Options Trading Goes Ballistic
DWT: What kinds of institutional trades are the sweet spot for Ballista?
Rob Newhouse, Ballista:
Starting out, we will work with two types of trades. The first is volatility transactions, also referred to as delta-neutral trades, which can consist of one, two or three option legs tied to an equity leg. The second is block option trades over 500 contracts in size with no stock attached.DWT: How does the new platform prevent information leakage?
Newhouse:
Our system provides something we call a "show," which is a message about the legs of the transaction without any information on where the initiating order is. Contra-parties won't know if the order is a bid or an ask, its size, or what the price level is.If a trader decides to provide liquidity to that auction, they are then given the privilege to view the liquidity. Once the trader views the liquidity, the trader is obligated to provide liquidity. This basically prevents front-running by forcing everyone who views liquidity in the system to provide their own liquidity at the same time.
Ballista also offers a "Phantom" order type, whereby an initiator can hide all details of their order from trading counterparties, removing the ability to glean any information about the initiated order.
DWT: Will Ballista be drawing liquidity from all seven listed options exchanges?
Newhouse:
In terms of access liquidity from the outside world, we'd like to go after all liquidity from all seven options exchanges. However, we are still in the process of determining the exchanges from which we will be sourcing liquidity.DWT: Will Ballista develop a proprietary application programming interface (API) for better performance?
Newhouse:
We started out with a proprietary API, which took a few forms. We started out with a proprietary third-party API based on Java Objects using Java Metadata Interface (JMI) messaging back and forth between the front end and our servers. Even though it was more efficient, the value add of the decreased latency didn't make much sense.We found by the time we were parsing the Java Objects and using all of the JMI calls, we could have used an industry standard FIX parser, which is very fast these days. We weren't gaining enough going through a proprietary protocol.
The first change we made was that our front end speaks FIX to our server side. Then because our front end speaks FIX, we released that API as our standard FIX interface.
While we initially had focused on a proprietary API, we instead have moved toward a standardized FIX interface for external parties as well as our own proprietary front-end. By standardizing on FIX communication, we can ensure the normalization of a single standard for both our front-end as well as connecting external parties, and remove the need for coding to a proprietary API.
DWT: Did you develop your own FIX interface or go with a third-party provider?
Newhouse:
We built our own proprietary system because our "reactive auction" trading model requires custom fields to handle negotiation between counterparties, and we thought it best to build a proprietary FIX engine rather than leverage a commercial application.DWT: Which programming environment did you use to develop the platform?
Newhouse:
All of our server side components are Java. Right now we are using Sun Microsystems' Java Virtual Machines (JVMs). We're also experimenting with BEA's JVM because of its better garbage collection.We're also using a multi-broadcast bus called Spread, which is an open-source initiative, funded by the U.S. Defense Advanced Research Projects Agency (Darpa) and the National Security Agency (NSA). It's the communications system powering the Future Force Warrior initiative. It carries messages from a soldier's headset to their weapon and we are using the same guaranteed delivery. Spread is one of the strongest message delivery systems we've seen. We've implemented it and had great luck with it.
DWT: Did you look at other messaging candidates before selecting Spread?
Newhouse:
There was do-it-yourself proprietary multicast, Tibco and other commercial messaging bus platforms. We chose Spread because it is a very elegant platform and very easy to implement.DWT: Ballista has deployed a lot of open-source technology. Was it the firm's intention to adopt open source whenever possible?
Newhouse:
Not at all. It's quite the opposite, which is very interesting to us. Everything we've been doing we've looked at open- and closed-source platforms and went with the strongest candidate. We've made some decisions to go for closed-source platforms. For example, we've standardized on Microsoft SQL Server. That's the only Windows-based system we have because SQL needs Windows support. We felt that with the performance we were getting out of open-source databases, such as MySQL, it made sense to pay for the value.Spread is the best of breed for messaging and Linux is the best of breed as an operating system for running JVMs.
We've looked at the full spectrum of products and the messaging piece and programming language happen to be open source.
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