Piper Jaffray Finishing Vhayu Rollout for Algo Trading

Piper Jaffray is close to completing the rollout of data into the Velocity tick-capture and analysis system from Los Gatos, Calif.-based Vhayu Technologies.

The securities firm's algorithmic and program trading group in New York deployed Velocity as part of a three-year deal signed last year. This group was previously an independent company called Vie Securities but was bought by Piper Jaffray in late 2004. While still Vie, the group created its own database for the universe of roughly 2,000 stocks that it traded.

Around 18 months ago, Piper Jaffray decided to improve its trading models by adding quote data to the Vie trade data. But this would have put too much pressure on the firm's system, which would have had to be redesigned to handle quote data. After evaluating whether to build a new system or buy one from a third party, it chose to purchase Velocity, says Chuck Kennedy, managing director and head of algorithmic and program trading at Piper Jaffray.

According to Kennedy, the system is now a key component in the process of generating and updating automated trading strategies.

The deployment was divided into two phases. The first stage involved rolling out a consolidated feed of historical Level 1 equity data from New York-based vendor Lava Trading. That work began with a 60-day proof-of-concept phase and was completed toward the end of the first quarter last year. It went into full production last summer.

The data is used to run the nightly statistical analysis that updates the trading models by reviewing previous days' trading and creating statistical projections of how a stock should trade.

The second phase focused on introducing Level 2 depth-of-book data from Archipelago and the Brut, Inet and TotalView products from Nasdaq, all of which is sourced from Lava's ColorBook product. This is used by quantitative analysts, who manually run queries against the data on an intraday basis to improve the models.

Kennedy says most of the Level 2 data covering the OTC markets has been in place for around a month, and the firm is now in the process of completing the line-up with data from the New York Stock Exchange's OpenBook product. Kennedy says this final component could come online anytime now, and is only a matter of exchange paperwork.

The data is captured by Velocity's feed handler and then passed to a broadcast server, which has an analytical engine attached. This comprises an in-memory database that compresses data and an open API that developers can use to build trading strategies on. Velocity's publish-subscribe mechanism, EventStream, can be used to send orders to trading engines or to compliance or portfolio management systems, says John Coulter, vice president of marketing at Vhayu.

Coulter says the vendor wrote a special feed handler to take in the data from ColorBook, which is in the region of a gigabyte of data per day. "They are taking in massive amounts of order book data in real time, storing it, and writing micro-market strategies—where you look in detail at the bid and ask all the way down the book and try to come up with patterns of where a price is going to move," he says.

Piper Jaffray's algorithmic trading group acts as a route to market for both internal groups in the firm and its institutional client base, which sends orders to the firm by FIX interface, phone, e-mail, fax or instant message. From there, the statistical models determine an execution strategy and, combined with real-time data that does not go through Velocity, generate buy or sell signals. The signals are sent to Piper Jaffray's order management system, which is supplied by New York-based vendor Portware, to be executed.

Both Velocity and Portware run on Dell servers running Microsoft Windows, while the firm utilizes a three terabyte storage area network from EMC with Velocity.