Carl, when was Kammas Trading founded and why did you decide to set up the company?
Kammas was founded in 2002. Originally I opened the firm as a pure consulting venture targeting primarily retail FX groups. My experience as an institutional FX options dealer with Bank of America and Prudential as well as comprehensive retail FX experience having worked with GAIN Capital from their inception in a variety of capacities gave me a unique insight. As an industry retail FX was still
in relative infancy at that time, many retail groups found they had questions when it came to liquidity, risk management techniques, prime brokerage, etc. About two years later I came up with the idea of an outsourced or Virtual Dealing Desk. It was my observation, from working with many retail FX firms of all sizes that the smaller groups were largely opting to create white label relationships with larger firms. The primary reason for their decision was a lack of understanding of how to profitably manage a market making desk. Further, for those groups not located near New York or London they did not have an available talent pool to hire from and in many cases the cost of retaining a full time trading staff of experienced dealers was simply untenable. My idea was to put together a group of highly experienced FX dealers who can manage these clients risk books independently. Each client only pays for the portion they need making it a much more cost effective solution and all benefit from our decades of dealing experience, the flow information we see in total, our skill at technical and fundamental analysis, as well as our continued connection to friends and contacts within the banks.
What services does Kammas Trading provide?
Our services can best be defined along three separate lines. The first and most unique is the Virtual Dealing Desk service. Through this vehicle we offer a customized dealing desk product with highly evolved risk management practices at a price consistent with the extent of each client’s need. Our experience is strongest in FX, with all of our dealers sourced from major bank FX dealing desks, and our understanding covers not only spot but forwards and options as well. We also manage metals, energy and index CFD flow for our clients as most brokers have added these markets to their offering.
Second is an execution service best suited for automated fund managers (hedge funds and CTAs) as well as agency desks. We have experience primarily in the FX and futures markets executing orders. This understanding comes from early in my career when I traded for large CTA groups including some inside of the famed Commodities Corp. For these groups the need to fill orders with minimal slippage and market disruption is paramount. Not only will it enhance return but also allow a strategy to grow assets under management. For these reasons execution is highly valuable to the revenue and sustainability of these managers.
The third line is consulting. Here we cover a large range of topics for a variety of market participants. We work on finding the right technology and clearing relationships for a particular client’s needs. For corporate clients we suggest hedging strategies to insulate their multi currency payable and receivable expectations from adverse fluctuation. Considerations for appropriate strategies to corporate clients need to include their financial and accounting framework to ensure they remain compliant and that hedges do not hinder their balance sheet unnecessarily. We have worked as an expert witness on legal cases. We have been a sounding board for the private equity community looking to learn more about certain sectors of FX as they prepare to enter and price new investments. We have created educational packages focused on bringing greater understanding to the retail sector. Our input has been used to develop new trading and risk management platforms in FX. We worked with a Swiss based mutual fund that wanted to better understand their risk / exposure and hedging opportunity that came from holding primarily USD based investments. And a number of other projects too numerous to mention. Our experience is diverse and can be applied in a flexible way across many topics in this field.
Who are the key people involved in the firm and what are their main day to day responsibilities?
I head up the company and am involved in business development, relationship maintenance, and trading. Everyone else is primarily involved in trading with each dealer heading a specific time slot. Geoff Gowey joined Kammas in 2005 and has had a very successful career in the foreign exchange market spanning 30 years as a trader and manager. He successfully and profitably managed the trading operations for some of the largest banks in the world, including Societe Generale and Banque National de Paris. John Hanly joined us in 2005 after a successful 25 year career working for banks such as Bank Austria, West Deutsche Landesbank and BNZ. Mike Wootton joined in 2006 after spending 20 years working for Bank of New York managing both sales and global risk management services. Richard Ashe joined Kammas in 2006 and has been in the FX market since 1987, working for Commerzbank in both New York and Frankfurt.
What sort of clients utilize your Dealing Desk Management services and what are their main objectives?
Our Dealing Desk Management clients are FX and CFD Brokers. These are groups who have recognized the opportunity this market provides. Traditionally they are very good sales and customer service groups, often having a background in equities or futures. In some cases they have a strong technology background and build their own platforms. However, an overwhelming number of these firms are opting to choose many of the high quality platforms available for purchase or lease. They wisely recognize that outsourcing parts of their business they are less familiar with allows them to focus on their core strengths. Their main objectives are to build a solid business around providing a fair market, good tools, and good customer service to the sub-institutional market. Further, as good business people they strive to improve the risk adjusted return they are able to earn. Our service is integral to this goal.
What types of currency instrument are you trading and what execution time-frames are you typically employing?
We manage our client’s flow across a wide and ever increasing variety of currency pairs. In addition to the majors and all related crosses we also see flow in a variety of less liquid currencies including Hungarian florin, Indian rupee, Singapore dollar, Brazilian real, Scandi currencies, South African rand as well as metals priced in USD as well as Euro, GBP and JPY, energy and indices quoted as a CFD. All are quoted as spot and settled in USD. Additionally, we manage option risk on some of the more liquid currency pairs.
For execution clients the amount of time allocated to each trade can vary. Some want to know their trades are completed within a relatively small window of 10 to 30 minutes. In other cases more discretion is allowed, generally no more than 12 hours. The difference often comes down to the expected life of each trade. Longer-term strategies can afford to take some extra time to help improve the average entry price than a shorter strategy can.
In what ways do you customize your risk management methodologies to suit the individual needs of clients?
I started this firm because I saw a need for experienced risk management by many of the retail FX brokers who were making 1 of 2 general mistakes:
1. Managing client flow internally without regard or understanding for appropriate risk / position levels resulting in exceptionally high revenue volatility (often putting them out of business to the chagrin of their account holders)
2. Sending all of the volume STP to another market-maker who either pays a relatively low flat fee (rebates) or whose price they marked up for the same effect. While this method removes the risk component and is certainly more desirable than the first scenario, it also leaves a large amount of potential revenue on the table and makes for a generally undesirable long-term business plan.
One of the first tasks I undertake with a new client is the clear understanding and agreement of risk parameters. There are many fancy methods including VAR for calculating this however, I find the best place to start is by setting maximum exposure limits. This is by far the most practical solution for a trading desk to employ as risk limits are primarily tested during high volatility market situations when there is exceptionally high customer activity and no time to ponder or reach for a calculator. The considerations for determining these levels are a mix specific to each broker and include balance sheet, volume expectations, nature of the client flow, risk appetite, and per trade revenue expectations. Obviously, more liberal risk parameters should lead to higher “pip capture.” However, revenue predictability will reduce as return volatility increases. Therefore, it is imperative to find a happy medium that meets each client’s expectations.
You have been working in FX for over 20 years. In what ways do you think that long experience has provided you with greater insight into how the FX market operates and helps you to construct and implement more effective risk management frameworks?
Despite public opinion (or should I say political opinion) it is clear that the OTC framework of open self-regulated markets works exceptionally well in FX. The explosive growth in trade volume among all participants and acceptance of the product among ever smaller participants has proven this. OTC FX has ignited interest and volume in the FX market allowing growth dramatically beyond what futures were ever able to accomplish. Innovations in option structures give hedgers more precise tools to manage their business while allowing opportunity for directional players to expand their interests. All of this produces a highly liquid market environment with very tight spreads. Because of this level of efficiency we are able to formulate solutions for our clients that closely match their needs. Further it has spawned a myriad of new business ventures working within and around FX all adding value. e-Forex has done a great job profiling many of the different participants new to FX and helping it’s readers to understand their contribution.
Who are your Execution Services targeted at and what are they designed to achieve?
Kammas provides execution services for hedge funds, CTAs and agency desks. With a well-rounded understanding of markets and in-depth experience, Kammas can design a solution for clients to enter market orders with minimal impact / slippage. Each solution differs based on the expectations of duration for each trade. Legitimate managers never want to create market disruption through their orders. Kammas has experience primarily in the FX and futures markets executing orders both with and without discretion primarily for systematic programs (black box).
What are the sorts of problems and inefficiencies you find many trading firms are experiencing as they seek competitive advantages within the high performance FX trading environment?
Speaking from our experience and what I hear from colleagues at other firms I think it has to be technology. Increasingly we are putting together a kaleidoscope of unrelated technology providers, FIX and radiance API feeds, multiple databases, internally and externally developed software, redundant colocation facilities and much more while expecting everything to work flawlessly. To be completely upfront, given the complexity, it surprises me that it runs as well as it does. This may be a testament to the integrity of the IT teams we work with. I know of horror stories that have or nearly put solid organizations out of business. When problems do occur you quickly realize just how vulnerable and in some cases untenable the situation quickly becomes. In our case we are often dealing with well over 100 thousand transactions a day so as you can imagine without a clear window our position can potentially get away from us quickly.
Do you employ FX algorithms to help some clients minimize market impact when working orders and if so, are these constructed in-house or bought in?
We have a number of customized algos and indicators. All have been built by us or in a few cases as a collaboration with clients of ours. Each of my dealers have over 20 years experience trading FX for major banks. Consequently each has developed their own very specific “toolbox”. I strive to provide them with all of the market insight they need to be successful including a variety of charting services, news feeds (both written and audible), bank contacts, and customized algorithms.
A large portion of our success can be attributed to the experience and insight our team applies to the markets every day and this includes the proprietary algorithms we have developed.
What type of solutions are your FX Consultancy services team called upon to assist clients with?
As you know there are a large number of participants in the FX community. Each one has a different objective. However, regardless of the intended use each relies on basically the same set of tools and to produce the outcome desired. Here is where we make the biggest impact. Whether it is a corporate client looking to hedge their non reporting currency exposure from future payables and receivables, or a money manager who has exposure in a variety of assets priced in different currencies. We provide advice on how to neutralize the potential effect. Or we may give our opinion of where we expect the range of a currency pair to trade over some period allowing them to determine where to add a hedge at a more advantageous point by allowing a bit more fluctuation and risk limits. Often this can be expressed through various options strategies. We will also suggest liquidity and technology partners, work with Private equity groups looking to make strategic investments in FX, be retained as expert witnesses and a variety of other engagements.
Have you noticed any significant demand for specific FX Consultancy expertise in any particular areas and what impact could proposed regulatory changes to FX market operations have on this side of your business?
It is interesting how the topics we are asked about ebb and flow with changes in regulation. Clearly regulation affects us all. In many cases these changes are for the best, keeping investors safe from unsavory elements that seem to have found their way into FX as well as other markets. However, all too often regulators overstep creating a situation where companies are put at a competitive disadvantage in the US vs. other legitimate jurisdictions. They fail to see the global reach internet trading offers or the potential revenue available to US companies by creating a regulatory environment that is globally fair, attractive, and competitive. They restrict new products in order to protect the exchanges (something we don’t see out of Europe or Asia) and change leverage and net capitalization levels as often as possible. Interpret vaguely written legislation to suit their argument (and often it seems budget as well) while enforcing inequitably. This has created the need for large compliance departments who often try to determine the right jurisdictional mix to facilitate their business.
We operate under the regulatory umbrella of our clients. Therefore, we avoid the need for direct regulation. The effect to Kammas is that we have found most of our new clients coming from outside of the US. As for our US clients all of their growth is non-US based as well.
What trading platforms does Kammas use and what factors influenced that choice?
We generally work from the platform each client provides us. Many FX brokers are choosing to use Meta Trader as a front end or “client facing” platform due to its wide acceptance among retail clients. However, we find MT less attractive as a risk management platform, an opinion that is becoming more widely agreed upon. As such many Bridge and back office risk management systems and companies have been created. A prerequisite for brokers using MT and working with us is to establish a centralized risk management framework allowing for clear efficient viewing and management across any front-end platform they choose to offer. We use many and each has attractiveness to different client types. I would encourage anyone interested in adding these to contact me for a discussion.
How did you go about building your trading desk IT infrastructure and what steps have you taken to ensure that you offer minimal downtime and guaranteed continuity of services?
Our IT setup has been designed pragmatically and I suppose organically based on need at the time with room for growth. Primarily we have relied on outside consultants to assist us with design. I feel it is important to pay for quality as our machines are generally going strong all week with multiple feeds and some decent number crunching, so the average PC will not suffice. Additionally, each machine on average supports 4 monitors so the need for high-end video cards and extra memory is important to ensure performance.
Due to the nature and challenges of running a 24hr trading operation along with my main focus of hiring top trading talent regardless of location I have decided to create a satellite office structure. As such we are well insulated from power and internet outages. Rarely are we down for longer than a few minutes. Currently the majority of our trading sites are on the east coast of the US however, we have had sites on the west coast and in Europe.
With internet speeds and technology ever improving, the need for a centralized office structure is disappearing across many industries. The key challenge is to facilitate and encourage communication, demand professionalism, and allow for natural selection to form your team… preconceptions are almost always proven wrong.
What do you see as the main challenges facing firms like Kammas who are always seeking to optimize their risk management operations, trading technology architectures and execution pathways?
Definitely strength and flexibility in design of the software. These products need to be designed by traders not programmers. All too often trading tools are built by programmers who have at best a cursory understanding of what is required. Only a few have recognized that collaboration between programmer and trader will produce the best results. As for execution pathways I know of many efforts underway focused on this area from advanced ECNs to dark pools and virtual exchanges. All will help to improve the ubiquity of these markets across various segments.
What do you consider to be the key strengths and operational advantages associated with the Kammas business model?
My concept of the virtual dealing desk, allowing firms to outsource this portion of their business, was built to accomplish a number of advantages and efficiencies. The first advantage comes in the experience of our staff. When we began I was in a unique position to assemble a team of world class traders who understand these markets because they have been infused in them for so long. Further, they work extremely well as a team sharing information openly and willingly (not the easiest accomplishment with traders). Unlike most trading operations we do not compete against each other internally, everyone participates equitably as revenues increase. I am confident that our team is second to none when compared to market making groups at any institution large or small. Because we are able to work with multiple clients simultaneously the cost each client group incurs is dramatically less than hiring a dedicated team and setting up in house trading desks. We further reduce their risk by charging a large portion of our fee as a percentage of the revenue we create. I strongly believe everyone needs to a have “a dog in the fight”…it keeps you focused on a common goal. In the end all parties win.
As the FX market continues to grow where will you be looking to explore new business opportunities for Kammas Trading in the future?
We are looking to expand by offering liquidity. Our opinion is there is an under served market segment that would benefit from greater high quality access to the OTC FX, metals and CFD markets. Of specific interest is option pricing, partially given my background I suppose. However, I believe packaged properly and in effect providing unique and reliable wholesale products for distributors to offer to their clients and managers to use with confidence. Currently we are speaking with a number of market participants to partner with for this opportunity.