• Broker Account – The starting point to trade in the markets
• Live Market Data – To feed to your trading robot so that it can generate trading signals. Most brokers provide market data with proprietary or third-party technology- although market data can also be obtained from an independent vendor (e.g. eSignal).
• Order Routing – To transmit your orders to the exchange. These can be proprietary to the executing broker or third-party based (e.g. Zen Fire).
• Broker Trading Platform – To access your account information, place orders, etc.
• Charting Platform – Sometimes the broker platform charting capabilities are mediocre and an independent charting platform is required (e.g. eSignal)
• Signal Generation Platform – The actual trading robot: it analyses market data, account and positions information and implements the automated trading strategies to generate trade management signals (i.e. Buy / Sell / Exit, etc.).
• Excecution Platform – Receives trade signals and forwards them to the order routing.
• Platform Hosting – You can host the trading robot on your local machine, host it in a dedicated rented server or entrust a specialised broker to host and run your trading robot.
• Historical Market Data – Used as source for back-testing trading strategies
• Strategy Development Application – Allows for coding, optimisation, back-test and result analysis of trading strategies.
• Statistical Analysis package – for in-depth statistical analysis of back-testing results.

Some of these distinctions are physical, some are logical. For example, TradeStation packs many of the points above into one system: a broker account and a trading platform that allows you to:
Access live market data + Visualise price charts + Automate trading strategies that generate signals + Route the trading signals as orders on the exchange + Access account information + Store historical data + Back-test strategies

Sounds like it fits the bill perfectly, doesn’t it?
Well let’s look at the areas you need to consider when deciding on your automated platform.

Type of broker

Different issues to consider: is the broker a clearing broker, a non-clearing FCM or an introducing broker? If the latter is it an independent introducing broker or a guaranteed introducing broker (backed by a clearer)? It would seem that the closer to the exchange you broker is (in terms of relationship), the better/safer it is. See Anatomy of a Futures transaction for more detail on the different types of brokers.

Markets supported

Every broker offers access to different products and different markets. For example Interactive Brokers offers one of most complete coverage (worldwide Futures, Options, Equites and Forex) all “housed” under the same Universal Account. Other brokers only offer access to specific products/markets.

Latency/Speed

For some type of trading strategy, this can have a large impact and various platforms/feeds offer different levels of performance. This has led to specialist companies such as Zen Fire or Trading Technologies – which locate their servers very close to the exchange – achieving speed and reliability for data feed and order routing. They offer their services to brokers who can in turn offer it to their clients.

Development Language

This is mostly a matter of personal preference, experience and expertise. TradeStation has been around for longer and a big collection of Easy Language scripts are available for re-use while NinjaTrader, for example, uses C# and CQG Trader their own language.

Strategy Complexity vs. Platform Functionality

Most of the automated trading platforms that offer back-testing functionality lack sophistication of dedicated applications such as Mechanica, TraderStudio or Trading Blox. For example portfolio testing is usually not available in the live trading platforms. This might work for some simple strategies but not for more complex Money Management ones.

Hosting

You can run the trading robot on your machine, which makes you subject to power and connection failures or you can choose to rent a server to host your robot. Some brokers also offer trading strategy hosting and execution on their own servers.

Charting

Some specialised platforms offer better charting capabilities than the standard trading platforms and can be used as a standalone charting application. Some, such as eSignal, also offer a data feed.

Costs

An obvious one but between platform costs, execution costs, hardware, etc. there exists a wide range between bottom-end and top-end offerings.

What/how to choose?

While researching for this article I have come across many different packages offering different solutions. One of the best ways to help you decide on a solution that makes sense to you is to list your goals and cross-check each platform against them in this fashion (PDF doc).

There are endless possibilities for combining all the differenty packages. Just for fun I tried to “virtually build” the opposite of an all-in-one package such as TradeStation (which will probably not address most automated trader goals) – here is one “wacky” implementation.

A trader decides to use TradeStation as a signal generating platform. However she does not want to use TradeStation data feed and instead decides to go for the eSignal package integrating the broker Dorman Trading and the Zen-Fire connection for market data and a charting platform. In order to route the market data to TradeStation, she needs a bridge application - OwnData from TS Support for example. The backup feed solution would be TradeStation data feed. For the execution side of things, our trader decides to send the trading signals generated by TradeStation to NinjaTrader, which can route the orders to the exchange through a broker. The primary route is through Velocity Futures broker using Trading Technologies order routing, while the secondary route is through Interactive Brokers via their TWS trading platform and API! Additionally, the strategy research and testing is performed with Mechanica using CQG tick data while the results are analysed using R.

Conclusion

Sorry to end up on a cliche but there are no silver bullet to making the choice. If you take away one point is that you need to list your own requirements clearly and make the choice for yourself based on them.

Check that 60-page thread at EliteTrader if you want an endless discussion as to which is the best platform/architecture…

Here is a “gradual” description of how a Futures trade takes place with all intermediaries involved:

A BUYER AND A SELLER

In its most basic form a transaction involves 2 parties: a buyer and a seller.

A buyer transacts directly with a seller

THE EXCHANGE: A CENTRAL “MEETING” PLACE

However buyers need to find sellers and vice-versa. This is where exchanges come into play. They are a central place where trading takes place.

For example, the Chicago Board of Trade (CBOT) is the central place where wheat trading takes place. All sellers and buyers meet and agree on transaction prices there. Exchanges also enforce rules such as standardised terms (e.g. wheat futures contract provides for delivery of 5,000 bushels of any of several varieties of wheat during March, May, July, September, or December).

All buyers and sellers come to the exchange to transact

COUNTERPARTY RISK

Futures contracts are an agreement between two parties for future delivery of an underlying (e.g. wheat) in exchange for a Cash amount (settlement) dictated by the agreed price. Up until settlement, there is risk that one of the parties will not be able to fulfil its obligation and result in a financial loss to the other party. This is called Counterparty Risk.

To avoid this situation, an intermediary, part of the exchange, will guarantee the trade. This is the Central CounterParty. All trades are actually given up to the Central CounterParty – which means that technically you buy from the CCP and your counterparty (the other side of the trade) sells to the CCP.

The CCP enforces each party to maintain adequate levels of initial and variation margin to cover any potential losses. All of the CCP trades are cleared through its clearing house.

The exchange provides a Central CounterParty and Clearing House to act as a guarantee between buyer and seller.

BROKER INTERMEDIATION

Now, there are millions of buyers and sellers that want to trade on the exchange. The exchange is not going to deal with all buyers and sellers. Instead, an exchange is a B2B-only platform where broker-dealer firms place their trades between each other.

For a buyer to trade, she needs to go through a broker to place her order/trade on the exchange. However broker-dealers (also called Futures Commission Merchant – FCM) are large independent firms, or part of large investment/commercial banks. As such they will not deal with most clients (retail and small institutional). Those clients would go through Introducing Brokers (IB), which will act as an extra intermediary between the client (you) and the exchange in a B2C fashion – delegating the trade execution, back-office operations, etc. to the FCM.

There is a further distinction between FCM:

• Clearing FCM, which is a clearing member of an exchange
• Non-clearing FCM, which must clear its trade through a clearing FCM

The picture gets fuller with broker intermediaries: Introducing Brokers, clearing and non-clearing FCM.

HOW TRADING TAKES PLACE AT THE EXCHANGE

In the old days, most trading took place in open outcry, on the trading floor of the exchange, between the local representatives of the broker-dealer firms (traders, brokers, market-makers/specialists). Floor traders stand in a trading pit to call out orders, prices, and quantities of a particular commodity by making “crazy hand gestures” (think of the last scene of Trading Places). Note that open outcry is pre-dated by blackboard trading.

Electronic trading has emerged in the last decades and gradually replaced open outcry. The electronic platform of an exchange (e.g. e-cbot for CBOT) is essentially a matching engine which all broker-dealers connect to and submit their orders.

The full picture.

With the advent of electronic trading a new class of brokers has appeared: Direct Access Trading (DAT) brokers. They offer their clients (including retail) an electronic platform that allows for a direct access to the exchange (as opposed to more traditional online retail brokers, which are just an electronic IB). DAT brokers usually offer to retail investors low transaction costs and high execution speed.

I hope I have not forgotten anything. If so, please let me know in the comments. In a next post I will investigate how the various automated trading platforms fit into that model.