A look at what will happen next in the world economies
Tuesday, November 18, 2014
A High-Speed Trader Looks to Slow Critics
A High-Speed Trader Looks to Slow Critics. They do not provide liquidity; they are arbitragers of time and do not add value. Aivars Lode
By Bradley Hope
Jason Carroll helps run one of the most active trading firms in the world, accounting for more than 5% of U.S. stock transactions on most days.
But to a chorus of critics, his Hudson River Trading LLC represents everything wrong with modern markets.
Mr. Carroll is a high-frequency trader.
After years of operating out of public view, Mr. Carroll and his colleagues are now in the cross hairs of some regulators, politicians and investors who believe firms like Hudson River can gain an unfair advantage and manipulate prices using complex algorithms and superfast communication links to exchanges and other trading networks.
The Securities and Exchange Commission, New York’s attorney general and Federal Bureau of Investigation are among those investigating whether high-frequency traders violate market rules or break laws. Earlier this month, a Chicago grand jury handed up an indictment of a small New Jersey-based firm on charges of fraudulent and manipulative trading, in the first criminal case against a high-frequency trader.
High-frequency traders use their own capital to buy and sell securities, and their willingness to trade rapidly has made them an increasingly important market middleman. If a mutual fund buys shares of a blue-chip company like General Electric Co., for example, there is about a 50% chance it will trade with a high-frequency firm, according to Tabb Group, a Massachusetts-based firm that tracks the trading industry.
In his first interview about the business since co-founding New York-based Hudson River in 2002, Mr. Carroll said he and his colleagues have been unfairly cast as market villains. In their view, they simply used technology to supplant an expensive and inefficient system of floor traders and brokers.
“What we do is very hard to understand,” said Mr. Carroll, 37 years old, whose jeans and T-shirt wardrobe is more Silicon Valley than Wall Street. “Turning the tide of public opinion might be the next big challenge for our industry.”
Critics say the complex structure of markets is what allows high-frequency traders to flourish. Still, Mr. Carroll has aligned himself with industry executives pushing for a less complicated trading environment. Among those who have said markets should be simpler are Jeffrey Sprecher, chief executive officer of exchange operator Intercontinental Exchange Group Inc., and Brad Katsuyama, CEO of trading firm IEX Group Inc.
Mr. Carroll acknowledges he wouldn’t be speaking out if it wasn’t for “Flash Boys,” the best seller by Michael Lewis published on March 31. The book argued the markets were rigged to benefit firms such as Hudson River Trading, as well as big banks and exchanges.“I truly believe investors would feel much better if there was a simple system,” rather than the byzantine collection of order types and fees that drive much modern trading, Mr. Carroll said. “Let’s focus on getting rid of everything that incentivizes the creation of a system that’s more complex than that.”
As the backlash that accompanied the book intensified, Mr. Carroll wrote a memo to employees urging them to keep their heads high.
“You should be incredibly proud of what you’ve done and where you work, and your friends and family should think very highly of you for that,” he wrote.
The controversy was jarring for a firm that enjoys a light-hearted work environment.
When the U.S. stock market opens for trading, computers at its offices in lower Manhattan are programmed to play a clip of cartoon character Homer Simpson bellowing, “No time for that now, the computer’s starting!”
Next to screens showing information about market prices and the status of the company’s trading systems is a live video feed of the ping-pong table in the game room, known as the “Play Tank,” where researchers and programmers often compete in tournaments.
Mr. Carroll, who grew up in Silver Springs, Md., joined Tower Research Capital LLC immediately after graduating from Harvard University with a degree in computer science in 2000.
Tower was among the very first high-frequency trading firms, and it gave Mr. Carroll a glimpse into the way technology was changing the business. He and four friends—also graduates of top schools, with science or math degrees—decided to set out on their own, using about $600,000 of savings and money from family members and friends.
In the early years, they did little more than build programs that automated many of the market-making decisions made by floor traders. Over time, their strategies grew more sophisticated to include algorithms that used statistical analysis of data from across the markets to make short-term predictions on where prices were headed.
After the markets closed, they stayed late in the office to play computer games such as “Warcraft.”
The company, which has 100 employees, made the founders wealthy. Mr. Carroll, who owns the largest stake among partners after buying out others over the years, owns Argo Racing, a sailing team that travels around the world to compete in regattas.
In addition to its massive trading in U.S. stocks, Hudson River also is active in futures, options, European and Asian equities, currencies and bonds on about 75 exchanges and marketplaces around the world.
The firm doesn’t disclose financial measures such as revenue or profit.
Hudson’s head of business development, Adam Nunes, said the firm’s trading isn’t predatory as some critics allege about the industry.
“We don’t try to race ahead of an institution’s order or sniff out whether someone is trying to place an order here or there,” said Mr. Nunes, 38, a former Nasdaq OMX Group Inc. executive.
The firm operates according to one main rule: Every order entered into the market should represent a real desire to buy or sell that security, Mr. Nunes said.
“We are in favor of things we think are better for the long-term stability of the markets,” Mr. Carroll said. “If capital markets aren’t healthy, that’s bad for our business.”