HFT Legend Exits The Business: "It's Harder To Make Money"

Tyler Durden's picture

To those who have followed the rise and fall of the HFT industry, and certainly the far more dramatic rise and fall of one former Goldman trader and programmer, Sergey Aleynikov, the names Misha Malyshev and Teza Technologies are very familiar.

Malyshev founded Teza - named for a river in his native Russia - in 2009. The high-frequency trading group used automated programs to vault to the top ranks of participants on venues such as the CME and BrokerTec, a marketplace for US Treasury bonds once dominated by banks.

Malyshev, who has a doctorate in astrophysics from Princeton, made more than $1 billion for hedge fund Citadel In 2008 while serving as its head of high-frequency trading. Shortly after, Malyshev quit to start Teza, whose profile rose after it hired Sergey Aleynikov, a programmer who was convicted, and later exonerated, for stealing trading software codes from his former employer, Goldman Sachs.

Fast forward to today when the same Malyshev, who became one of the biggest and fastest traders in financial markets, announced he was abandoning his core business after its revenue engine stalled, a sign of the challenge of adapting in markets that unfurl in nanoseconds. As the FT reported, Teza Technologies plans to exit its proprietary trading business in the next six months to focus on building up a quantitative hedge fund that manages more than $1bn, company executives said.

The reason for the dramatic pivot in the business model is that revenues at the company's core, prop trading business, in which historically HFTs have been used to frontrun other orders under the guise of "providing liquidity", and which trades with Teza’s own money, steadily declined from about $250 million four years ago to $80 million in 2015, as increasingly more HFT competition ate into revenues and margins, while HFT-free trading venues like IEX have doomed the high frequency frontrunning business model. In 2016, the business has struggled to make a profit, the people added.

“Generally, it is harder to make money,” Misha Malyshev, Teza chief executive, said in a rare interview.

As the FT, which interviewed Malyshev said, Teza’s situation reflects broader pressures within the industry, where increasing sums are spent on telecoms infrastructure, computer algorithms and exchange fees in order to be an instant faster than others. Chopper Trading, another HFT group, quit the arms race last year when it sold out to competitor DRW. 

The Teza payroll expanded from about 45 employees in 2013 to peak at 117 about a year ago. It has dropped to 93, Mr Malyshev said.

Hoping to raise some money before it is too late, Teza in July began approaching investors with potential deals including purchasing equity in the core proprietary business, licensing its technology and becoming a partner in the fund business. It is unclear if anyone has invested in this melting icecube business model, which was a slamdunk in 2009 but is now utterly commoditized.

Meanwhile, the hedge fund, Teza Capital Management, started managing outside money in October 2014 and contained $1.1bn as of February, according to a regulatory filing. “The future of Teza is the asset management business,” Mr Malyshev said. Well, clearly it's not in the frontrunning of retail orderflow business as everyone else also does it now.

The filing warned Teza Capital’s computer models could fall short, including by making “assumptions regarding the existence of relationships that appear to hold true or in fact held true in the past but that may not exist or hold true in the future”.

But one specific thing caught our attention: speaking a day after Donald Trump won his long-shot bid for the US presidency, Mr Malyshev added: “One thing we know is that in financial markets, six-sigma events are happening with the frequency of two-sigma or even one-sigma,” the lower numbers being statistically more likely. So about that market crash that can never happen...

 

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Cognitive Dissonance's picture

"It's harder to make money."

That's why some people steal for a living. Maybe you should become a banker. That way your theft will be legal.

“One thing we know is that in financial markets, six-sigma
events are happening with the frequency of two-sigma or even one-sigma,”

So everything was (morally and structurally) OK when you were making money? It's always all about the money. When it flows, all is well. When it slows or stops, suddenly everyone becomes outraged by the manipulations and distortions.

You had no problem with them when it was making you money.

Lumberjack's picture

He saw a nail guns were on sale everywhere....My guess is that he is not a hockey fan and will be relocating soon to sunny places...

junction's picture

The Wall Street Journal has a story today about how the Carlyle Group invested $400 million in a Moroccan oil refinery last year and already, the investment is gone.  This is the same Carlyle Group that owns Booz Hamilton Allen, the NSA contractor that spies on all Americans and employed Edward Snowden.  Carlyle Group already put in another $5 million on this failked deal, to cover litigation expenses as it tries to recover funds that it lost to extremely sharp Moroccan rug merchants and camel jockeys.  Carlyle should stick to ripping off American taxpayers, where it only has to deal with bought off low IQ former generals who are fans of Star Trek.

--- 

A Carlyle Group LP hedge fund has lost the $400 million it invested last year in a Moroccan oil-refinery deal, according to a securities filing and people familiar with the matter.

The hedge fund, known as Vermillion, was to receive a share of revenue at the refinery, which ran into financial trouble and was seized by Moroccan authorities later in 2015, the people said. The refinery, known as Societe Anonyme Marocaine de l’Industrie du Raffinage, or Samir, was put into liquidation this year.

King Tut's picture
King Tut (not verified) junction Nov 10, 2016 8:21 PM

Anything the French have been/are involved in is guaranteed to be as corrupt as hell- Morroco, Haiti,  New Orleans, etc 

marcel tjoeng's picture

Canada, Texas, Louisiana, Virginia, Connecticut..

Trangalanga's picture

wow cognitive get with the game, how else are people supposed to progress

Trangalanga's picture

I would aay start trading now that the hft are too scared, prove who really knows whats up. #SGG #FreeofChargePaytoWin #FreeToPlay #Batmananonimity

Angus McHugepenis's picture

Cog... rats fleeing the shit, er... ship?

Infield_Fly's picture
Infield_Fly (not verified) Nov 10, 2016 8:25 PM

“Generally, it is harder to make money,” Misha Malyshev, Teza chief executive, said in a rare interview.

 

Hookers say the same thing.

Kprime's picture

Hookers say, "It takes money to make it harder".

Quantum Bunk's picture

legend ? heh

 

any fool can make money in a  40 year long credit expansion

Dead Canary's picture

Is this a possible sign that Trump will drain the swamp of Wall Street?

Are the rats leaving a sinking ship?

Snaffew's picture

trump hasn't done anything yet, and won't for another 10 weeks.  As far as I'm concerned, all the Trump election did was fill the swamp further in a putrid liquidity of snakes and leeches.  Hence, the rapid rise in the markets.

venturen's picture

What a USELESS business.... TAX IT TO DEATH! 

exartizo's picture

HFT ALGORITHM USE ON BMY DROP OVER OPDIVO

1. HFT Algo unable to analyze and trade on Fear vs Greed 16% drop in BMY (day 1)
2. HFT Algo trades under dark pools on high volume to drop BMY another 5% (day 2)
3. Speculative Fear Longs unable to exit what should have been a profitable trade (day 2)
4. Paid shills in MSM (banks, analysts, columnists) write pieces designed to justify short positions in BMY (eg Credit Suisse).
5. HFT Algo injects shorts under 5% day 2 drop trapping Speculative Fear Longs (day 3)
Continue to support the BMY short narrative to drop the stock to mid 40's.
6. BMY drops under support at $56, as institutional investors exit on trigger long enough to force weak hand Speculative Fear Longs out at a loss (day 4)
7. BMY continues to trade down on institutional investor selling, MSM propaganda journalism pieces, industry downgrades, prop desk short traders/algos cycle.
7. Potential short squeeze back above $50 as HFT algos flip BMY trade to speculative long.
8. Rinse and repeat from step 2 day 2 until support holds and institutional investors come back into the stock.

THE ONLY THING THAT THEY CAN'T CONTROL AND CAN'T SEE ARE BLACK SWANS - THEY ARE THE SMALL RETAIL TRADERS' ONLY TRUE TRADING STRATEGY.

GOT A CRYSTAL BALL?

GET BUSY USING IT.

hedgiex's picture

Smart guy..exiting the HFT biz that is a dead model. No disagreement on his 6 sigma frequency. He pays for talents. Watch him.

 

firestarter_916's picture

This is like cutting in line at Disney all day only to leave a suggestion card at the door saying you had a lousy time.  GTF outta here you filthy ruskie!

Youri Carma's picture

So you have a swarm of HFT traders frontrunning/siphoning off clients and possibly each other on low volume. A perfect recipe for flash crashes which are as common now as the sun coming up every day. Like Disney always said, “It’s a crazy world after all” ;) Talkin’ bout Disney,

Disney Misses As ESPN’s Subscriber Losses Take A Toll
http://www.zerohedge.com/news/2016-11-10/disney-misses-espns-subscriber-...

magnetosphere's picture

umm this guy does not have a phd in astrophysics from princeton..