High Frequency Trading Review


    An Interview with Will Mechem

    In this interview for the High Frequency Trading Review, Mike O’Hara talks to Will Mechem, who is Managing Director of Pan Alpha Trading, a high frequency trading firm that uses quantitative, systematic, market-neutral investment strategies.

    Will is also Managing Director of Willard John Thomas Associates, which provides consulting services to start-ups, technology firms and financial firms globally.

    High Frequency Trading Review: Could you give me a run through of your own background, what you’ve done over the years and what you’re doing now?

    Will Mechem: Sure. I started off in the technology world in the late 80’s, primarily within the Financial Services industry.

    Over the next twenty years, my clients were all of the big brokerage houses, investment banks, commercial banks even. And later on, into the late 90’s, as the hedge fund space started to bloom, more and more of my clients were in that space.  So although my experience came mainly from the technology side, of course when you’re working with those clients, especially if you’re working consistently in a new domain, you get to know their business very well.  So, I learned a lot about buy-side and sell-side, trading and risk management systems, and systems we have today that nobody had even heard of in the 80’s – the OMS’s and EMS’s and things like that.

    In about 2008, I started up a firm to focus on consulting within that space, in terms of building out trading and risk management platforms. We did a couple of projects here in New York and I guess we just kind of sat down one day and said, “Why are we building this for other people?  Why don’t we build it for ourselves?” And that was the genesis of Pan Alpha Trading, which is the focus that we have today.

    HFTR:  So what exactly does Pan Alpha do in the HFT space?

    WM: The vision from day one was to take the approach of the high frequency traders, the Market Makers (the GETCOs, the Citadels, those guys), who have very high performance technology and stable, predictable equity curves and returns, but to not compete with them, to not try and play in their sandbox because they had a huge head start on us.  They had very, very deep pockets (they still do!)

    With our competencies being on the technology side and also on the quantitative side, the modeling side, we took the approach where we would still go for the high performance, low, latency trading, but we would combine that with the quantitative models, to go after alpha that those guys are not going after, so we would not be competing directly with them.

    At Pan Alpha, we’re not about ultra low latency trading, we’re about low latency. We don’t try and scrape fractions of pennies to ultimately do millions and millions of trades, that’s not our game. Our game is to make ten cents or twenty cents or forty cents a trade. And do that by placing bets that are somewhat directional but typically market neutral, so we would typically have our long and short side to every basket and trade the baskets.  Our focus has been mostly on equities up to this point, but we are quickly moving into the futures and the FX space.

    HFTR: What is your typical time horizon on these trades?

    WM: We have a lot of different strategies that we use, which range anywhere from a holding period of a few seconds to a couple of hours. We do have strategies that will hold a position for the better part of the trading day.  But everything is intra-day; we’re always cash at the end of the day.

    And the strategies are different, so we do some stat-arb type strategies and we also have some that are more pure pairs trading or other kinds of arbitrage strategies.  The holding periods will vary depending on the kinds of strategy.

    HFTR: So would you class yourselves as a High Frequency Trading firm?

    WM: Well, everybody has a different definition of what high frequency trading is.  But I look at high frequency outside of the actual amount of time that you hold a position, more in terms of what you are doing. We’re in and out of a position in the same name multiple times per day, so clearly we’re not a long term investor!

    We’re trading with higher frequencies than most people on the market, most people don’t go after that type of a model because it can get very expensive from a transactional cost standpoint. If you’re a day trader sitting at home trying to do something like this, and you’re paying $5.00 a trade, forget it; it’s never going to work for you.

    For us, really it has to do with the fact that we are trading multiple times throughout the day, and that can be anywhere from two or three times to literally thousands of times in the same instrument, IBM or whatever.

    The other thing is that we can take both long and short positions in the instrument throughout the day as well.  So, we’re not making directional bets in terms of “this is going to go up; this is going to go down”.  We don’t really care about that.  We’re looking for movement relative to where we think the price should be.

    So that’s how we define higher frequency.  Most people make a differentiation in terms of the infrastructure latency, particularly if you talk to technologists within this space.  But when you go and question them about it, what they’re talking about is not necessarily the frequency of the trading, but the latency of the trades, microseconds versus milliseconds, etc.  And when you’re talking at the microsecond level, those guys have hundreds of millions of dollars invested in their infrastructure.  They have the absolute fastest possible connections to the exchanges and they’re hoping to make a tenth of a penny per trade, they are what I would call the ultra high frequency guys, they have to have a lot of volume and they have to have very, very low transaction costs.

    When you get above a few hundred microseconds, that’s not really ultra-low latency or ultra high frequency anymore, that’s just fast.  Where two hundred microseconds and longer is the latency, its high frequency but it’s not ultra high frequency.

    HFTR: Turning for a moment from Pan Alpha Trading to the other side of your business, Willard John Thomas Associates (WJT), what can you tell us about that?

    WM: WJT is where technology and people and capital meet. The vision there was initially to do business development work; to introduce people to potential partners in this space; to help people make decisions around technology.  That business opens a lot of doors, even for Pan Alpha, especially in the emerging markets.

    HFTR: Drawing then upon your experience from both sides of the fence, setting up your own trading firm and providing services to help other firms set up trading operations, what do you see as being the key elements in setting up an HFT firm from scratch?

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