Tradelegs: Solving the Unsolvable – Neil DeSena

 

Did you know?

US Equity Options Series have grown from 369,817 in 2009 to 883,309 in 2015—a growth of 139%.

In 2012  Cisco stated they  spent more than $5.8 billion—or about 13 percent of its revenue—in research and development each year.

In 2012, there were 815,300,000 passengers scheduled for Domestic and International Airline travel on a total of 9,821,000 scheduled flights.

As you read the stats above, I’m sure you had the same reaction my wife did. “Why are options volumes mentioned in the same list as random Cisco and airlines stats?” Just hang with me and read on—I promise I haven’t lost my mind.

Option trading strategies are often misunderstood and underused. There are many reasons to use these complex products, maybe in anticipation of earnings, hedging your position against an inverse move in the market, possibly some news that has come out about a stock, or in the case of many hedge funds, alpha generation (generating excess returns). Not only are options complex, but so many variations can be traded that even if you were a human calculator it would be impossible to analyze all the various combinations that would allow you to isolate the optimal solution to implement your investment strategy. To give you a good visual as to the amount of ‘what can be traded,’ the following chart shows the increase of US Equity Options series over the past 15 years. Mind-blowing numbers!!

Chart 1_Did you Know TL

Chart 2_Did you Know TL

Layer on top of that growth the shortage of a pure institutional quality technology to assist in options trading (unlike those that have matured over the past 25 years in the equities space), and it’s clear why options strategies aren’t being utilized to the fullest. So how do these big banks solve the problem? You would think one of the big financial technology companies must have something in their offering that solves it. How about I dust off my father’s old Schwartzatron (eventually purchased by Reuters)?

To offer a little insight, these banks and large institutions hire an army of quants calling themselves Delta One Desk and spend millions on their technology infrastructure. The large banks have also set up these special desks for the Private Wealth clients that execute on some of the above mentioned strategies by using – surprise – the Private Wealth version of the Delta One Desk. These desks are considered such a specialized group that they charge a premium over what a traditional desk would charge. Let’s assume for one minute they have it correct AND these groups ARE able to generate the most optimal strategies. It would still leave the vast majority of smaller institutions and banks, high net worth individuals, traders and the general public without a means of sufficiently protecting themselves or optimally executing on their investment thesis. Who has the solution for all? Tradelegs.

Luckily one of the co-founders and lead scientist of Tradelegs, Hani EL-Sakkout, personally experienced this problem. In today’s lineup of misunderstood and overused buzz words – Artificial Intelligence (AI), Big Data, Cloud, Software as a service (SAS) – you’d think one of these techy ‘big thinkers’ would have a solution. Well it’s here, and it’s called Tradelegs. While all those previously mentioned buzz words are crucial components of the big picture, what truly is the gem when you look behind the curtain is “hybrid combinatorial optimization.” This is an AI technology that has recently become cost-efficient, thanks to major algorithm breakthroughs and inexpensive, ultra-fast cloud computing. It is such a specific discipline that only a few hundred scientists in the world exist with this expertise and the majority of them are in academia. Tradelegs has the scientific leaders in this field with a proven track record and past exits on the tape.

Before I continue and expand on how Tradelegs is revolutionizing options trading, let me touch upon what this group has done in their previous businesses to solve complex problems. First, they’ve managed to optimize airline routes for British Airlines. They reduced planes in the air without affecting the number of flights. Now that by itself may not sound like a big solution, but think about the last trip you took that had a connection through Atlanta or Dallas. Just note the scale of what was solved: as of February 2012 there were 87,000 planes in the sky daily across the US and of those, 28,537 were commercial. Think of the technological work that needs to go into managing the takeoff, landing, gate assignments, switching of planes, all of this organization plus more had to be taken into account to ensure a happy passenger. Second, they solved for Cisco what Cisco themselves, other Fortune 500 technology companies and the leading Academic Institutions called an unsolvable problem. Cisco wanted to convince mobile service providers that their core backbone networks could use Internet Protocol for cost effective transport of VoiceTraffic and still guarantee bandwidth and minimize delays even when part of the network failed. They solved the unsolvable problem and sold their company to Cisco.

Tradelegs took this specialized competency and applied it to the options market. They literally compute every different combination possible, the math is mind-blowing – 10^30 (1,000,000,000,000,000,000,000,000,000,000,) possibilities and that is just in ONE stock. I’m sorry, but I can’t imagine a human alive who has this ability. Tradelegs goes as far as to say that if their system doesn’t come up with an optimal way of expressing your trade thought, then it doesn’t exist. That’s a bold and compelling statement!

Click here to view Tradelegs case studies. Tradelegs is offering a badly needed solution to a problem that is big today and, as the charts above show, will continue to grow. If you are hedging your portfolio, executing on your thesis, managing your kid’s college education portfolio or a multi-billion dollar endowment, Tradelegs’ solution applies to you. A litmus test I like to use when SenaHill makes an investment is what does the “professional community” think about the product or service? Well, in June 2014 the CBOE invested in Tradelegs. Litmus test – ACED!!

As I wind down this piece, one of my colleagues asked what the purpose was of this blog. I try to write and express my views on what I have learned over my 32 years in the business, reflect on the past and ask myself, if I’d seen this before, what would I do? At the end of the day it is about trying to shine light on something to raise awareness on my opinions. In the Tradelegs case, I strongly feel what is there today and the promise of what tomorrow can bring compelled me to pen this.

— Neil

Read More about Tradelegs here.

P.S. I had completed this blog and was ready to send it out – when I saw a friend had put pen to paper and unknowingly supported my argument by stating, “Last year, complex trading emerged as the dominant source of options volume, accounting for 60-65% of the total volume last year. This was up from around 50% in 2014.” Thank you Alicia Reilly & Greg Bender. Read More.

 

SenaHill Partners, LLC is an investor in Tradelegs. This does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product.  All information herein is for informational purposes only and should not be deemed a recommendation to purchase any security or investment product. No representations or warranties are made as to the accuracy or completeness of the information provided herein.

 

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