The New York Stock Exchange is due for a tune-up.
That was the diagnosis after its new owner, IntercontinentalExchange Group Inc., examined the software known as the matching engine that pairs buyers and sellers, according to two people familiar with the matter. To modernize trading on the 222-year-old market, ICE bought Algo Technologies Ltd., a firm that claims to have the industry’s fastest matching engine, the people said.
The system created by Algo Technologies, which was formed in 2010 by executives with backgrounds in high-frequency and quantitative trading, will drive NYSE’s U.S. stock and options markets, according to the people familiar with the matter, who asked to not be identified because the acquisition hasn’t been publicly announced. ICE considers the current NYSE technology outdated and slow, one of the people said.
High-frequency traders have become the de facto facilitators of buying and selling in the $22 trillion U.S. equity market, and their business models depend on reacting to price movements as fast as possible. Those firms are some of the best customers of exchanges, so the faster Algo Technologies system could help ICE lure business away from NYSE’s competitors Nasdaq OMX Group Inc. and Bats Global Markets Inc.
ICE purchased NYSE Euronext in November, briefly catapulting itself to first place in the rank of world’s biggest exchanges by market value. While the crown jewel of the acquisition was the London-based Liffe derivatives market, ICE Chief Executive Officer Jeff Sprecher also picked up the New York Stock Exchange, two other U.S. stock markets and two options platforms.
Brookly McLaughlin, a spokeswoman for Atlanta-based ICE, declined to comment on Algo Technologies. Shares of ICE rose 2.2 percent to $198.03 today, trimming their 2014 decline to 12 percent and giving the company a $22.8 billion market value.
Algo Technologies claims to have the industry’s lowest latency, a term describing how long a matching engine takes to process and complete requests to buy and sell. Its AlgoM2 technology takes 16 microseconds, or 16 millionths of a second, according to the Algo Technologies website. That compares with 124 microseconds for London Stock Exchange Plc’s Millennium platform, 138 microseconds at Bats Europe, 250 microseconds at Nasdaq, and 500 microseconds for NYSE Arca, according to Algo Technologies.
The debate over the need for speed, and whether lightning-fast trading gives some investors an unfair advantage, has been reignited by the March 31 publication of “Flash Boys” by author Michael Lewis. In it, Lewis argues that high-frequency traders, exchanges and broker-dealers have rigged the U.S. stock market.
Regulatory and technological changes since the 1990s have reduced trading profits for brokers, squeezing out humans. High-frequency traders have filled the void, becoming the primary market makers that facilitate buying and selling. Faster exchange computers can help high-frequency traders buy and sell quicker.
Even as Sprecher tries to improve the NYSE, ICE has explored ways to nullify advantages enjoyed by high-frequency traders, according to a person with knowledge of the matter. He offered to buy IEX Group Inc., the upstart trading platform that serves as the hero in Lewis’s book, the person said. ICE not only liked the firm’s technology, but also wanted IEX CEO Brad Katsuyama’s expertise, the person said.
Gerald Lam, a spokesman for New York-based IEX, declined to comment.
ICE met with market operator PDQ Enterprises LLC, but didn’t consider buying it, according to a person familiar with the matter. Like IEX, PDQ has marketed itself as a haven from high-frequency traders.
Keith Ross, the CEO of Glenview, Illinois-based PDQ, said he met with ICE last year to discuss the structure of the U.S. equity market. No transaction was discussed, said Ross, who used to work for Chicago-based Getco LLC, a high-frequency trader. PDQ was created by Christopher Keith, an NYSE official during the 1970s and 1980s who served as the Big Board’s chief technology officer.
The management team at Algo Technologies has deep ties to high-frequency and quantitative trading. It was founded in 2010 by Hirander Misra, Rami Habib and Alexei Lebedev, who owned stakes along with Algo Engineering LLC, a technology firm specializing in algorithmic trading.
Misra had been chief operating officer of Chi-X Europe Ltd., which began a trading platform that challenged traditional European exchanges. He quit Algo Technologies in 2011, citing a strategy disagreement. Bats Global Markets bought Chi-X Europe that year.
Habib, who replaced Misra as CEO, has a doctorate in computational fluid dynamics. He is a co-founding director of AlgoSpan, a “provider of ultra-low latency ‘shortest path’ fiber networks that gives access to low latency market data and execution,” according to a biography on the Algo Technologies website.
Lebedev, an Algo Technologies director, has spent years “applying his technical wizardry to high frequency trading, developing a technological base for redundant low-latency coordinated distributed systems,” according to the website.
From 1983 to 1989, Chairman Howard Morgan oversaw venture-capital investments as president of Jim Simons’ Renaissance Technologies Corp., the hedge fund that helped pioneer quantitative investing.