HIGH-FREQUENCY FUTURES DATA Cantab Capital Partners

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MARCH 2013

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■ Cantab Capital Partners LLP (‘Cantab’) is a systematic global macro hedge fund manager based in Cambridge, UK.

■ We seek to deliver alpha uncorrelated to traditional assets, as well as to other hedge funds, within strictly managed risk parameters.

■ The firm was founded in 2006 by Dr Ewan Kirk and Erich Schlaikjer (both ex-Goldman Sachs) and Chris Pugh (ex-KBC). Dr Tom Howat became a Partner in 2011.

■ The team consists of 42 employees, 29 of whom are fully dedicated to research, systems and trading. Cantab has close ties to Cambridge University. Professor Chris Rogers, who heads up the Statistics Lab at the University, advises Cantab on a consultancy basis.

■ The CCP Quantitative Fund was launched in March 2007; the CCP Core Macro Fund was launched in Jan 2013.

■ Cantab’s assets have grown from USD30mn at launch to USD5bn. This is due to Cantab’s high-quality team, robust high-performance strategies, state-of-the-art risk management, world class technology and high levels of liquidity and transparency.

■ The investor base is 60% institutional, 35% funds of funds and 5% family offices and HNW.

■ A vast amount of information is produced in the financial markets every day.

■ Typically the majority of the data is either discarded or ignored by both practitioners and researchers.

■ With powerful computers and massive data storage more of this data can be analysed.

■ But…

■ We’ve lived in a Gaussian or near-Gaussian financial world for our entire professional lives and much of this data is not even close to Gaussian.

■ Concepts like “return”, “volatility” cease to have meaning.

■ There are huge amounts of data, 200MB per contract per day.

■ In the univariate case, the data on a single contract is bursty and not evenly spaced.

■ In the multivariate case, data is not cotemporaneous.

■ There are no obvious intellectual frameworks.

■ But…

■ The financial opportunities are large.

■ 20 years of S&P500 data.

■ Eyeball statistics tell you that this is log-normal with a drift. And, to a first approximation, it is.

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200 15Jan88 1Jan90 1Jan92 1Jan94 1Jan96 1Jan98 1Jan00 1Jan02 1Jan04 1Jan06 S & P 500 Spot Index

■ But think hard about this. What is this data? Does it bear any resemblance to the market on the day?

■ There are 5000 data points here and this is probably about as much as you can reasonably hope to work with. © 2013 Cantab Capital Partners. Authorised and Regulated by the Financial Services Authority. What about a month worth of data?

■ 29 days S&P500 data.

■ It’s pretty obvious here that you can’t say much statistically.

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1380 1Dec07 10Dec0717Dec0724Dec0731Dec07 7Jan08 14Jan08 21Jan08 S & P 500 Spot Index

■ Oh, and don’t forget that there are weekends, holidays, early closing days in this graph.

■ The futures market generates a lot of data but there are lots of little issues with futures.

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1380 1Dec07 10Dec0717Dec0724Dec0731Dec07 7Jan08 14Jan08 21Jan08 E-Mini S&P 500 Index CME Nrby b 01 S & P 500 Spot Index

■ They’re not the same as the spot index (and in some cases like oil, there isn’t a spot index).

■ They also expire and roll, lots of tough stuff to worry about here, but let’s ignore all these issues and just look at the hourly data.

■ Oh no! What’s gone wrong?

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0 12/1 7:30:00 1/31 7:30:00 hloc2(ccp_rt_esh8.trdprc_1,-60)

■ Well, there are zeros in the data stream.

■ Looking a bit better but there are some pretty odd things happening here:

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1360 12/1 7:30:00 1/31 7:30:00 zapz(hloc2(ccp_rt_esh8.trdprc_1,-60))

■ And let’s not forget that I’ve just said “hourly” but what does that mean? Average price over the hour (argh!), highest price, lowest price, last price, first price? When does an hour start and end? Last traded price or mean of last bid and offer? How much do you weight a price at 11pm on a Friday compared to 2pm on a Wednesday? What does 11pm and 2pm mean in this context?

■ 1 hour: 24 (?) points, 93 15-minute points, 1387 minutely points. Note: 4 days’ data is more than the 20 year S&P500 graph! 1420 1415

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1370 1/15 0:00:00 1/16 0:00:00 Hourly 15 Minutes Minutes ■ Clearly minutely data gives a lot more information than hourly and there are some interesting bits of structure here. But there are lots of times when not much is happening. How do we deal with this? Oh, and the kurtosis is 45…

■ Even with minute data, we’re throwing away more than 99.5% of the data.

Tick data

■ Every time something happens on a futures exchange, the exchange sends out a message to every subscriber saying what has happened. So what can happen?

□ A trade. We get trade time (to nearest millisecond but there are lags), trade volume and, obviously, trade price. □ The best bid can change and the size on the best bid can change. □ The best offer can change and the size on the best offer can change.

■ In addition, there is “level data” which is the next best bids and offers down 5 (or more) levels.

■ This screen flashes continuously pretty much all day…

■ This is starting to look more interesting.

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1370 1/15 0:00:00.000 1/16 0:00:00.000 zapz(ccp_rt_esh8.trdprc_1) zapz(ccp_rt_esh8.bid) zapz(ccp_rt_esh8.ask)

■ This is a randomly chosen 30-minute window from 10:30 EST to 11:00 EST on the 15th of January.

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■ What can we say about this data? The digital nature of the system is starting to become more obvious.

■ Oh, and let’s not forget that there are 1400 trades in this period and 43488 changes of the bid or offer price or size.

■ In this single half hour, there is more data than in the entire history of the S&P500 series since 1945… And we get a new set every 30 minutes…

Zoom in even more (2 minutes)

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1395.5 0 1/15 10:38:00.000 1/15 10:40:00.000 Trade Bid Ask Traded Volume Bid Size Ask Size

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1397.45 600 1397.4 550 1397.35 500 1397.3 450 1397.25 400 1397.2

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1397.05 250 1397 200 1396.95 150 1396.9 100 1396.85

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1396.75 0 1/15 10:38:10.000 1/15 10:38:20.000 Trade Bid Ask Traded Volume Bid Size Ask Size

Did the bid size change here? Nope

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1397.45 600 1397.4 550 1397.35 500 1397.3 450 1397.25 400 1397.2

1397.15 350 Simultaneous trades at bid and 1397.1 offer? Then nothing for over 2/10 300 of a second! Relative calm! 1397.05 250 1397 200 1396.95 150 1396.9 100 1396.85

50 1396.8 1396.75 0 1/15 10:38:13.000 1/15 10:38:14.000 Trade Bid Ask Traded Volume Bid Size Ask Size Trades happening on the bid ■ Rule of thumb, one second of data is equivalent to about six months of daily data.

■ Look at the interesting structure. Artefacts too!

Trade Bid Ask Traded VolumeBid Size Ask Size 10:38:13 1397.25 1397.25 1397.50 1 69 186 10:38:13 1397.25 1397.50 68 189 10:38:13 1397.50 1397.25 1397.50 20 68 180 10:38:13 1397.25 1397.50 71 181 10:38:13 1397.25 1397.50 76 173 10:38:13 1397.25 1397.50 76 160 10:38:13 1397.25 1397.25 1397.50 76 76 170 10:38:13 1397.00 1397.00 1397.25 250 134 9 10:38:13 1397.00 1397.00 1397.25 8 133 93 10:38:13 1397.00 1397.00 1397.25 5 111 122 10:38:13 1397.00 1397.00 1397.25 2 100 136 10:38:13 1397.00 1 10:38:13 1397.00 1397.00 1397.25 1 91 138 10:38:13 1397.00 1397.00 1397.25 20 91 146 10:38:13 1397.00 1397.00 1397.25 1 69 126 10:38:13 1397.00 1397.00 1397.25 1 68 126 10:38:13 1397.00 1397.00 1397.25 1 2 122 10:38:13 1397.00 1396.75 1397.00 2 611 58 10:38:13 1396.75 1397.00 596 59 10:38:13 1396.75 1397.00 564 35 10:38:13 1396.75 1397.00 544 50

■ Note that Excel (which was used to reformat the data) doesn’t understand times less than one second.

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-0.5 -1 -1.5 -2 1/15 10:00:00.000 1/15 10:01:00.000 SP500 Trade FTSE Trade Dax CAC STOXX

■ I’ve removed bids/asks and sizes (but don’t forget the richness of that data).

■ FTSE and the S&P500 are both equities, so they should be related - but how? Not sure that the “correlation of returns” is really going to help here…

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91.92 1/15 10:00:00.000 1/15 10:01:00.000 Crude Oil Crude Bid Crude ask

■ One minute, quite a lot of moves - but maybe not as many trades?

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115.77 0 1/15 10:00:00.000 1/15 10:01:00.000 Bund Bund Bid Bund ask FGBLH8.BIDSIZE FGBLH8.ASKSIZE

■ The bund moves a lot less in one minute.

■ There are literally thousands of futures contracts. Hundreds of them produce this much data every second.

■ Conservative estimate is that since the start of electronic trading in 2002, the crude oil contract has produced 30 billion data points (5 levels deep bids and asks x 12 contracts x 255 days x 5 years).

■ Include equity indices, bonds, currency futures, other commodities, and it is close to 10 trillion data points.

■ This is a hugely richer data set than the usual SP&500, Lehman Bond Index and “Oil” daily data that most people seem to do research on.

■ Apart from high energy physics, there probably aren’t very many areas where there is this much data which needs to be modelled.

■ But why do we want to model it?

■ Make Money (Statistical “Arbitrage”):

□ With all this information, can we predict where the next trade will be? Can we identify short term trends, short term mean reversion, does the intra day information tell us something about the next tick, the next 30 seconds, the next hour, the next day? □ Forget your GARCH models, intra-day volatility is a lot better than GARCH at forecasting volatility tomorrow. □ Costs in these markets are tiny! FX is the best with USD1m of notional costing USD3 to trade. 1/30th of the tightest bid offer spread. FX spreads are often <1bp. Futures costs are considerably less than one tick and the markets are 1 tick wide most of the time. So if you can get a 2 tick move, you’re making money. □ But how do you backtest strategies? Just because you saw a trade at the bid, doesn’t mean that you got done at the bid in your backtest. Queues, latency etc.

■ Don’t Lose Money (Algorithmic Trading)

□ If the bid market depth is 50 lots at 100, 50 lots at 99 and 250 lots at 98, and I have to sell 350 lots I know I can do this right now at a WAP of 98.42. Can I do better? What about if I need to do 3500 lots? □ There is a risk trade off here. And it gets even more complicated because I might need to do 100 trades (“program trading” as it is known). □ I can wait but might miss my price. □ Market impact, order arrival, agents… □ This has spawned the whole VWAP, TWAP, Iceberg…etc etc industry.

■ There are LOTS of computers in the market doing this on the back of some pretty hokey modelling.

When algorithms go bad… 10 very, very bad seconds for some statistician at a bank…

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1355 20000 1/14 2:01:10.000 1/14 2:01:20.000 ESH8.TRDPRC_1 ESH8.BID ESH8.ASK ESH8.ACVOL_1

■ I’m not presenting a model.

■ I’m presenting a problem.

■ A big problem.

■ If anybody is interested in the problem, then I’m happy to talk through it in more detail.

■ I was going to hand out a CD with 600MB of data on it. This was the 15Jan08 for the front month FTSE, SP500, 10y Bund and Crude oil.

■ But there are licensing issues with our data provider. If you want access to this data then get in touch and we’ll work out a way to do it.

■ [email protected]

This financial promotion is issued by Cantab Capital Partners LLP “CCP”, which is authorised and regulated by the Financial Services Authority (“FSA”). The fund(s) under our management (the “Fund(s)”) are defined as “Unregulated Collective Investment Schemes” (“UCIS”) and the promotion of a UCIS either within the UK or from the UK is severely restricted by statute. Consequently, this document is only made available to professional clients and eligible counterparties as defined by the FSA and also to persons of a kind to whom the Fund may lawfully be promoted by an authorised person by virtue of Section 238(5) of the Financial Services and Markets Act 2000 and COBS 4.12.1R. Shares in the Funds should only be purchased by persons with experience of participating in unregulated schemes and any other person who receives this document should not rely upon it. The value of the Shares, and any income from them, may go down as well as up and an investor may not receive back, on redemption of his Shares, the amount which he invested. Commodity trading involves substantial risk of loss. Changes in rates of exchange between the US Dollar and the currencies in which the investments of the Fund are denominated may cause the value of the Shares to go up or down. The Shares will not be dealt in on a recognised or designated investment exchange for the purposes of the Act, nor will there be a market maker in the Shares, and it may therefore be difficult for an investor to dispose of his Shares otherwise than by way of redemption or to obtain reliable information about the extent of the risks to which his investment is exposed. This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, the Shares, nor shall it or the fact of its distribution form the basis of or be relied on in connection with, any contract therefore.

Recipients of this document who intend to apply for Shares following the publication of the prospectus to be issued by the Fund are reminded that any such application must be made solely on the basis of the information and opinions contained in the prospectus, which may be different from the information and opinions contained herein. Neither CCP, nor their directors or employees warrant the accuracy, adequacy or completeness of the information contained herein and CCP expressly disclaims liability for errors or omissions in such information. No warranty of any kind implied, express or statutory is given by CCP or any of its directors or employees in connection with the information contained herein. Under no circumstances may this document, or any part thereof, be copied, reproduced or redistributed without the express permission of a partner of CCP.

RULE 4.7 DISCLOSURE: PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A POOL OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR THIS POOL.

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED.

Registered in England No. OC317557. Registered office: City House, 126-130 Hills Road, Cambridge, CB2 1RE. © Cantab Capital Partners LLP