Professional Documents
Culture Documents
Understanding Systematic Trading
Understanding Systematic Trading
Understanding Systematic Trading
By:
Manish Jalan
Director, Samssara Capital Technologies LLP (www.samssara.com)
Slide - 1
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Overview of the program
Slide - 2
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
The size of systematic trading strategies
Slide - 3
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
The changes in trading techniques in Indian market
Present Future
Multi-Exchange / Multi Asset
Cash to Cash Arbitrage / Badla
Co-located Arb
Slide - 4
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
The building blocks
Slide - 5
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Defining the end goal
• Proprietary Trading
• Agency Trading
Nature • Clients Trading (Wealth Management)
• Low
• Medium
Frequency • High
Slide - 6
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Defining the set of rules
Experience
Simple
Simple
observations in
technical rules
market
Slide - 7
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
The spread strategies
Now most of the spread strategy game has shifted to NSE co-locations as the
spreads needs to be hit fast
Hence, in the process – risk based arbitrage strategies are gaining much needed
ground
Slide - 8
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
The spread / badla
( BestAsk BestBid )
Spread ( BP) 10000
( BestAsk BestBid )
2
Slide - 9
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Type of spread strategies
Cash-Future Arbitrage
• Prevalent with houses having large funds
• Cash-Future Arbitrage (Long Cash / Short Futures) – As they converge on day of expiry
• Rollover of the futures – to continuously benefit from premiums / discount (~ 1% monthly)
• Risk free trade
• Most frequently in stocks which has higher volatility in futures
Calendar Spreads
• Only span margin required with doing calendar spreads in futures in NSE
• Stocks in Premium – when they goto extra premium – you short far month and buy near month
• Stocks in Premium – when they trade at par – you buy far months and short near month
• FII’s willing to automatically trade even at 0.5% monthly
• Most prevalent from middle of month – when liquidity in next month starts in stocks
• Nifty – always liquidity available
Dividend Arbitrage
• Stocks trading at premium goes to discount in futures
• Underlying cash delivery is bought by many because of the dividend benefits
• You get tax free dividend – on the delivery stocks and hence the discount Eg: SBIN
Slide - 10
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
ETF / Other instruments
Currency
• Calendar spreads, Dollar arbitrage
Slide - 11
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Trading Calendar Spreads in Tata Motors
2.5
1.5
0.5
HDFC ICICI
150
140
130
120
110
100
90
01-06-2010 01-07-2010 01-08-2010 01-09-2010 01-10-2010
0.90
0.85
0.80
0.75
0.70
0.65
01-06-2010 01-07-2010 01-08-2010 01-09-2010 01-10-2010
Slide - 13
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Why Mathematics & Statistics?
Moderate ROI when model is working Superior ROI when model is working
Large draw-downs when model stops Flattish ROI when model stops
Slide - 14
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Mean and Variance
Slide - 15
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Designing profitable trend following system
6000
5000
4000
3000
2000
1000
0
Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10
Slide - 16
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Profiting from Bid/Ask and Order books in Currencies – USDINR
VAeq 55.5725 2
f ( Bid , Ask )
VBeq 55.5700 7
VBeq B0 ( B1 )1 2 ( B2 )1 3 ( B3 )1 4 ( B5 )1 5 55.5675 15
55.5650 25
12 13 14 15
VAeq A0 ( A1 ) ( A2 ) ( A3 ) ( A5 )
55.5625 31
55.5600
Use the order book to identify whether bids are heavy or offers are 42 55.5975
heavy 20 55.5950
Analyze trades done on bid/offer to identify short term directional
movement 15 55.5925
Give higher preference to best bid / ask and decay the significance 11 55.5900
down the order book
6 55.5875
Identify short term directional movement – to benefit from short
term movements in the USDINR currency market
Slide - 17
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
High frequency example
Slide - 18
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
What is Risk?
0.6
0.5
0.4
0.3
0.2
0.1
0
-3 -2 -1 0 1 2 3
-0.1
Slide - 19
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Systematic Risks
Systematic Risks
We can foresee and prepare for these risks
Market direction risk, net rupee exposure
Sector risk
Single stock risk (E.g.: Satyam)
Slippage risk
Execution risk (software crash, power failure etc.)
Slide - 20
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Systematic risk mitigation
In design
• Portfolio hedging and dynamic hedging
• Market direction, net rupee risks / Market direction neutral
• Single sector exposure risks (< y% of the portfolio)
• Single stock exposure (< x% of the portfolio)
During execution
• Design to take order book (bid and ask) into account
• Caps on daily turnover in the system
• Caps on single trade max rupee value to be executed
• Caps on number of trades in a day
• System should handle power failure and software crash
Slide - 21
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
The Delta Hedging – Evolution
Mindset in Past: Easy money / No Risk Mindset Today: Taking risks and managing
Returns in delta hedging strategies risks to yield consistent returns
Delta hedging in Gold ETF / Nifty ETF Opportunity in Pure ETF arbitrage still exists
Slide - 22
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Delta hedging in Bank Nifty Options
Slide - 23
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Delta Hedging in Nifty Portfolios
6000
5000
NIFTY Prices
4000
3000
2000
1000
0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Delta - Net rupee exposure in the market – subjected to market direction risk
Delta hedging is the most popular technique to protect wealth and manage risk
Identify cycles in the market using trend momentum strategies
Time period to be decided based on trading position: daily, weekly, monthly etc.
Using of Nifty futures and options to hedge delta
Hedging can be all 100% or partial: 50%, 25% etc.
Slide - 24
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Recommended referrals
Slide - 25
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
About Samssara Capital Technologies LLP
COMPANY BACKGROUND PRODUCTS OFFERED
Samssara Capital Technologies LLP (“Samssara”) is an Samssara’s products vary from pair trading (statistical
investment solutions firm focused solely on developing arbitrage), factor models, Nifty Index beating products to very
automated algorithmic and quantitative trading and investment high frequency trading strategies
strategies samCAP, a key product offered by Samssara, is a factor
It was launched in 2010 by a team of IIM Ahmedabad and IIT model, where the model identifies a basket of stocks in Nifty
Bombay graduates - Rajesh Baheti, Manish Jalan and that tend to outperform the index and takes a long position in
Kashyap Bhargava these stocks. Alongside, the product also hedges the
Samssara caters to its clients' needs of providing an investor’s portfolio using Nifty futures – whenever the market
alternative asset management vehicle, with the focus on 100% turns bearish
automated and quantitative trading strategies Other products offered include samTREND - a trend following
The team at Samssara works on mathematical models and strategy in equities, commodities & currencies and samWILLS
statistics that identify repetitive patterns in equity, commodity – a long-short strategy based on statistical arbitrage
and currency markets Samssara also develops in-house products which are used by
The addressable market for Samssara is global - as the firm investors like HNI’s, corporate treasuries, Prop houses of
can develop and build models which can function in both brokers and investors who wants an alternative vehicle for
developing markets with limited competition and developed investment apart from equities and fixed income.
markets with strong competition The products are designed to generate consistent returns and
Samssara’s client base includes the leading international and ride the volatility of the markets with systematic approach
domestic banks, international and domestic stock brokers, Additionally, Samssara works on providing high end services
family offices, corporate treasuries and HNIs and strategy development consultancy to hedge funds and
International Banks globally
Slide - 26
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise
Contact us
Slide - 27
This presentation is intended solely for the recipient and should not be replicated in any form or manner electronic or otherwise