The hedge fund has been no stranger to controversy throughout the years. One of the issues is the provision of market surveillance technology via Tradeworx to US financial markets watchdog, the SEC, amid cries of conflict of interest from some HFT industry critics.
Mike Beller talks to Automated Trader about the evolution of Tradeworx and Thesys, the technical challenges of conducting and monitoring ultra-high frequency operations, and why he believes public-private partnerships are inevitable for successful market surveillance in the 21st century.
Automated Trader: What are some of the big changes you've seen throughout your time with Tradeworx?
Mike Beller: I thought I was joining a financial technology company because that is what we started, but we have gone through a lot of changes over the past 15 years. The financial tech business did well for three years, but then in the (dot.com) market crash and September 11 (2001 terrorist attacks), we were not able to continue that business model. So we rebooted as a hedge fund and had to redo a lot from scratch. Initially a lot of our edge came from advanced analytics and our ability to gather data and make decisions quickly. That has always been an edge for Tradeworx; but as the years went on, it became more and more important to evolve our trading technology to be able to efficiently trade a larger and more diversified book in a situation where the markets were getting more complicated. There was decimalisation, there was RegNMS, and the beginnings of colocation. We had to conform to these changes or we would have had unacceptable trading performance.
We put more and more resources into trading technology until that became a huge part of the technical effort of the company. In 2008, we launched a fully colocated platform, which immediately paid dividends in terms of improving execution by our hedge fund, but we also found that it was possible to do high frequency trading on our platform. So we began a high frequency proprietary trading effort, which was immediately successful. That was very gratifying - it showed that the work we had done on advanced trading technology had really paid off. But there was an issue with the secular trend, this was going to be a very expensive platform to run. We knew that there was going to be a constant need for investment, for adapting the latest advanced technologies and continually improving our systems in order to stay on the leading edge.
AT: Can you be more specific? How expensive exactly?
MB: Millions of dollars a year. At the time, it was an incremental thing. At first it was a modest investment and then it became more and more. You can go into a new colo, set up networking, get connectivity up and then there would be a newer lower latency this, or higher bandwidth that, and you would have to keep adapting.