trading
Into the Cloud, to Power Trading
By Shane Kite

The conventional wis- dom has been that only back-office and admin- istrative systems could be put into the “cloud” of computing, where capacity on networks and servers are shared—and your proprietary code is out of your hands.

Putting trading code in the cloud also is supposed to mean delay— which, if your strategies rely on speed, means you risk losing your edge.

proved and successful, right here in my own room and make money doing it now?

That, Chan said, represented his
motivation: “I wanted to be my own
boss.”
Increasingly affordable and easy
access to powerful resources like
the EC2 cloud and electronic direct
market execution services like that
of Interactive Brokers have in effect
spawned a second-generation “day
trader.” Essentially: the day trading
quant.

PROFILE IN PROGRAMMING

But some smaller hedge funds and proprietary traders are using Amazon EC2’s compute cloud to specifically power their trading algorithms, execute their automated strategies and store the results.

Ernie Chan, a quantitative trader, consultant and co-founder of EXP Capital Management in Chicago, wrote a book on the business (“ Quantitative Trading: How to Build Your Own Algorithmic Trading Business,” John Wiley & Sons, 2008). Now he’s using EC2 for his own trading.

“I use EC2 because it’s extremely affordable,” Chan said. “And it’s much more stable than running everything on your own desktop, which I did for a couple of years. Co-locating your own servers at a broker can be quite costly—a few thousand dollars a month, which can be too much for a startup hedge fund.” EXP pays about $100 per month to EC2 to power its trading.

Photos: Brandon Barré

Whiz kid Max Dama, a third-year student at the University of California at Berkeley who teaches an experimental class on quantitative trading, is known for applying artificial intelligence to finance at Berkeley’s Center for Innovative Financial Technology. Dama’s doing pairs trading using EC2 from his dorm: Algorithms place bets on the spread between two simi-

Ernie Chan of EXP Capital Management: The cloud is “extremely affordable.”

lar, typically correlated stocks, as one drops or rises against the other.

“[EC2] allowed me to self-start,”
Dama said. “If I were to attempt to
support this on my own, I would have
to hire a whole army of developers
just to manage the servers.”
While large funds and banks have
generally dismissed public clouds as
too insecure to entrust core opera-
tions such as trading, a new genera-
tion of technology savvy “quants”—
those highly educated folks taken to
applying mathematical and scientific
methods to trading securities—are
using public clouds such as EC2 to
break out on their own.
At the very least, according to
those doing it, public clouds represent
an accessible and very cheap source to
begin trading. For instance, it costs
68 cents per hour to run an extra-
large, on-demand, compute-intensive
processing program on EC2’s cloud
located in Northern Virginia, accord-
ing to Amazon’s EC2 website. That
rate grants a user roughly 16 central
processors (via 8 “virtual” dual cores),
7 gigabytes of working memory and
1,690 gigabytes of storage.

LONE WOLF, IN THE CLOUD

Amazon began to rent unallocated capacity suitable for high-performance, compute-intensive applications in the giant data centers it had originally set up to fill online book, music and merchandise orders on Oct. 16, 2007. This enabled quants who wanted to trade for themselves, like Chan, to get in the game.

They got cheap processing power and storage. They could bet on their best algorithms, make money and take home all the returns (at least until they added investors). Call it a lone-wolf hunt for alpha. Or, high-speed hedge fund formation, part two.

“We use Amazon EC2 for some of our trading engines in our fund,” said Chan, who began trading on EC2 in March 2009. EXP has $10 million under management.

“These programs are connected to
market data feeds and will automati-
cally submit orders to our brokerage
account when appropriate,” Chan
said. “So far, we have not used EC2 for
back-testing or research.”
The latter two—testing trad-
ing strategies on historical data, or
doing analyses, which don’t involve
immediate or near-term trading—are
more typical of how public comput-
ing clouds are used in capital markets.
But EXP actually places orders in
the cloud. EXP’s order management
system sits on EC2.
“We use EC2 for actual order
; SecuritieS induStry newS | June 7, 2010