Quantitative Brokers applied their expertise in agency, algorithmic technology to the fixed income market, helping clients minimize implementation shortfall and optimize execution.
QB's research focuses on forecasting volume, volatility, and liquidity dynamics to enhance algorithmic execution and adaptability to different market situations.
Deep dives
Kristin Hoff and the Formation of Quantitative Brokers
Kristin Hoff, co-founder of Quantitative Brokers (QB), discusses the formation of the company in the aftermath of the financial crisis. He explains how QB applied their expertise in agency, algorithmic technology used in equities and equity options to the fixed income market, which lacked such solutions at the time. Hoff highlights the 'trader's dilemma,' which involves executing a trade quickly with minimal market impact. QB's goal was to help clients minimize implementation shortfall and optimize execution. The early days of QB involved extensive research and understanding of microstructure mechanics in futures derivatives, particularly in interest rate complexes. QB's research focuses on forecasting volume, volatility, and liquidity dynamics to enhance algorithmic execution.
The Evolution of Algorithmic Execution
Hoff discusses the evolution of algorithmic execution and the increasing emphasis on electronic trading. He predicts that electronic trading will continue to grow and provide more transparency and analytics for clients, helping them understand the quality of their execution and quantify implicit costs. QB expects market participants and major exchanges like CME to explore alternative asset classes and expand access. While electronic trading expands, Hoff emphasizes the importance of maintaining a harmonious combination of human and computer interaction to enhance productivity and efficiency. Trust-building and relationships remain crucial in an industry where QB acts as a consultant and an outsourced quant execution team for end users, focusing on best execution while navigating their workflows.
The Impact of Flash Rally in Bond Markets
QB conducted research into the flash rally that occurred in the bond market in October 2014. Hoff explains that the flash rally was a rare and significant event, and QB wanted to understand its influences due to their involvement in interest rate markets. They found that market sensitivity and the hedging behavior of risk officers played a role in the rally. The evolution of liquidity providers, with non-bank names dominating the electronic clubs for treasuries, also influenced market dynamics. Despite the extreme move, liquidity remained available, and no major disruptions occurred. The flash rally served as a learning experience for QB and reinforced the importance of their algorithmic tools' adaptability to different market situations.
The Future of Electronic Trading
Hoff shares QB's perspective on the future of electronic trading. He believes that electronic trading is here to stay and will continue to offer more transparency and analytics for clients. QB aims to be a market leader in optimal execution across fixed income, currencies, and commodities. Hoff predicts further expansion into different asset classes and increased access to marketplaces. QB emphasizes the preservation of relationships and the combination of human and computer interaction. They aim to make people more productive, efficient, and able to focus on evolving industry and business goals. They also emphasize the importance of trust-building and consulting with clients to solve execution puzzles and enhance workflows.
A native Australian, Christian Hauff capitalized on the financial crisis to co-found Quantitative Brokers with Robert Almgren in 2009. After working together on the development of agency algorithmic technology in equities and equity options, Christian and Rob saw an opportunity to apply some of that IP to the world of fixed income, where no such solutions existed at the time. Christian describes the “trader’s dilemma”, a challenge that every investor faces in whether to execute a desired trade instantaneously or to work this order over a period of time. He explains how his firm’s algorithms help its clients optimize this trade-off to minimize slippage and reduce their implementation short-fall. Our conversation provides insights on the early days of QB, where countless hours were spent in the lab studying the “rule book” of Eurodollar futures to better understand micro-structure mechanics that underpin Algo execution strategies. We also talk about research at QB, including its deep-dive into the Treasury Flash Rally of October 2014 and the VIX spike in February 2018. Lastly, Christian shares his views on the future of agency electronic execution including the trend toward more robust transaction cost analysis, improved access to more markets such as FX and centralized clearing. I hope you enjoy this episode of the Alpha Exchange, my wide-ranging conversation with Christian Hauff.
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