Into the Cloud, to Power Trading
June 7, 2010
The conventional wisdom has been that only back-office and administrative 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.
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. They can also find help with supercomputing power, from academia ("Universities Put 'Blue Gene' Machines in Cloud, to Help Hedge Funds Trade").
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.
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 similar, 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 operations such as trading, a new generation 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, according 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.
Such clouds can be viewed, therefore, as either a quick-launch option for startup funds or prop traders, or a stepping stone on which to perch until one garners enough disposable income to buy more expensive access, like co-locating servers with a broker.
The simple question many of these traders have asked themselves before hanging their own shingle: Why should I go through the rigors of trying to join a large firm and get noticed there when I can apply my ideas and strategies, which I know are proved and successful, right here in my own room and make money doing it now?
