Me and My Machine

Me And My MAchine
Me and My Machine:
The Automated Trader Interview
Founded in January 2010 by Brian Tehako, TnT Group
specialises in intra-day trading of futures products “in a macroeconomic style” that innovates by combining automation
with a conventional prop shop. Driven by the belief that
communication is key to success, TnT Group is open to
ideas from traders, and, as Larry Levy discovers, represents
a compelling argument that HFT is not the only future.
Larry Levy: Let’s start with some
background and a run down of the TnT
group?
Brian Tehako: The TnT group was formed
in January 2010. The idea was to form a
group with three functions: to click trade;
to long-term trade; and to have automation.
The in-house trading, click trading, and
the long term trading are proprietary and
the automation was going to be proprietary
to traders in-house and out-of-house. I thought,
why not make the old prop style of trading into an
automation prop style?
Larry Levy: You are effectively forming an
automated prop shop? Are you carrying on with the
conventional prop shop alongside that?
Brian Tehako: Yes, exactly. We are trying to form
the two so they can support each other. From my
understanding this is completely new.
Larry Levy: Do you think that the increasing
prevalence of automation, and the rapid-fire
opportunities that it brings, are pushing the click
trader out?
Brian Tehako: I would say 90% have already been
pushed out.
Larry Levy: You don’t think that’s anything to do
with the financial crisis?
Brian Tehako: No. Every trader has gone through
different crises. The thing about crisis is that we
love it. It causes movement and volatility on an
intra-day basis, which as a click trader, or a trader in
general, you want. You don’t want low volatility.
Larry Levy: It’s generally assumed that the decline
in the number of people in the trading chat room
and the discretionary individual market is because
the amount of disposable income in the US has
gone down.
In conversation
Larry Levy spoke to TnT Group’s Brian Tehako, Andrew Tehako and Kevin
Yokley in January 2011.
BrianTehako started at the CBOT in 1993. He became one of the first Murex
traders in 1998, working with Bill Noyes at Yes Trader. He formed his own
prop shop at Gelber Group, in 2005, called Boss Trading, which had 28 click
traders at its peak. In 2009, Brian left Gelber Group with the aim of increasing
his involvement in automated trading. With Kottke Associates to supply
infrastructure and support, Brian used his own capital to start TnT Group.
Andrew Tehako, Brian’s younger brother, majored in economics in Chicago.
In his sophomore and junior years he interned at Boss Trading as a clerk, and
then, in his senior year, interned at a grain brokerage firm. Andrew followed
Brian to Gelber Group and left with him to form TnT Group.
Kevin Yokley began his career as a developer at Gelber Group in 2009, where
he met Brian and Andrew and others who would become part of TnT Group.
“When they decided to leave they asked if I wanted to come with them and I
did. I like the idea of the group and the principles Brian was putting forward.”
Kevin has a degree in applied mathematics and a minor in computer science.
Kevin Yokley (left), Brian Tehako (Middle) and Andrew Tehako (Right)
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Brian Tehako: I disagree 100%. I think what
happened was the traders used to be the hunters.
We used to hunt the automated stuff and the roles
have been reversed. The automation got so good
that they became the hunters and they hunted out
Me and My Machine
Me and My Machine
that what we are doing is beneficial to them and it is
something where they can gain access to the market
with no risk, they do normally come around.
originated on we also try and test every other product
possible just to get a feel for what it can do in other
markets.
Kevin Yokley: On the technology side, we develop
our own software and everything is traded on our
hardware. Nothing given to us is shared or given to
anyone outside the TnT group.
Larry Levy: Do you think that running an ordinary
discretionary prop shop and an automated trading
based prop shop are complementary?
Larry Levy: Do you find yourself having to do
additional work on the business logic of ideas/
models submitted or do you just confine yourselves to
programming the idea or model?
Kevin Yokley: A lot of the time we have to do
additional work with the business logic portion. By
that I mean times to run the actual system, whether to
Brian Tehako: They are very complementary. Without
having the ordinary prop shop involved, watching the
markets consistently on a daily basis, I think you lose
that focus and idea of how the markets are still moving.
We still create our own automated ideas in house and
we base those ideas on what types of relationships we
are seeing in the market and how things are moving and
reacting. Having those things that go hand in hand is
great for what we do on a daily basis.
Larry Levy: If you are cannibalising some of
your normal discretionary trading ideas to the
automated side, do you predict further decline for the
discretionary trader?
the traders. They could tell what positions they had
on, how far they could go. It’s the same exact thing
that happened when we went from the floor to the
screen. The floor traders used to pick off the screen
guys until the screen guys became so good they could
pick off the floor guys.
Larry Levy: Can anyone submit just a trading idea
or concept or must it already be a complete trading
model with entries, exits and risk control all already
defined?
Andrew Tehako: Anyone with just an idea can submit
it. We can take their thoughts and experience and
possibly improve upon it. If you have an idea that is
fully defined then that’s great and we will take a look
and throw it at the markets. With that we can still
take our experience and throw it on top of an already
defined automated system. If it’s a very raw idea we
will take that and test it and back test it and see what
it can do.
Brian Tehako: We will take on all your risk, develop
your idea, we will forward test it and back test it and
we will run it for you. It’s the same as any trader that
walks in the door and says hey I want to trade xyz and
you sit them down and give them an account so they
can trade it. I wanted to implement that same thing
because the prop trading groups are dinosaurs and
they are going away.
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Brian Tehako: We would
just tell then we already
have it and we have run
it but if they have any
other ideas that could
complement the system or
some small changes to make
it better, then we look at it.
If they have the exact same
idea as someone else then
we just tell them that.
Larry Levy: Are any models
that you accept traded
by TnT using your capital alone so that there is no
financial risk to the model’s developer?
Brian Tehako: We take on all the financial risk.
Larry Levy: How do you handle the issue of
intellectual property security so that those submitting
trading models are reassured?
Brian Tehako: There isn’t a ton of reassurance that
you can give someone except to sign a contract and
grow a relationship with them. You have to show them
what you are doing is beneficial to them. There isn’t
too much else you can do and a lot of people have
problems with giving up their ideas. Once they realise
Larry Levy: Like intraday position trading rather than
scalping?
put stop loss systems on it for each individual trade,
when to turn it off or what products to trade. There is
a lot of extra input that we end up putting into these
systems that goes along with the business side of it.
Larry Levy: So I could walk in the door today and
say I have a great idea for trading the German bund
and you would still pay me out but you would end up
saying we did some work here and it works better on
another product?
Kevin Yokley: Yes. We are always in contact with
the person that developed the system and it’s a joint
development process. We have a lot of experience
here so we like to throw our thoughts and opinions
at it. While we do test the system on the product it
Brian Tehako: Right. The scalping in and out is what
the automated traders are eating up. The normal
fundamental macroeconomic movement of markets
are still there on an intraday basis. It’s just how they
get there is what is screwed up right now.
Andrew Tehako: Yes. Automated trading has taken
out the emotion in the markets. If you see something
move, and a market you expect to move off the back
of that doesn’t really move, it is just because it’s a
computer controlling the trade so there is no emotion
to the trade.
Larry Levy: When trading with a discretionary
technique do you sometimes think it could be better
done if it was fully automated or vice-versa?
Brian Tehako: I think most of the time you are better
automating than using your own discretion. The only
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Larry Levy: If someone comes along with an idea
that you already have, how do you politely explain to
Brian Tehako: There are two things that I feel are
going to happen in this market. The automated trader is
only going to live and breed in a market like this where
they can work hand in hand with programmers and
developers. The human element of the game right now is
taken out because of the automated side. The other thing
is that I think the click trading is going to move towards
a fund atmosphere. People are going to take four or five
good traders that can click trade and tell them not to
click trade but put their ideas together in one model and
maybe trade on both an intraday and long term basis.
them you already have that
one and you aren’t going to
share that with them?
Me and My Machine
Me and My Machine
problem I have with that is relationships are changing
on an intraday to daily basis. So you can’t be that fast
at automating your ideas and changing them quickly
with your developer.
I still like to be able to discretionary trade my ideas
but the problem is you have to be very disciplined. If
you aren’t disciplined then that is when you get into
trouble. I personally think that for success down the
line the future is going to be fully automating your
ideas and watching them trade on a daily basis. I think
you have to be involved and watch the market but still
let your system trade it.
Larry Levy: What technology do you use in
programming and execution?
Kevin Yokley: We have created a proprietary platform
written in C# which we code all of our automated
strategies into. That platform actually controls
the taking in of the data and running whatever
calculations necessary and then it’s able to execute
through Cunningham’s T4 API. That’s how we run all
It’s not a FIX protocol API and they offer their own
API to do the execution but what is nice about the
T4 API is that they actually developed their front
end using their own API. This means anything their
software can do you can actually do yourself behind
the scenes so it gives you a lot of ability to tweak
things and it’s very versatile.
Larry Levy: Do you have that 10%
circuit breaker automatically in the
systems so when it reaches that figure
it just shuts down?
Brian Tehako: Yes that’s right.
Larry Levy: What made you decide to use C# rather
than anything else like C++?
Kevin Yokley: I actually chose not to use C++ because
it’s a lower level language. The advantage of using C++
is that you get a speed boost, but none of the strategies
we have worked with so far are high frequency so we
don’t necessarily need that boost in speed. C# gives
you a lot of things that you would have to handle
manually in C++. I just don’t have to worry about
them. The amount of time it takes to develop a
strategy and get it to the market - we are able to do it
quicker in C# because we don’t need the speed boost
of C++. So it was just the obvious choice.
Larry Levy: What operating systems do you use?
Kevin Yokley: All of our systems operate 64 bit
Windows 7. The hardware is all solid-state drives with
12GB RAM in each system. They are running quad
core 64 bit processors, Intel, at about 3.2 GHz.
Larry Levy: Please give us an overview of
your hardware back up and networking and
communications solutions?
Kevin Yokley: Our back up systems are still being
set up. We are a new group and a lot of that will
come in throughout the next year. We do have some
redundancy in our systems just in case anything gets
lost in one system. We have multiple copies. We
can be up and running quickly if anything were to
happen. The networking is controlled by our jointventure company, Kottke Associates, so we don’t deal
with any of that.
Larry Levy: What communications
provider are you using? Are you all
within the CBOT or are you trading in
the Eurex and other markets?
Larry Levy: Tell us about your
testing procedures, Kevin?
Larry Levy: If you had a robbery or a fire how long
until you would be back up and running?
Andrew Tehako: We could be up and running
tomorrow.
Larry Levy: What instruments are you trading at the
moment on the automated trading side and are some
clearly better than others?
Andrew Tehako: Currently our automated systems are
trading the same range as the click traders. We have
autos trading the Emini S&P500, Emini NASDAQ100,
Emini Dow, crude oil, whatever really. If it’s out there
and someone has an idea for an automated system for
it we are happy to try that. As for which instruments
are better it’s really dependent on the strategy itself.
Some instruments are more volatile than others so those
strategies are taking bigger swings but ultimately in
terms of profitability it is really difficult to say.
Larry Levy: How do you quantify your risk and
reward in terms of relative returns?
Brian Tehako: Same philosophy as when I brought
in a new trader for prop trading. We are going to
start small and have a small lot size and small daily
risk. Once we see success we ramp it up. My personal
philosophy on risk is that we never want to lose more
than a 10% drawdown in a day on someone’s account.
So if we can get someone’s account up past that
10,000 dollar mark the risk is basically 1,000 dollars
a day. Whatever that goes up to then the risk stays at
10%. We want to be active in the market and we don’t
want to be limited to the amount of trades.
Larry Levy: So you are in the high-risk, high-reward
business then?
Kevin Yokley: These are easily
summed up as a process that goes
through the back-test phase, then
optimisation, back-testing again,
optimising again and we continue like that until we
find something that consistently makes money. At that
point we will actually begin forward-testing, which
is just running the test in a simulated environment
with live data; we are checking to make sure all of the
execution is going through correctly and only then if
it’s still looking profitable will we turn it on live.
Larry Levy: How long would that typically take, say if
I came to you with a complete system today how long
until you might see fit to take that live?
Kevin Yokley: If the system is complete, then we are
able to do the back-testing and optimisation fairly
quickly. If it is complete with all the stops in place and
profit targets and all the parameters are set the way
you want them, we’ll run the tests. We may even skip
the optimisation phase because you may have already
done a lot of testing there. That whole process may
take a day and at the same time we would be coding
it into our platform to go ahead and do the forwardtesting. We may do a week of forward-testing just
to make sure everything is running correctly, but we
could be up and running by the week after. I would
say if you had a complete idea it would take between
5-10 days for it to be up and running.
Larry Levy: Given your experience, Andrew, is there
any type or category of model that you prefer over
others, Are there any that you automatically exclude?
Andrew Tehako: We tend to look at any idea that
comes to us as long as the person with the idea can
define, to Kevin, the principles behind the system. We
will take a look and entertain that idea. Computers
don’t really have a thought process to them so in order
to run the system Kevin really needs to be explicitly
told what to tell the computer to do. That plays a
major factor in accepting an idea.
s
Andrew Tehako: We trade
Eurex. We all trade in-office so
communicationwise, if you are
talking about an office in Europe,
we don’t do anything like that.
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Brian Tehako: Absolutely. That was
the way I was taught and that is the
way I have always lived my life.
of our automated trades right now.
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Me and My Machine
Andrew Tehako: There is no exact answer to that.
There are plenty of ideas and models that don’t work
for whatever reason. We do take any volatile models
but we also take the consistent models where everyday
it will make a little bit of money. It’s hard to put a
percentage on it because there are a ton of models that
don’t work.
Larry Levy: What percentage of models that come in
through the development process are finally accepted?
Kevin Yokley: We go through a lot of strategies before
we find profitable ones. I would say maybe 10%. The
other thing is that maybe a strategy starts off profitable
but then whatever it was looking at in the market may
be gone. The opportunity might not exist anymore. At
that point that strategy would become obsolete.
Larry Levy: Do you have a maximum drawdown
policy?
Brian Tehako: We haven’t run into that
problem yet. The idea I have on that is the same
thing I would use for a trader that is trading
proprietary for me. There are a lot of different
routes to get to a $100,000 loss and I think
you have to take that into consideration. To put a
number on that would be really hard, but if a system
is losing money consistently on a daily basis we are not
going to let it keep going. We will shut it down and
take another look at it. That could be after $5,000.
We could take another system that has a daily risk of
$10,000 a day and all of a sudden it loses 5 times in
a row for £50,000 dollars, but it made money in the
past - it gets looked at two different ways.
Larry Levy: So it’s more on a case-by-case basis?
Brian Tehako: That’s right. It all depends on how we
got to the point we are at and that always depends. If a
system the year before made us a million dollars we are
not going to shut it down after a $100,000 dollar loss
the next year. It’s the same thing with a prop trader. If
he makes a ton of money in ‘07 but starts out with a
loss in ‘08 you aren’t going to fire him.
Kevin Yokley: This is the reason why we put up all of
our own capital. It’s because we have to have complete
control over whether the system is running or not.
Larry Levy: Do you have, or believe in, mixed
models? Automated trading with some discretionary
input or circuit-breaker factor?
trader or system. Some trades may be very short and
only last a few minutes and then some can be more
medium-term, which could be a day or two.
Larry Levy: Do you have systems that would only
trade for a second or two?
Brian Tehako: We are not as high frequency as that,
no. Our shortest is probably a few minutes here and
there. It also depends on the market. In more volatile
markets you are going to be in faster than slower
markets.
Latency is not an issue. We are not really into the
high-frequency game right now. It may be something
we take a look at in the future.
Kevin Yokley: We can probably do trades within a
second, but anything shorter than that then latency
would become an issue. Like we mentioned before,
we don’t have any strategies that need to execute that
quickly.
Larry Levy: Brian, do you trade your own ideas as
well as ones suggested by others?
Brian Tehako: I trade only my ideas.
Larry Levy: What is your view of the evolution of
automated trading and its future prospects?
Kevin Yokley: I do believe AT is the future and I
think we have made it to a point where we can’t go
back. We can’t get rid of all the computer systems
and go back to click trading. At the same time I
think the AT systems are not going to be able to push
all humans out of the system. That is only because
computers are basically tools which do what they are
Andrew Tehako: We definitely
believe in the circuit-breaker
aspect of it. We are very adamant
in making sure the systems don’t
react and cause major problems.
We always have circuit breakers in
there just in case something does
go wrong. Then the system just
shuts off. As to discretionary, if you
are doing an automated system
then you have to make sure it’s
automated and leave it alone.
Brian Tehako: I think the only
time where you can mix those two
is basically signals. If you have some
sort of automated system that is
creating a signal I think you could
use that as a click trader. If it’s
something that gives you a signal
that says you should look to sell oil
here because 30 different technicals
are pointing to that I think a
click trader could use that to his advantage and be
discretionary.
Larry Levy: Do you use volatility-based stops?
Larry Levy: Do you execute on non electronic
markets?
Andrew Tehako: No, we don’t.
Kevin Yokley: We are able to use whatever kind
of stop the idea developer requires of us. Whatever
they would like to see in their strategy, we are able to
develop it for them.
Brian Tehako: On both click sides and automated
sides those answers can vary. It really depends on the
Larry Levy: What percentage of TnT’s trades are fully
automated?
Larry Levy: What, if any, execution algos do you use
to trade your automated or discretionary strategies?
told. When a computer is executing trades there is
no actual price discovery going on. The system is just
following a set of rules and anytime it sees that criteria
in the market it’s going to do whatever it is supposed
to do. People are capable of making decisions without
saying this price is way out of whack so I need to get
in on it. That whole process is what makes markets
efficient. People will always be necessary.
Larry Levy: Do you think AT systems are introducing
new opportunities for common-sense discretionary
trading?
s
Larry Levy: How long does your average trade last,
how often do you trade and what are your shortest
and longest time periods for a trade. Is latency an
issue?
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Kevin Yokley: The only thing we use is the platform
we developed. Whatever execution is necessary we
would prefer to code it from scratch. We don’t work
with anyone else’s execution platform. The only thing
we use is the T4 API.
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Me and My Machine
Holding for long-term, macro, and
not getting caught in the minute-toten-minute type moves. I personally
feel that this is the way of the future
of the click trader and I want to be an
innovator along that path.
Larry Levy: Does being in Chicago
make a real difference to your trading
or would another financial centre be
just the same?
Kevin Yokley: I believe so but that’s just me. Since I’m
not an actual trader and I don’t see it and deal with it
all day its hard for me to say for sure.
Brian Tehako: I’m not sure. On a daily basis,
watching the markets, it’s hard. I’m not sure if there is
price discovery out there or if it’s price discovery like
too many people sold it so we are going to go higher.
There is a fine line and a grey area there that I’m not
sure about at this moment in time. I think in the next
year or two I’ll be able to understand it better.
I think right now there are more automated systems
that are predatory than they are value based. I think
the predatory systems will win out right now because
there is not enough volume or players in the market
to find that price discovery and take that value into
account. You see a lot of something that gets out of
whack, but stuff does come back.
Larry Levy: How do you see the future and what
plans do you have for expansion at TnT?
Brian Tehako: The future that we are looking at with
the automated prop is where we are, I think, going to
find a lot of our success. I’m heading that way and will
go full steam ahead with that and try and bring in as
many systems as possible. I am getting our name out
there and getting my face out there to grow that side
of the business.
The other side that we are changing, and that I’m
growing, is more of the fund-type trading. I will be
doing more persistent-type and longer term trading,
taking out everything of the market that is going
on visually and trading more of a macro-type term.
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Brian Tehako: I don’t think it really
matters where you are. Your location
is there for your connections. Dinners
and drinks and other networking-type
things. With the technology today, with
the connectivity, it doesn’t really matter
with your location because we can be
anywhere in any exchange in the world.
With what we are doing, we don’t need to be next to a
server or anything.
Larry Levy: What made you call the company TnT
Group?
The T stands for “Tehako” the N stands for “and” and
the other T stands for “Trading”.
Larry Levy: Outside financial markets, what makes
you buzz?
Andrew Tehako: I’m a pretty big sports fan. I played
football and baseball in high school so anything to do
with sports really makes me tick outside work. Being
from Wisconsin I’m a pretty big Green Bay Packer
fan. Now being in Chicago with the Chicago bears it’s
hard being a packer fan but I get by!
Brian Tehako: I’m married with kids so I like
spending time with my family. I coach youth football
and baseball so that keeps me busy. I also own a
restaurant and sports bar called Mullets. I also have
another business venture doing sports performance
and personal training called Pure Fitness. All of those
things keep me happy and busy and I also enjoy
having a beer once in a while.
Kevin Yokley: I’m a big soccer fan. I love Manchester
United and I watched Barcelona dismantle Real
Madrid the other day and that couldn’t have made me
happier! That’s pretty much me.
Larry Levy: Gentlemen, thank you very much.
Further information at www.tntgroup.me