http://www.ft.com/intl/c...b7de.html#axzz3U5WDg6wV[/b][/b]


copied the article below:

A proprietary trading firm has clawed its way into the big leagues using recruits from India, Kenya and China

Anshuman Mishra’s working day inside Bangalore’s Diamond District office building began when the sun rose over the City of London and ended just after lunch in Chicago. Mr Mishra held a new kind of job in this Indian city of call centres and tech groups. He was a futures trader seeking his fortune on western exchanges.
Supplied with Bloomberg terminals, stacks of analyst research, biryani and foreign capital, he and fellow young traders — graduates of the best Indian universities — learnt to decipher Federal Reserve statements and US oil inventory reports published 8,500 miles away in Washington. They watched from afar as Lehman Brothers failed, then coolly traded through the aftermath. One of Mr Mishra’s colleagues made so much money shorting crude oil in 2008 that he bought a string of flats around Bangalore.

“We were very in tune with what the rest of world was doing. It was a unique position, because I don’t think the rest of the world knew what we were doing,” recalls Mr Mishra, who traded US and European stock indices until 2009.
His former employer, Hertshten Group, has quietly broken into the top ranks of traders on global derivatives bourses in Chicago, London and Frankfurt. Yet few of its 700 employees live anywhere near these financial centres. Most are in emerging and frontier markets such as India, China, Kenya and Mauritius, as well as Israel. Most still execute orders with a manual mouse click even as rivals are investing millions to shave microseconds off trades.
Hertshten is a proprietary trading firm, betting its own capital on global exchanges. Such traders’ heavy volumes grease the financial system, allowing others to easily enter or exit positions. While “high-frequency” firms have attracted intense attention for their lightning-fast trades, “point and click” armies such as Hertshten have grown largely unnoticed.
Its success shows how the offshoring that began with manufacturing and services is now encroaching on the diehard capitalists of the western trading industry. “Jobs that are disappearing in Chicago are appearing in Nairobi,” says a US-based trading executive.
$1,000 - the typical monthly salary for a new graduate trader in India, compared with $5,000 a month in Chicago
The group now ranks among the top five sources of energy futures volume on CME Group’s New York Mercantile Exchange; top five in grain volume on its Chicago Board of Trade; top three in interest rates and in soft commodities such as sugar on the Intercontinental Exchange; and top 20 on Eurex, a derivatives division of Deutsche Börse, says Marc Lagesse, Hertshten’s chief executive. The company transacts 250m-300m contracts a year, he adds.
Such volume increases the odds that a farmer selling corn futures delivered on the Illinois River or a corporate treasurer hedging short-term UK interest rates will have a 25-year-old in Gurgaon, Wuhan or Nairobi on the other side of the deal, perhaps dreaming of becoming a “trade mogul,” as Hertshten calls its online recruitment tool.
Futures markets — where the future values of assets from wheat to bonds are negotiated — represent a huge opportunity for proprietary trading firms. The $1,100tn in derivatives that changed hands on CME alone last year was 13.5 times the value of all global equity trading, estimated at $81tn by the World Federation of Exchanges.

Proprietary traders survive in fragile symbiosis with exchanges, which both police their behaviour and reward their volumes with fee discounts and rebates. Exchanges reserve special perks for traders in developing countries, and industry executives say Hertshten is a recipient. In return, the group has been training a far-flung generation of traders who are loyal exchange customers.
The rise of proprietary groups in emerging markets comes as electronic trading loosens ties between exchanges and the local communities that built them. Chicago-based CME said last month it would close “open outcry” futures trading pits that date to the 19th century after floor volumes shrank to 1 per cent of the total. Futures floors on ICE are already extinct; 30 per cent of CME’s electronic trading revenue now comes from abroad.
As the pits emptied, some ex-floor traders stayed close to home and created electronic proprietary firms such as Jump Trading of Chicago and New York’s Virtu Financial, founded by a former Nymex gasoline trader. Hertshten Group is owned by Gedon Hertshten, who began his career on the CBOT floor in 1978 and became a director of the London International Financial Futures and Options Exchange, now part of ICE.
250m-300m - contracts executed each year by Hertshten Group
But telecommunications improvements drew distant cities nearer. Orders now bounce between India and Chicago in milliseconds. Mr Lagesse says: “The fact that it was now electronic meant that rather than having to be in London, New York or Chicago to participate in markets, you could now be based wherever you wanted to be, frankly. You could be based in Rio or Mumbai or Beijing.”
To a high-frequency trader such as Jump or Virtu, a millisecond is an eternity. But the “vast majority” of Hertshten traders still point and click with their mouses; computer algorithms account for less than a quarter of volumes. To Hertshten, being fast is important but being the fastest is not worth the high cost of the technology.
“If I’m sitting on South Wacker Drive [in Chicago] I’m always going to be faster than someone sitting in Mumbai,” acknowledges Mr Lagesse.
Fees: Volume discounts come under scrutiny
A Chicago Mercantile Exchange sign is seen outside CME Group Inc.'s headquarters in Chicago, Illinois, U.S., on Thursday, May 20, 2010. CME Group is the world's largest futures and options exchange. Photographer: Tim Boyle/Bloomberg
You need volume to get volume. That is a mantra for the executives who run futures exchanges. To ensure a minimum level of activity, exchanges give fee discounts to proprietary trading groups and others willing to buy and sell contracts steadily, especially fledgling ones. These incentive schemes have existed for years but are now drawing scrutiny.
Continue reading
Hertshten is not the only proprietary trader standing by point-and-click. London-based OSTC has 16 offices in 10 countries including Poland, Russia, Turkey and India. Jonny Aucamp, OSTC chief executive, says his staff also trade this way and have exchange volumes “not dissimilar” to Hertshten’s.
If Hertshten is at a speed disadvantage, how does it compete? By hiring hundreds of bright graduates at a fraction of the cost of western traders.
The company’s trading business spread overseas from London to Israel in 2002, then entered India in 2004. Mr Hertshten — whose company declined to make him available for an interview — laid out his vision in an industry magazine column in 2009.
“The talent pool that the industry must actively seek and recruit consists of technology-savvy, extremely intelligent young individuals who are willing and able to work the long hours the exchanges are open,” he wrote. “New talent of the sort the industry should be recruiting can be found in the science and engineering departments of developing countries’ top universities.”
In practice, this means approaching schools such as the Indian Institutes of Technology, famous for their minuscule acceptance rates. At a workshop at Nairobi’s Strathmore University, delegates from Hertshten’s Futures First division and the CME pitched to students on the firm’s “friendly work environment and hefty financial rewards” and cited bonuses of up to Ks100m ($1.1m), according to a university report. (The sum is 948 times Kenya’s per-capita gross national income.)

Founders of the firm saw parallels between early overtures to graduates and Million Dollar Arm, the film in which a US sports agent scouts Indian cricket bowlers to pitch for a major-league baseball team.
“They had no idea what futures were, how it all worked, and yet here they were being hired,” Mr Lagesse says.
High employee turnover — about 60 per cent of hires leave within two years, says Mr Lagesse — deters some applicants. Mr Hertshten is known to have tried to assuage parents fearful over their children’s careers. “People outside the industry see it as scandalous. They think it’s gambling and pure luck,” says Rajat Pal Gupta, a former commodities trader at Futures First, who says his own volumes approached a tenth of the London white sugar market.
$1,100tn - the value of the derivatives trades on the CME last year, 13.5 times the value of all equity trading
Tests gauge applicants’ maths skills and logic. Interviewers ask if they are aggressive or passive and prefer a fixed salary or a bonus, former employees say. “They wanted to get a sense of whether I had trader instincts in me,” says Rajeev Ranjan, a former employee in India. “I come from a country where financial literacy was very, very minimal. I didn’t even know what was the concept of a trader.” Now Mr Ranjan studies markets as a technical expert at the Federal Reserve Bank of Chicago.
Once appointed, recruits absorb the culture. Mr Mishra’s colleagues in Bangalore screened Wall Street and Rogue Trader, the film about the collapse of Barings Bank. “We had the occasional bouts of insanity. People chucking their phones across desks. Someone smashing their computer monitor because they had lost a tonne of money. Things like that,” Mr Mishra recalls.
Some traders earn $1m bonuses and drive BMWs or Audis to the office, say former employees. But a typical new hire in India receives a $1,000 monthly base salary, people familiar with the company say. In Chicago a graduate with technical skills might command as much as $5,000 a month in base salary, plus a bonus, according to Objective Paradigm, a recruitment company. “One of the attractions is great talent at an incredibly reasonable price,” says Michael Gorham, a finance professor at Illinois Institute of Technology.

Hertshten has its headquarters in Mauritius. Most employees work for its Futures First subsidiaries. The company says trades are conducted through a Mauritius-based company called Mercury Derivatives and cleared by GH Financials, a London-based broker controlled by Mr Hertshten. Mr Hertshten’s son Ron told Automated Trader magazine in 2012: “We had our back office in London and all our traders in India.”
Hertshten has five Futures First offices in India, the most of any country. Executives describe Futures First as a “service” company and not a trading company, even though staff tout their trading experience on LinkedIn. Bobby Parikh of BMR Advisors, a Mumbai-based accountancy and consultancy, says India-based companies face a 30 per cent tax rate on short-term capital gains from trading on foreign futures exchanges. When India-based employees provide support services and do not undertake trading, companies can sharply reduce this tax exposure.
30% - percentage of CME's electronic trading revenue that comes from abroad
Rival traders say proprietary groups in emerging markets receive unfair assistance from the western exchanges. For example, CME’s incentive programme offers proprietary groups outside North America nearly half off the non-member fee for trading Nymex crude oil. ICE runs “new jurisdiction” incentive programmes in US natural gas, sugar, coffee, cocoa, cotton and other commodities.
A US proprietary trader complains: “It’s one thing to get yourself knocked out because of competition. It’s another thing when competition is being financially subsidised.”
Mr Lagesse says he and exchange officials discuss how to improve volumes and liquidity, but Hertshten does not receive special treatment. “As far as I know, we are neither benefiting nor suffering from different deals,” he says.