TheBooks

Imagine walking up to a trading screen (any broker or vendor’s trading screen), entering a trade and when the trade is filled, having the fills automatically show up in TheBooks. That is what FIX Drop copy in TheBooks provides.

FIX stands for Financial Information eXchange (FIX) Protocol and is a messaging standard developed specifically for the real-time electronic exchange of securities transactions and is supported by most trading partners. TheBooks supports both versions 4.2 or 4.4 of the protocol and several vendor-specific variations of these versions.

Let’s examine one application of this capability and how it can streamline the operation of a CTA or hedge fund with managed accounts:

Background
Our hypothetical advisor has both discretionary and systematic trading components in their programs and have a fund as well as several managed accounts. They execute trades through multiple platforms through multiple brokers and have clearing relationships with three separate firms. They trade most or the major liquid global futures markets as well as some options and equities.

Each trading partner requires trade allocation information to be transmitted to them via an sFTP file transfer in their own specific format as soon as the trade has been filed. Each of the claring firms require an end of day file with trades they should expect from the various executing parties, and several 3rd party administrators as well as investors also require a daily recap of trades done in their accounts either sent via email or sFTP.

System Configuration
The diagram below provides a high-level view of how the advisor is configured to communicate with the firm’s various trading partners:

The FIX interfaces are implemented as point-to-point, always up connections over VPNs. The sFTP and email connections use the internet and are used as needed.

Trading Operations
Discretionary traders trade through multiple platforms such as TT’s X_TRADER and Goldman Sac’s Redi+. System-generated trades are placed into the market through the programming interface of a popular trading platform.

As trading occurs, fills, regardless of source, are automatically routed to TheBooks via the FIX connections. Fills for each ticket are consolidated into trades within TheBooks and are booked to what is known as a holding account.

This is done because as orders are worked, the ticket number for a trade typically changes as the limit is moved. This is a function of the execution platform, but the behavior is pretty standard across platforms. The result is that multiple tickets could really be part of a single trade. By having the trades booked to a holding account, the advisor can select multiple tickets that are to allocated to a block of accounts as a single trade.

For platforms that do not generate new ticket numbers as the trade is worked, TheBooks could be configured to automatically assign the trades to a pre-selected block of accounts.

Post Trade Allocation
After a logical trade has been completed, the trader or back office personnel select the ticket(s) which make up the logical trade and associate them with the group of accounts which are to be allocated to the trade. As an option, the trade can be associated with one or more strategy (or system) to allow tracking of virtual positions and performance by strategy.

Contract quantities are automatically assigned based on the each account’s relative trading size and once saved, quantities and fill prices are allocated to the accounts.

If the advisor wanted to work up trades in advance of execution (using TheBooks ability to combine trades from multiple systems/strategies, for example), the assignment of the ticket to the block of accounts can also be done by simply selecting an existing trade rather than specifying a group of accounts. In that case, the fills from the tickets are “pushed” into the existing trade.

Counter-Party Notification
Once the block order has been allocated, TheBooks automatically sends allocation information to those 3rd parties configured to receive it. In the case of the executing broker, this is typically done immediately. In the case of clearing brokers, administrators, and investors, this data is typically sent at the end of the day.

In all cases, the advisor is able to configure the format of the file, including symbology to be used and the transmission method (email, FTP, sFTP, etc) and whether the information is to be sent at trade completion, at end of day, or both.

Summary
By using TheBooks FIX drop copy interfaces in conjunction with its order management capabilities, this advisor easily implemented a diverse portfolio of trading strategies and execution platforms across multiple managed accounts with a minimum of manual effort.

Any CTA with managed accounts knows that one of the most time-consuming aspects of the job is reconciling your books and records with those of your clearing brokers. This becomes an especially arduous task when you have clearing relationships with multiple brokers. It seems that no two brokers have the same statement format, use the same symbology, or adhere to a consistent price convention.

What makes things even more frustrating is that most of the effort is spent reviewing trades that are correct in order to locate the ones that are wrong.

TheBooks reconciler automates this process and presents you with the trades, positions, and balances that do not agree, eliminating the tedious process of manually locating discrepancies.

Statements, not data files

TheBooks reconciler reads human-readable statements, not data files. This allows you and the software to use the same source when reviewing the information provided by your brokers.

In addition, TheBooks automatically organizes, encrypts, and compresses your statements and saves them within its database providing a single point for backup. It also includes facilities for exporting your statements onto disk in an organized fashion allowing you easily prepare for audits.

A three step approach to data extraction

TheBooks reconciler goes through three phases in preparing the data on a broker’s statement for use in the reconciliation process. These steps are outlined below:

The third step, validation, is what converts the data from the various standards that exist on broker statements into the standard you have defined in TheBooks. This step uses what are known as statement symbols to translate and, if required, re-value symbols and prices and is based on the settings you configure. In this way, TheBooks performs standards-independent data transactions from the broker statements into the format you desire.

Only the issues

When you ask the reconciler to look for differences, it only shows you the trades (or positions, or balances) that are different. You then spend your time resolving the issues; rather than looking for the issues. In addition, TheBooks reconciler maintains a list of open trade breaks and includes them on any break sheet you send to your broker.

As missed or extra trades are corrected on your statements, they are automatically removed from the list of open breaks. Price corrections are also detected and reported.

Summary

TheBooks reconciler’s ability to read the same statements you read, convert the symbology and price conventions to your standard, and to present you with only the issues, makes it an invaluable tool for the CTA with managed accounts.

For more information, see TheBooks Reconciliation at www.dmaxx.com

DMAXX is a major sponsor of the Northwestern University Solar Car team. The team recently competed in the 2008 North American Solar Challenge where they came in 13th out of an original 25 entrants.

The 2008 North American Solar Challenge (NASC2008) is a competition to design, build, and drive solar-powered cars in a cross-country time/distance rally event. Teams compete in a 2400 mile drive from Dallas, Texas to Calgary, Alberta.

For more information about this program see the following links:

• NUSolar’s Home page
• A video of the NUSolar car driving in traffic during the rayce
• A special segment on CNN about the solar challenge, featuring the NUSolar car

DMAXX congratulates these enterprising young men and woman in the efforts and their accomplishments and looks forward to supporting them in the future.

This sounds like a great idea: generate accounting and performance numbers for managed accounts and funds by reading broker statements.

On the surface, it is a great idea; unfortunately, it is not likely to succeed in the context of a CTA or hedge fund that trades futures and/or FX; not to mention over the counter instruments such as swaps.

There are several reasons why this can’t work reliably. The most notable are:

• Traders of any size have out trades every day. Basing accounting on the contents of broker statements that have missed or incorrectly booked trades is guaranteed to be wrong.
• Broker statements for futures are cash based, not accrual based. They do not include the accrued trading commissions for the exit side of the trades. If performance is based on the contents of the statement, that performance will be over-stated by the amount of the accrued exit commissions. The statements also do not contain accrued interest on cash held at the broker. Again, basing performance on the contents of the statements results in inaccurate performance calculations.
• Statements do not include management or incentive fee accruals. These must be calculated outside the context of the data on a statement.

Another problem that believing what is on a statement causes is it defeats the whole concept of reconciliation. By accepting what is on a statement, the advisor is in effect, doing the same thing as never balancing a checkbook.

In the case of an investment manager, he is being paid to manage the money of his investors. It is the manager’s responsibility to ensure that trades are booked in the correct account at the correct price, that positions are accurate and balances are in line. Basing accounting on the contents of the statements bypasses these important checks.

A better approach
If you assume an investment manager must maintain the list of trades she has made as well as her open positions in order to effectively run her business, she is already most of the way to being able to produce the required financial performance records.

A system like TheBooks is designed to take advantage of this fact. It provides simplified recording and reporting of trades and automatically keeps track of positions (both net to the street as well as by system/strategy) and it generates the appropriate accounting entries resulting from those trades and open positions.

A clear advantage of this is that reconciliation can be performed at the trade, position, and cash balance levels (another capability of TheBooks). In addition, because commission, fee, and interest accruals are also performed by TheBooks, the resulting accounting and performance reporting numbers are accurate.

Another advantage to performing your own accounting rather than basing it on the contents of broker statements is time. If accounting/reporting is based on broker statements, there is no easy way to provide end of day performance reports. All reporting must wait until the statements are received; typically early the next day.

TheBooks reporting is based on the trades that have been posted and the market prices as they are now. This means that end of day reports detailing daily/monthly/annual performance (summarized or detailed by sector and/or market) can be sent automatically at the end of the trading day; significantly improving the level or reporting and transparency an advisor can provide to her clients.

Summary
An advisor must maintain a record of his trading activity. Using a system like TheBooks not only maintains a record of all trades, it maintains positions and generates all the performance and accounting records required in a way that delivers more accurate and timely reports than those that can be produced by using broker statements.

Beyond that, it provides the basis for robust trade, position, and cash balance reconciliation, helping the advisor manage the inevitable trade and position discrepancies that occur when trading futures and FX.

With version 2.2.1 of TheBooks, the Data Manager has come of age. This release has transformed the Data Manager from being simply an historic data repository and continuous contract builder into a research tool for futures traders which allows the combining and manipulation of data never seen before in commercial data management software.

The 2.2.1 release of TheBooks adds the following features to the Data Manager:

• The ability to define derived data sources. These are data streams which are based on other data streams (more about these later…)
• The ability to overlay your actual trading history onto price charts. The running position and P&L can also be charted as part of this option. When trades are overlaid onto a continuous contract chart, the trade prices are adjusted to match how the continuous contract was adjusted.
• Direct access to CSI data via their API. You no longer have to export data from Unfair Advantage to incorporate the data into TheBooks. You just tell TheBooks what computer in your network is running CSI and TheBooks is able to directly access the data.
• The charting package has been completely re-written and is now a high-performance utility with the ability to quickly scroll through large data sets and zoom in and out allowing you see as much or a little detail as required. In addition, gaps in the data can be highlighted as can roll dates.
• We have added the ability to easily switch between viewing any data set by simply clicking on the data set name within the viewer.
• Export formats can be easily defined using a point and click interface. This includes the ability to translate market symbols from one symbol set to another.
• For those traders that want tighter integration, TheBooks API (Application Programming Interface) has been extended to allow direct access to Data Manager data. This means your research platform and/or signal generator can read price series directly from TheBooks without the need to have the data exported to text files.

Even though DMAXX spent considerable effort on these enhancements, the features of the Data Manager that had set it apart from other data management applications have been retained and enhanced as well. These include:

• The ability to use actual trading history as a roll rule when building continuous contracts.
• The ability to define export sets which allows multiple data sources to be exported together to a single location in your network and to flag them to be automatically exported anytime any of the underlying data sources change.
• Multiple price data vendor support. This includes CSI, CQG, and eSignal, in addition to user-defined text file imports. This means you can easily use data from the vendor(s) which make the most sense for your research and trading.
• Flexible data download scheduling allows you to define as many scheduled downloads as you like. The data is downloaded in the background and is performed automatically. Continuous contracts and derived data sources are automatically updated and, as described above, any exports that are required are automatically performed as well.

Derived Data Sources
Derived Data Sources are an exciting new feature introduced in the 2.2.1 release of TheBooks. A Derived Data Source is a Data Source whose underlying data comes from one or more other Historic, Continuous Contract, or Derived Data sources combined using user-defined or pre-defined transformations. Once a Derived Data Source has been constructed, it can be used to like any historic data source or continuous contract.

There are four types of Derived Data Sources:

Ratio
A Ratio data source is simply the ratio of two underlying data sources. The numerator bar is divided by the denominator bar. This can be used to provide a relative strength data stream between the two instruments or can be used to create FX cross rates from two data streams of FX rates.

Index
An Index data source is the weighted sum of all the underlying data sources. For example, a user could define an Index-type derived data source as being a basket the major long-term interest rate futures contracts (US and foreign) and weight each as desired. The data stream would be the weighted sum of each of the underlying stream’s Open, High, Low, and Close. The trader could then track the index and Buy/Sell the basket of contracts as appropriate.

Term-Infused Spot
A Term-Infused Spot data source is a way to insert the term structure of continuous contract futures data into a data stream of daily spot prices. This provides a way to produce both outright and cross-rate historic price data that contains both a valid daily price range and term structure where currently the historic data does not exist. It uses an Historic Data Source which is an outright or cross-rate spot rate and a Continuous Contract.

User-Defined
A user-defined data source is a way for the user to apply his/her own transformations between two or more data sources. These transformations can include logical as well as numeric expressions, allowing to you perform operations such as splicing two data streams together at a specific date or comparing data streams from multiple sources and using the values from the stream that make the most sense on a given date within the data.

Summary
The Data Manager has evolved into a premier data management tool for the professional futures trader and researcher. These new features and those to come are designed to facilitate better research and better trading. It you are not using the data manager in your operation, now is the time to review its capabilities again.