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2007 TOC

Toby Crabel, Chief Executive Officer, Crabel Capital Management (Milwaukee)

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Personal Background
Fund Background
Technology and Algos
Big Picture

Description of Firm:

Headquartered in Milwaukee, Wis., the company also has an adjunct research firm in Eastern Europe. Worldwide, the firm has approximately 90 employees. I started looking at markets in the mid '70s; the firm itself started in the early '90s. The track record for the benchmark product started in 1991. The firm's focus has been on short-term trading -- we're characterized as one of the more active futures trading firms in the world.

Assets Under Management:

More than $3 billion.

Trading Volume:

For futures, it could be a couple hundred thousand contracts a day and in the hundreds of millions of dollars in value.

Structure of Trading Operations:

The trading desk totals about 30 people. Some of the traders also work in the research area. There are about 30 people devoted to research, and in IT there are about 15 people working on infrastructure development and execution platforms. We also have a narrower group of what I would call portfolio managers who oversee the portfolios and are the ones thinking about the allocations and the instruments that are traded, and how to get the best risk-adjusted return we can possibly get in those portfolios. The development of execution algorithms has been a collaborative effort combining the research group's expertise in short-term price predictions, the traders' knowledge of execution and the IT team's expertise in technology.

INTERNATIONAL TRADING

Does the firm trade internationally?

We have a 24-hour desk, and we trade markets all around the world.

What are the challenges of trading globally?

Our whole desk is in the U.S., so the Asian and European sessions, in particular, affect our traders' sleeping patterns. That's one challenge -- we have to get people who are committed to that kind of schedule. One thing we can do to counteract destroying sleeping patterns is to have desks in the different regions. We haven't done that yet, but that's the logical next step.

TECHNOLOGY

Technology Environment

We've developed most of it in-house -- that's just where we started years ago, and we've built on that. We've had some help externally. Nowadays, a lot of the brokerages and independent vendors provide you with platforms with which you can execute pretty effectively, so we look to that whenever we can to try to expedite the development. But our infrastructure is primarily built in-house. Right now, we have parallel developments occurring in the firm. On one side, the IT team and researchers in the algorithm area are developing tools to enable traders to more effectively execute large orders. At the same time, we are improving the execution algorithms we use in executing straight-through processing. Currently, many of the larger orders are executed by the trading desk because it's very difficult to develop algorithms for very large orders, especially with our holding period. On the algorithm side, smaller orders are a lot more appropriate -- a computer can obviously reproduce its actions over and over again, whereas on the trading desk we're focused on larger orders that have greater difficulty in the execution. So as far as technology development, there are certain things we need to do to help that trading desk, and at the same time, we are developing infrastructure for the automated trading.

Buy vs. Build Strategy

One of the problems with external software pieces is that they're upgraded and they change, and whatever you've been building on prior to that, you're subject to their direction. The other thing is, when we started we had platforms that supported our trading signal generation, so we ended up building around that. There wasn't any software good enough out there. So we're focused on building the infrastructure in-house. Recently, in doing an analysis of the cost benefits of faster execution, I realized we could spend an awful lot of money reducing our execution time by milliseconds -- but we're pretty quick as it is. The area in which I really found benefit was in improving our existing software. Just on the generation of a trading signal, there's a lag time in the processing of the strategy as the data is coming in. So we have a lot of low-hanging fruit that we can pick just by improving our in-house software.

Who ultimately is responsible for the firm's technology?

My COO, Kathryn Daley, whose background is in technology.

Use of Crossing Networks and Dark Pools

Dark pools, because we haven't traded much in equities yet, haven't been a concern for us. We certainly have looked at them, however; I think they will become much more of a factor for us in the next six months to a year.

ALGORITHMS & BROKERAGE SERVICES

Use of Algorithms

We use some pretty basic, "stupid" ones that essentially just chase the market; I think everyone has that. As you work further out from that, you start to think about when is the best time to go to the market; when is the best time to, if you're buying, take the offer and if you're selling, hit the bid; and when is the best time to hold off on that and try to capture the bid-ask spread. All of that is what I would describe as the microstructure environment. So when we're analyzing our algorithms, we're looking at the conditions of the market in the microstructure prior to putting the order in, and then monitoring that as we're executing. As our pool of knowledge about certain behavior in the market within that short time frame increases, our orders, theoretically, should be executed more efficiently. Half of our European team is spending its time studying the microstructure and working through our long list of questions about the market environments and how they're affecting the bid-ask spread and the short-term movement. It's a very interesting game -- five to 10 years ago if you'd asked me where we'd be and what we'd be thinking about to try and improve our business, this is not the area I would've picked.

Prime and Executing Brokers

The largest investment banks in the U.S. and globally.

How do you determine which brokers receive your order flow?

Because we trade a lot, we have a bit of clout. The more you're trading, the lower the rate could be. But it's not just cost -- the costs are so competitive now from firm to firm. That isn't as much of a factor. We look at convenience to us as well, and ability to hide the order from the people who are watching the market.

BIG PICTURE

Biggest trading opportunities for the firm?

We're really working on the equity area right now -- we're relatively small there, but it offers tremendous opportunity. The main problem with equities when compared to futures is that you can't get as much diversification from markets, so you have to think in relative-value or market-neutral terms. So we have multiple programs in incubation that have a market-neutral focus. That's very exciting. We think we have a library of very effective, robust timing indicators that we can integrate with a market-neutral equity portfolio. There are many ways to do this and many countries around the world that have equities that are viable trading vehicles. When I think about our prospects, there are so many things that we haven't explored with our existing models and our existing knowledge, it just looks to me like a wide-open field for us.

Difference between trading for an alternative investment firm vs. trading for a traditional asset manager?

A person executing the trades at a traditional firm generally would have a much more discretionary element to what he's doing. In contrast, our traders are usually following orders. Now they have to have some savvy in the very short term to execute those orders, but they are really responding to quantified trading signals -- they don't have a lot of decision-making to do. At traditional firms, the portfolio manager is everything -- he's the primary producer at a firm. In our case, it's the researchers, the developers, the idea people who are at the top of the heap.

What is the most challenging aspect of your job?

There's a lot of competition in the quantitative area. In my worst moments, I think about how terribly inadequate our firm is compared to the best quantitative firms. At my best moments, I think we really have something, and if we just got a little better, we would be able to compete at the top of the hedge fund world. I try to stick with the latter viewpoint because it keeps me energized.

Major Industry Trend

The competition to attract talent. A lot the quantitative firms have gone to the sciences and drawn from there, so that's raising salary expectations. In addition, you have to be constantly aware of the technology changes that are going on. We're not really a technology company; we're a trading company that uses technology heavily. But it's really important for us to stay on top of that.

Interview Conducted by Randall Devere, Contributing Writer