look into co-locating a server in one of the Chicago buildings ($1000-$7000/month).

Risk starts to take on a different definition. Retail platforms will typically let you buy if you have enough margin and they might give you special margin rates on certain products. Trading new products is pretty straightforward. If you have enough margin the order will go through.

Institutional is typically very different. Risk is defined as how many of a specific contract are you allowed to get into each day. So you tell the risk department you want to be able to buy 10 CL contracts. You have $300K on deposit. No problem. Then you try to by 1 ES. Can't do it. Need to request risk for every product you want to trade before trading it. So, Monday you buy 8 CL, Tuesday you add 8 CL, Wednesday 10 more. Now you have 26. Now you want to sell all 26 to get flat. Can't do it! You need to call the risk department and get them to bump your risk up first.

Most clearing companies care about overnight margin and care very little or do not even track intraday margin. And the systems that monitor your intraday positions are totally separate from the systems that monitor your risk. So, suspend rationality at the door - don't argue that nothing makes sense and move on.

Position tracking:

It is YOUR responsibility to track your position. If network connections go down and you fill without getting notified or the exchange starts breaking your trades it is not the clearing company's problem. It is your problem and you need to call the exchange and reconcile your position with them then let your clearing company know. If your clearing company accidentally puts someone else's trades in your account it is YOUR problem. You have to have some way to look at your overnight statement and be able to prove that you did not make those trades. If you are trading many thousand contracts a day this becomes kind of a pain. I've seen several people blow up this way - exiting a position that they never owned in the first place. So when the 'entry' was removed weeks later their account went to $0.


Most clearing companies offer many ways to execute trades: Pats, TT, Orc, RTS to name a few. What exchanges you can access is the combination of what the software supports and what exchange gateways are offered by your host.

Pats: never used them - seem to be getting phased out some places

TT: use them a lot. Fairly good exchange connectivity. Tech support is very spotty. Some things they care a lot about fixing and some they don't care at all ever. ONLY FOR FUTURES AND FUTURES OPTIONS

Orc: thought about using them. Their software model seems like the most elegant but they aren't very standard

RTS: connects to almost anything. Lots of option trading. Futures are generally good but if you run into a bug it can be a problem. On a product I used to trade I submitted more than 10,000 orders when they ran out of order numbers (for that product) and their solution was to tell me I can trade it the next day. This was 2008 when the world was going crazy. Seemed like a bad solution.


Direct: If you are a pretty good programmer certifying your own direct connection to an exchange isn't really that bad. Best to buy a good fix engine. You will have to provide a risk module for your clearing company. Major advantage is speed. With a direct connection you will beat anyone who is not direct (if you don't make any dumb mistakes).



CLEARING COMPANIES
I should have put this first. There are many clearing companies to choose from: NewEdge, Advantage, RCG, Fortis, MFGlobal (uh, maybe not!). They all cater to different traders and your success will be highly dependent on which one you chose.

I have not used them but RCG is probably the easiest for those making the transition from a retail platform as they provide and support their own execution software (ONYX).

Advantage is great for keeping costs low. You can rent space in their offices in Chicago for a very reasonable price and amazing speed - even just using TT. And they do all their own TT infrastructure and direct exchange access server hosting. Used them.

Fortis seemed like kind of a confusing place to me as nobody ever seemed to know who I was when I would call with a problem. Not sure what was going on there.

NewEdge is very large and mostly caters to very large funds. They have a Professional Trader Group for smaller accounts <5-10M which is pretty good. A good place to end up but it would be really intimidating to start there.
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Quote from garachen:

What killed me was paying IB $400K in commission...
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Apologies if this is inappropriate (and if so, just ignore), but did they do anything to try and keep you?
 
Quote from trend2009:

Many thanks for your post. it is really helpful.

when you say trading shanghai under institutional account, what instruments do you mean? shanghai equity index? is that available from IB or other brokers?

besides, I have no idea what you mean when you say institutional trader has access to liquidity provider that retail trader does not have. can you give an example that a liquidity source is only open to institutional trader?

many thanks. this is a great post. please share more information.
More...

If you have an institutional relationship you can set up a Chinese joint venture to access Chinese futures markets. It costs $$$ but your clearing company will show you how. US individuals cannot trade Chinese markets.

I didn't say liquidity source. You can enroll in programs that will give YOU a rebate as a liquidity provider. ICE has many programs like this. Russell futures is one of them. They are all over the place. Basically you sign some papers and your exchange fees get cut in half.
 
Quote from bs2167:

Apologies if this is inappropriate (and if so, just ignore), but did they do anything to try and keep you?
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Kind of - in a way.

We discussed letting me direct connect to the exchange or use some other execution provider and do give up clearing to IB. They had never really sponsored someone like that before so there were a lot of questions they couldn't answer. But they were looking for a client (like me) to experiment on at the time. Maybe more commonplace now?
 
Quote from trend2009:

Hi, one more question:

in the post, you talked a lot about connection to the clearing firms, and the comparison of different clearing firms.

Does that mean when you moves to institutional account, you become your own broker? Since IB offer institutional account, why not use IB instead? when you use institutional account with IB, you would still have these hassles?
More...

Very good question. To trade futures you do not need a broker. The minimum you need is a clearing company and a way to execute. Stocks are another story.

IB institutional accounts:
These are meant for small funds and lowish frequency prop trading groups. There is no straightforward way to unbundle IB execution and IB clearing. So, their institutional accounts are really still meant for retail customers. I had (still have) one.

IB's data latency is 300+ms
TT's at Advantage futures (when TT is working properly) is around 60ms
Direct connection is 3-4ms

(talking Globex here)

So if you are going to do any speed sensitive spreading you can't use IB's tools
 
that is clear. many thanks.

Quote from garachen:

Very good question. To trade futures you do not need a broker. The minimum you need is a clearing company and a way to execute. Stocks are another story.

IB institutional accounts:
These are meant for small funds and lowish frequency prop trading groups. There is no straightforward way to unbundle IB execution and IB clearing. So, their institutional accounts are really still meant for retail customers. I had (still have) one.

IB's data latency is 300+ms
TT's at Advantage futures (when TT is working properly) is around 60ms
Direct connection is 3-4ms

(talking Globex here)

So if you are going to do any speed sensitive spreading you can't use IB's tools
More...
 
Hire me please. I'm dying to get my foot in the door. I have been watching the markets for 2 years now. I have no capital to trade with. I'd be your best employee.
 
garachen,

I am guessing that you want to become more institutional (less retail) for the possibility of a much higher profit, either through a drastic cost reduction or speed enhancement.

With 400K of commissions to IB, what was your average commission per share/contract back then? What is it now? A lot lower?

Is your higher speed helping you to execute more volume? Many percentage more?

Between fees and speed, which item would you say contributes more to your profitability? And, in the end, did your profit increase by a significant factor?

I'm a small retail trader, but always curious about the advantages and the thought process that the bigger players have. Just trying to understand the ecosystem and where I fit in the food chain.

PS: Do you feel like there are already too many people doing what you do?
 
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