High-Frequency Trader Malyshev Mulls Outside Investors

High-frequency trading firm Teza Technologies LLC, whose founder Mikhail “Misha” Malyshev says he made more than $1 billion for Citadel LLC in 2008, is considering whether to also start managing money for outside investors, according to three people with knowledge of the plans.

Teza, which now only trades with its partners’ money, may complement its existing business with two quantitative funds and let outsiders invest in them, said one of the people, who asked to not be identified because the discussions are private. No decision has been made because Teza doesn’t yet know how much money the new strategy can accommodate, the person said. Kim O’Halloran, a spokeswoman for Teza, declined to comment.

Since Malyshev founded Chicago-based Teza in 2009, industry profits from high-frequency trading strategies have dwindled. Opening the firm to outside investors would add another source of income for Teza: charging fees to clients. HFT firms, who can dash into and out of investments in fractions of a second, are facing unprecedented scrutiny following Michael Lewis’s latest book, “Flash Boys,” which argues that their industry has helped rig the U.S. stock market.

“Things are not as easy as they used to be for a lot of these firms,” Sang Lee, managing partner at Aite Group LLC, said in a phone interview. By accepting client assets, Teza would probably have to change its trading strategy, possibly by extending the length of time it holds securities, he said. “They’re trying to change with a changing competitive landscape.”

$1 Billion

Malyshev, 45, was Citadel’s high-frequency trading chief before quitting in 2009 to start his own business. The Russian-born trader was sued by his former employer that year over claims he violated a contract not to compete with Citadel when setting up Teza, which is named for a river in western Russia. When testifying during that lawsuit, Malyshev said the Citadel department he ran made more than $1 billion in 2008, up from about $4 million five years earlier.

Citadel, the Chicago-based hedge fund run by billionaire Ken Griffin, in October 2009 won its bid for a court order to temporarily block Malyshev and his deputy from working on their new business.

Teza was also thrown into the spotlight in 2009 after hiring Sergey Aleynikov, the former Goldman Sachs Group Inc. computer programmer who was convicted in 2010 by the U.S. of stealing the bank’s trading software. While that conviction was later overturned, Aleynikov was then charged in New York state court. He pleaded not guilty.

Lagging Behind

Quantitative funds such as the ones under consideration at Teza use mathematical models to decide when to buy and sell securities. Quantitative hedge funds have returned 7.5 percent annually during the past five years, lagging behind the 7.9 percent gain at all hedge funds, according to data compiled by Chicago-based Hedge Fund Research Inc. The Standard & Poor’s 500 Index’s total return was 21 percent a year in the same period.

Earnings for high-frequency trading firms from U.S. stocks fell to $810 million in 2012 from $4.9 billion in 2009, according to estimates from Rosenblatt Securities Inc., a New York-based brokerage firm.

Other HFT firms are also changing their strategies. Tradeworx Inc. is holding positions for 10 to 11 minutes, double the average in 2010, Chief Executive Officer Manoj Narang said during an interview on Feb. 13. Global Trading Systems LLC has sought to hire strategists from statistical-arbitrage hedge funds, which turn over positions more slowly than HFT firms, according to CEO Ari Rubenstein.

Virtu IPO

KCG Holdings Inc., formed last year through the merger of Knight Capital Group Inc. and Getco LLC, has shifted its focus to serving institutional investors. Virtu Financial Inc., one of the biggest high-frequency trading firms, is seeking to sell shares in an initial public offering. Virtu delayed that process amid the uproar sparked by the publication of Lewis’s book on March 31.

Before joining Citadel in 2003, Malyshev worked at McKinsey & Co. and Bell Labs, according to Teza’s website. He earned a Ph.D. in astrophysics from Princeton University in 1998, according to the website. He holds a bachelor’s degree in physics and mathematics, and a master’s degree in theoretical physics from the Moscow Institute of Physics and Technology.

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