Manoj Narang wears a lot of hats. He's a technologist who built a low-latency platform and developed a monitoring system for the US SEC. He's an executive who runs a hedge fund and an HFT group. And he's an outspoken champion of data-driven decision-making.
In this interview with Automated Trader Editor Adam Cox, the CEO of Tradeworx talks about why he'd be happy to see some market changes enacted, even if that meant hurting his own business.
Adam: Your activities are now a lot more extensive than they were when you first formed the company, so what is the focus at the moment?
Manoj: In the beginning our focus was similar, conceptually, to what it is now, in the sense that we wanted it to be a democratising force when it came to availability and applicability of financial technology. But our principal way of making that a reality, when we first started the company, was to focus on the retail investment segment. And that's because the retail segment was actually where the locus of innovation was back then, because of all the changes in the brokerage industry, namely the advent of ECNs, or ATSs as they're known, the advent of online brokerage and of the internet as a data dissemination medium. All of those were very, very democratising forces in their own right and it opened up an opportunity that we saw as basically bringing analytical decision support tools directly to retail investors to empower them to make more efficient and more optimal decisions that correctly reflected their beliefs, opinions and preferences, and also, behind the scenes, leverage a lot of the sophisticated machinery of modern portfolio theory and metrics that they may not have that much familiarity with, in a way that was rather transparent.
The closest analogy is Google. The Google search box is simple enough that billions of people can use it. Really, the only requirement to use Google is just basic literacy. So if you can formulate a search query, behind the scenes some very complicated algorithms and mathematics are brought to bear to bring an optimal answer. But that's all beside the point as far as the user is concerned. They just care about the applicability of the answer. We had the same perspective.
Because of adverse operating conditions related to the dot.com bubble and the bear market of 2000-2001, we changed our business model circa 2001 to focus on institutional priorities. One thing we did was start our own hedge fund, which continues to have a superlative track record. Our mandate was always use completely home-grown technology, both on the trading side and the research side, and monitoring side. By doing that we've also created a very powerful base of intellectual property that can be re-appropriated by making it commercially available.
We started another business, namely the high-frequency trading business, in response to adversity in the hedge fund business around the time of the financial crisis. So we now have two different trading businesses. They both have different domains of intellectual property that give them their edge and so, wherever possible, we seek to commercialise parts of our IT that we deem to have wide applicability without compromising our edge.
Our high-frequency trading strategies are all dependent on an ultra-low latency trading infrastructure that we built from scratch, which is among the most powerful and complete in the industry. At the same time that we rolled out our top trading strategies, we also rolled out this platform for wide commercial availability and became clients of it ourselves. All in, about 5% of the average daily volumes of the US equity market is now going through that platform. We are one of the users of it, but we are not the largest.
Adam: So that 5% refers to all the users, not just yourselves?
Manoj Narang, CEO, Tradeworx
Fear, paranoia and ignorance
Adam: You've been described as one of the most outspoken champions for HFT. Is there a reason for your passion about this subject, apart from the fact that it's your livelihood?
Manoj: There are a whole lot of reasons why I've been very active in terms of reaching out to policy makers of all stripes and the press and the public. Principally it's because I feel there's a tremendous amount of misinformation and my interest is in a better marketplace. I think that when there's fear and paranoia and ignorance and ill-founded statements and basically lack of understanding out there - and that's driving policy making - I think that's very dangerous to the markets. So it really has nothing to do with my livelihood per se. I'm sure that some of the reforms that I've been advocating would be detrimental to my current high frequency trading business, but our interest is in a fair level playing field market and in a properly functioning market. I think that any sort of regulations, rules, demarcations to the current market structure that facilitate trader fairness and transparency - we support those whether they're beneficial to us in particular or not. That's been our motivation all along.
We are definitely concerned about the prospect for policies that are undertaken for the wrong reasons. Those reasons could be cynical reasons, having to do with grandstanding and so forth, sort of what you've seen in Europe for the past couple of years. Basically, what we don't like is that, rightly or wrongly, the public view of the financial industry has really plummeted since the financial crisis. I think much of that is well-deserved but the problem with that is there's been very little differentiation between good actors and bad actors in the industry. And what I don't like - and what I tend to take personally - is being lumped in with people who had something to do with the financial crisis. Nobody ever heard of high-frequency trading, nobody ever cared about high-frequency trading before the financial crisis, and because the financial crisis happened to coincide with when people first heard of high-frequency trading, I think those things got conflated, even though they have nothing to do with each other whatsoever.