Launching a High Frequency Trading Firm and Understanding Current Market Trends in FX, Fixed Income and Futures

Infrastructure and Technology Needs

Page 1 of 4

High frequency trading is, at its core, a technical undertaking. Each firm entering this space must confront a series of tough questions about the extent to which technology will shape and define their endeavor. The accuracy of the answers given will profoundly impact overall success. What follows is a high level structure for thinking about the role and requirements for technology within your trading firm. They are meant to help frame the myriad of decisions which must be made in getting started. The first section attempts to establish the drivers which can then be used to answer the questions posed in the second section.

Looking in the mirror

1. Know your strategy / know your market(s) a. What is your profit horizon (price ticks, time)

The size of price movement you hope to capture and the period of time over which you expect to accomplish it are key technology drivers. A strategy which hopes to profit from single tick movements requires far more from its implementation than one which is looking for longer more pronounced movements.

b. Who are you competing against for the trade Who are the primary liquidity providers in your market and what is driving their trading behavior. Who are the other market participants and what drives their actions. Competing in a market dominated by banks and screen traders is much different than competing head-to-head against a market dominated by algos.

c. Where will your losses come from When you do lose, was it the result of bad guess or poor execution. In the case of the latter was it the result of faulty picture of the market or competition for the quote.

2. Know yourself a. What are your key/core competencies Cutting edge technology expertise is difficult to simply bolt on to the side of an existing organization. To compete at the higher end of the technology spectrum IT must be integral at all levels of the organization. b. What is your appetite for IT spend (one-time/on going)

Good tech doesn’t come cheap and in a hyper-competitive environment such as this the shelf life of a solution is measured in months not years.

Launching a High Frequency Trading Firm and Understanding Current Market Trends in FX, Fixed Income and Futures

Infrastructure and Technology Needs

Page 2 of 4

c. How nimble do you need to be

Continued success in this business requires both adaptation and exploration. This can have a profound impact on technology.

i. Does your strategy adaptation have a technology component ii. Will new strategies entail significant IT changes iii. Must you maintain speed parity with your market competition iv. Do you plan on being an early adopter in terms of technology,

geography, market feature, etc.

d. How tightly held is your IP Your intellectual property along with your people, are your most valuable assets. To what extent can this “secret sauce” be separated out from the remainder of the strategy implementation and protected. Compartmentalizing knowledge is a must for all but the smallest shops.

e. Buy versus build preference Off the shelf or bespoke solutions are now available at every level of the high frequency trading solution stack. The extent to which these may be relevant or desirable depends quite heavily upon your answers to the foregoing. Applied correctly outsourcing/purchasing can provide:

i. Cost savings ii. Simplified IT organization iii. Superior technology iv. Speed to market

When applied improperly it can: i. Waste money ii. Compromise valuable IP iii. Stifle strategy innovation iv. Delay rollout

Establishing the requirements

1. Proximity Hosting The question of where to position a strategy can be very complex particularly where multiple markets are involved. The following considerations must be made:

a. Geographic sensitivity Are multiple geographically dispersed markets involved and are they handled by a centrally located strategy engine. If forced to choose a single or primary location, what is the basis for this decision.

b. Proper sizing (expansion / power) Power and its evil twin, cooling capacity, are the single biggest hurdle in determining the size of your buildout. The need for more power and cooling than are normally provided will more often than not force you to purchase more space than you physically require. Similarly, the desire to expand into additional racks without the need to physically move may necessitate initial over purchasing.

Launching a High Frequency Trading Firm and Understanding Current Market Trends in FX, Fixed Income and Futures

Infrastructure and Technology Needs

Page 3 of 4

c. Support services How you architect your infrastructure can have a major impact on the need for a physical presence to perform work at the data center. Most hosting providers offer rudimentary support services. These are useful when a button must be pressed or a cable plugged in. It is important to have a mechanism for dealing with more serious operations. This is particularly important when dealing with overseas installations.

2. Connectivity There are three primary forms of connectivity to be considered; Strategy server to exchange, strategy server to control (office, etc.), and strategy server to strategy server.

a. Creating Proper Specifications This has a number of interrelated dimensions:

i. Time criticality ii. Average and peak bandwidth iii. Latency target iv. Need for future growth

These then drive the: i. Bandwidth ii. Burst-ability iii. Underlying media

b. Managed vs. Old-line Telco vs. Dark fiber

As with all things, there is a serious tradeoff between cost, managerial overhead, and latency.

c. Redundancy Network failures are not uncommon and must be seriously considered. Redundancy as a hedge against such failures can take a number of forms:

i. Vendor diversity ii. Geographic diversity iii. Technology diversity

3. Hardware

a. Networking gear In reducing communications latency it is necessary to look not just at the long-haul circuit, but at the switches and routers to be traversed. The emphasis is both on reducing the number of boxes between here and there as well as the latency they introduce. 10GbE and Infiniband are the new gold standard for intra-datacenter connectivity.

Launching a High Frequency Trading Firm and Understanding Current Market Trends in FX, Fixed Income and Futures

Infrastructure and Technology Needs

Page 4 of 4

b. Servers (how bleeding edge)

Faster is better but there can be significant sacrifices in terms of reliability, support, and cost. Speed also comes at the expense of power and thus may have a significant impact upon your hosting requirements.

c. GPUs and purpose built hardware For certain classes of problems commercially available GPU cards can offer significant performance increases. They work well for large number crunching problems but are ill-suited to more procedural processes. More custom build hardware can circumvent some of these restrictions but require a significant commitment in terms of the expertise required to develop these.

d. Exchange/Network Protocols in Silicon The overhead associated with network and exchange protocols is significant, quite often dwarfing the core of the trading strategy. There are now a number of vendors offering both hardware network protocol implementations as well as fully integrated hardware solutions for exchange specific protocols. While offering significant speed and burst performance improvements they are expensive, require additional development, and may require the use of more exotic real-time operating systems.

4. Front-line trading software

a. Exchange normalization/aggregation b. Strategy engine c. Position and risk management d. Data collection e. Real-time trade reconciliation

5. Post-trade processes

a. Performance reporting b. Risk reporting c. Strategy analysis d. Trade reconciliation

6. Research tools

a. Tick history b. Analytics platform c. Trade event evaluation d. Trade simulation

7. Staffing

a. Access to talent b. Expertise requirements c. Protection of IP d. Group structure (central vs. desk orientation)

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James M. Fischer, Associate, Drinker Biddle & Reath LLPJames M. Fischer is a lawyer in Drinker Biddle & Reath’s Corporate & Securities Practice Group, where he focuses his practice on corporate restructur-ings, mergers and acquisitions/divestitures, entrepreneurial matters, venture capital financings, secured and unsecured financings and general cor-porate matters. Jim advises both individual and institutional clients in a variety of matters relating to investments in, and transactions with, domestic and foreign proprietary and high frequency trading firms and incubators, including in connection with the formation and operation of Trading Cross Connects and its affiliate Bay Head CI US LLC. Jim is a member of the Board of Directors of each of Trading Cross Connects Holdings Limited and Trading Cross Connects US LLC. He received his J.D., magna cum laude, from Seton Hall University School of Law and graduated Phi Beta Kappa and summa cum laude from The Catholic University of America.

Timothy James, Deployment Manager, Aegisoft Timothy James is the professional services manager at Aegisoft LLC, overseeing the team responsible for algorithm development, deployment, product customizations, code optimization, and other consulting needs. He has worked on algorithms and trading systems for many clients from large banks to proprietary trading firms. He also has recently appeared in E-Forex and FX-MM magazines. Timothy has represented Aegisoft and AthenaTrader at several industry conferences and forums, including FIA and FX Week.

Richard Kaltenbach, Senior Counsel, ICAP Richard Kaltenbach is Assistant General Counsel for inter-dealer broker ICAP North America, Inc., where he focuses on employment related matters. Prior to joining ICAP in 2004, he practiced with a New Jersey law firm where he specialized in employment law and commercial litigation. Rich received a JD from the Catholic University of America and a BA in Economics from Cornell University.

Gray Lorig, CIO, Trading Cross Connects Gray Lorig is Chief Information Officer at Trading Cross Connects, an incubator of high frequency algorithmic trading teams. After a career as a scientist in computer graphics and supercomputing, he now applies cutting-edge computational techniques to financial markets. Until recently, Mr. Lorig was the Chief Technologist and Manager of Trading Operations for Fourth Creek Management, LLC and he came to this job from Wellington Management where he had been in charge of fixed income investment technology, overseeing benchmarking and portfolio performance and management systems for $160 billion in as-sets. Gray’s Wall Street career began at EJV, a joint venture of major Wall Street firms that developed fixed income analytics, data and pricing for the capital markets. He was also CTO of Bridge eMarkets, a unit of Bridge Information Systems, which supplied exchange and market data platforms to the majority of Wall Street dealers. Gray graduated with a BE and ME in Computer and Systems Engineering from Rensselaer Polytechnic Institute.

Will Mechem, Managing Director, WJT Global Solutions Will Mechem, Managing Director, Willard John Thomas (WJT Global Solutions) has over twenty years experience delivering financial technology solutions to top tier multi-national clients. Will leverages his experience and vast network of global leaders in finance & technology to execute engagements, provide referrals and broker strategic relationships. Prior to forming WJT in 2008, Will led onshore and offshore teams for investment management and brokerage clients at Alliance Consulting Group and Genesis 10. Will started his career in the late 1980’s with Wang Laboratories and then went on to found Strategis Strategic Information Systems, which he led as CEO for 12 years until the firm was acquired in 2002.

Mitchell Rabinowitz, Partner, Crowell & Moring Mitchell Rabinowitz is a partner with Crowell & Moring, a multi-discipline, international law firm. Mitch has had extensive expertise working with, and has focused primarily on, the financial services industry over his 18 year career. His experience spans a wide range of markets and products, including FX, fixed income and futures, and he has worked closely and repeatedly with Wall Street’s largest banks, leading electronic trading platforms, brokers and proprietary trading shops. Mitch is often involved with many of the most prominent consortium transactions in the industry, as new businesses are conceived and created by leading industry players. At the same time, Mitch works with a variety of start-up financial services companies, assisting clients in working through the many steps in establishing successful businesses. Prior to joining Crowell & Moring in 2005, Mitch was counsel at Cleary Gottlieb Steen & Hamilton LLP, where he practiced for 12 years. Mitch received a JD from Harvard Law School, an MPP from Harvard’s Kennedy School of Government, a BS from The Wharton School and a BA from the University of Pennsylvania.

Dave Reid, Director FX Prime Brokerage, Citi Dave Reid is Global Head of FX Prime Brokerage Sales and has been at Citi since 2006.Prior to that he has held trading, sales, ecommerce and Prime Brokerage roles at AIG, ANZ and Swiss Bank Corporation in Europe, North America and Australia.

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Launching a High Frequency Trading Firm and Understanding Current Market Trends in

FX, Fixed Income and Futures

Henry Lebowitz, Partner, Fried Frank Henry Lebowitz is a member of the corporate department resident in the New York office. He joined the Firm in 2004 as a partner. Mr. Lebowitz concentrates his practice in the field of intellectual property law with a focus on patent law in the electrical and mechanical fields. His practice includes transactional work, litigation and counseling in those areas. Mr. Lebowitz is also a lecturer at Columbia University School of Law, where he co-teaches the advanced patent law seminar. From 1990 to 1992 he served as a patent exam-iner in the United States Patent and Trademark Office.

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David Schulz, Director, FX Products, CME Group David Schulz was appointed Director, FX Products of CME Group in 2007. He is responsible for developing relations with global foreign exchange (FX) market participants to increase global trading of CME FX products.

Schulz joined CME in 2003 and previously served as Associate Director, CME FX Products. Prior to joining the company, he was an independent floor trader in CME FX markets and held FX broker/sales management roles for Merrill Lynch Futures Inc. on the CME trading floor. He also has FX trading experience with Lloyd’s Bank PLC in New York.

Schulz earned his bachelor’s degree in economics from the University of Wisconsin-Madison.

Alan Schwarz, President & COO, Trading Cross Connects

Alan Schwarz is the CEO of Bay Head CI US LLC and President and COO of Trading Cross Connects. Together, Bay Head and TXC incubate high frequency trading firms by providing capital and infrastructure. This is Alan’s third start-up venture, which included BrokerTec Global LLC - the leading electronic fixed income platform formed by Wall Street’s largest banks. Alan was one of the early joiners of BrokerTec where he served as Global General Counsel and a member of its management team. Following ICAP’s acquisition of BrokerTec, Alan became ICAP’s General Counsel for the Americas. While at ICAP Alan was part of the management team that acquired several ICAP key businesses, including EBS and Traiana. Alan graduated with a BA from Rutgers University and a JD from Rutgers Law School, Newark.

Richard Tibbets, CTO, StreamBase Systems, Inc.

As a co-founder and Chief Technology Officer at StreamBase, Richard provides technical leadership for the development team and leads architecture design for StreamBase’s Event Processing Platform. Richard is also responsible for furthering new StreamBase capabilities such as StreamBase’s ‘white-box’ application frameworks, for example, the Smart Order Routing framework.

As CTO, Richard directs the next-generation of the StreamSQL, the event programming language developed by Richard and his team, which applies the benefits of SQL for stored data to real-time transitory data.

Richard is an active blogger and writer (@tibbetts), and frequent publisher and presenter at leading technology events such as SIGMOD, VLDB, and DEBS. Richard is also a founding member of the Complex Event Processing industry group EPTS in addition to working with multiple vendors, including Oracle on CEP standards.

Richard earned both his BS in Computer Science and Engineering, and Masters Degrees at MIT. He completed his graduate research under the direction of Dr. Mike Stonebraker, StreamBase’s

Paul Zubulake, Senior Analyst, AITE Group

Paul Zubulake is a senior analyst at Aite Group, LLC, specializing in financial, energy and commodities futures and options markets. His expertise in-cludes how the application of technology, such as algorithmic trading and FIX protocol, is playing an ever- increasing role in futures and options trad-ing. Mr. Zubulake has been quoted in the press in publications such as Bloomberg, Dow Jones, Reuters, the Chicago Tribune, Crain’s Chicago Business, Futures Magazine and Advanced Trading. He has spoken at industry conferences, including the OTC Derivatives Operations & Processing conference and FTF’s Electronic Trading for Futures & Options conference. Prior to joining Aite Group, Mr. Zubulake was the connectivity manager for the futures department at Citigroup Global Markets. In this capacity, he was responsible for the implementation of various futures electronic trading solutions. He specialized in vendor-based s olutions and DMA trading via FIX protocol. Prior to that, he supervised trading at the Broketec Futures Exchange. Mr. Zubulake has also held trading and institutional sales positions in the futures and options space at REFCO Inc., Cresvale International LLC, and Finacor Vendome Inc. Mr. Zubulake received his B.A. in Economics from the University of Maryland. He holds Series 3, Series 7, and Series 63 licenses.

Tom Scanlan, Senior VP, ICAP’s BrokerTec Tom Scanlan is Senior Vice President of ICAP Electronic Broking (IEB) in the company’s Chicago, Illinois office. ICAP’s global electronic trading business takes place on the award-winning EBS and BrokerTec platforms.

Tom and his Chicago team’s primary focus is selling EBS and BrokerTec products to the Chicago business community, including hedge funds, CTAs, FCMs and proprietary trading firms, among others, who seek access to EBS’ and BrokerTec’s wholesale market liquidity.

Prior to joining BrokerTec in 2001, Tom was a business project leader for the Market Linkage program at the Options Clearing Corporation in Chicago. Tom has also consulted in the international unit of the interdealer broker Prebon Yamane, and in the late 1990s, he headed training for the Chicago Board Brokerage (the first all in one repo, futures and treasuries trading platform). His tenure began in the markets in 1991 as a professional on the floor of the Chicago Board of Trade (CBOT), where he served in various capacities including member/trader, market and product development, and instructor for Electronic Trading.

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