Bringing the Heat: How to Incubate High-Frequency Traders
February 8, 2010
You hanker to launch your own high-frequency trading team. But you lack the requisite resources: a high-performance, low-latency, algorithmically-driven trading platform, connections to market data feeds, access to exchanges and trading venues, investment capital-and working capital.
No problem, if you fit one of the profiles preferred by entrepreneurial support centers that have been set up to incubate high-frequency firms that want to strike out on their own.
Many traders in the flip-your-portfolio-as-fast-as-you-can set are seeking new homes in the wake of Wall Street disruptions, realignments, debates about bonuses and new, proposed rules from Washington, D.C., that could force large banks to shut down their proprietary trading divisions, which often engage in high-frequency trading.
"The last couple of years, we've seen massive dislocations in the financial markets. A lot of good people got laid off from banks and hedge funds and so, there is now a demand for incubators to help these guys get up, going and trading as quickly as possible," says Ram Rao, director of sales and business development at Trading Cross Connects (TXC), a Jersey City, NJ-based incubator that aims to work with high frequency trading teams.
Traders who seek out an incubator-type setup for their operations are also able to quickly create a performance record, points out Jayesh Punater, CEO of Gravitas Technology, an IT consulting company to many hedge funds. "Traders without a recognizable name or proven track record have a more difficult time raising capital," for their high frequency fund.
At TXC, the preferred profile indicates: You have been a high-frequency trader for two years or more; trade in foreign exchange, fixed income or listed derivatives; and have returns that consistently outweigh the risks of the trades being made-ideally, a Sharpe Ratio greater than 7.
If that's your experience, TXC wants to talk to you and help your trading team launch in two to three months or less.
It is one of several, startup incubators with offices in the three-state area surrounding New York City. Another startup incubator that targets high-frequency trading teams is New York-based Thesys Technologies, a division of Tradeworx, a hedge fund based in Red Bank, NJ that employs both middle- to high- frequency trading strategies.
A third and "somewhat new" incubator is Eze Castle Integration, a Boston-based provider of IT, technology and consulting services to more than 500 hedge funds. For the past three years, Eze Castle says it has also been incubating startup funds out of its midtown Manhattan offices and more recently, has started to provide technology, infrastructure and disaster recovery services to high-frequency trading firms.
All these organizations try to offer high-end trading technology to the startups, related services such as co-location and proximity services and in the cases of TXC and Thesys, working or seed capital. In contrast, office space, a trading platform, co-location of trading servers near the matching engines of trading venues are the focus of Eze Castle Integration's incubator services. Capital is not provided.
While the aim of launching high-frequency firms may be new, the idea of providing the initial ecosystem to "incubate" entrepreneurial ventures is not. "These new incubators have not invented the wheel," said Alexander Kouperman, president of InfoHedge Technologies, a New York consulting firm. But, he said, they do offer a new wrinkle in the market, providing access to technology and services that cater to the needs of high-frequency traders.
