What Do Berkshire, Twitter and Alibaba Have in Common?
It’s the end of another day on the New York Stock Exchange in Lower Manhattan, and that means it’s Global Trading Systems vs. the world.
Brokers in blue jackets are crowding around the GTS trading post, looking to sell shares of Alibaba. They’re calling out figures above $98 a share, where they expect the Chinese retailer’s price to close. GTS is pushing back: They’ve got it wrong.
“Everything’s smooth,” says Patrick Murphy, 47, head of market-making at NYSE for GTS. His tan skin and floppy blond hair look out of place on the floor, like he’s been teleported here from a Southern California beach. “There’s no reason to take it up a dollar.”
“What are you saying on BABA?” a broker yells. “BABA’s looking quarter and a half,” Murphy responds, using trader shorthand to say the stock’s price will close somewhere between $97.25 and $97.50.
His confidence comes from a phalanx of proprietary algorithms that fill the five computer screens surrounding him. Digesting inputs from 35 metrics, including currency rates and prices for exchange-traded funds, they predict where a stock should be trading with razor-sharp accuracy.
Murphy’s role here is similar to that of a lifeguard, monitoring share prices throughout the day and jumping in when something goes awry. For the 1,200 securities GTS manages, he uses the algos to dive in and decide how much of the firm’s capital to cough up when it looks like a stock will swing dramatically away from its fair value. That job is particularly important at the end of the trading day, as volume spikes. Orders to buy and sell a stock sometimes get out of whack, as they have for Alibaba. On this particular day, it falls to Murphy to sell more than 150,000 Alibaba shares—an outlay in excess of $14 million—to bring the stock to a smooth close.
As the sound of the closing bell reverberates off the exchange’s marble walls and coffered ceilings, BABA closes at $97.42, right in line with the computer’s estimates. “The machine was right today,” Murphy says, relaxing his posture. He punches a teal button labeled DONE on a special square keyboard, closing out the stock.
A year ago, GTS wasn’t even here. It was a faceless player in financial markets, silently sending orders through servers in data centers. This high-visibility booth on the NYSE floor, within spitting distance of CNBC television cameras, was the property of Barclays.
Why would a 10-year-old high-frequency-trading firm that prides itself on its technological savvy and needs only a few handfuls of humans to run its business want to muscle its way onto the floor of the centuries-old NYSE? The answer is what’s driven finance since its very inception: GTS wants clients.
The company is a member of Wall Street’s new guard, a group of market-making upstarts that are changing the nature of trading. GTS and its peers, such as Virtu Financial, Jump Trading, DRW Holdings, and Hudson River Trading, were among the first to dedicate all their resources and energy to the singular goal of being the fastest, most effective traders, period. As markets rapidly went electronic, getting ahead of the curve paid off. By 2009 high-frequency-trading firms were earning more than $7 billion in U.S. equities annually, according to Tabb Group research.
That income has allowed these elite firms to continually maintain the best technology. But as the rest of the market has caught up and competition has increased, their collective equity revenue has fallen more than 80 percent, making it vital to pinpoint ways to grow. “All the firms that started up in garages with algorithms and made a lot of money with proprietary strategies have started looking at other businesses they can get into,” says Kevin McPartland, head of market structure research at Greenwich Associates.
Many of the business lines they’re eyeing have been traditionally associated with banks, which are being squeezed by stricter regulations and rising technology costs. The behemoth institutions, taking notice of scrappy up-and-comers, are seeking to outsource some services to the leaner firms. One example: Banks are connecting their currency desks to price feeds from high-frequency traders—including GTS—to complete client orders.
This changing of the guard has played out on the NYSE floor. Until a few years ago, banks including Goldman Sachs and Bank of America had a presence in this temple of American capitalism. Yet this year, for the first time, four electronic trading firms—GTS, Virtu, Citadel Securities, and IMC Financial Markets—manage just about all the trading on the historic venue. Barclays was the last bank to leave, when GTS purchased its floor unit in April, inheriting a roster of companies including Twitter and Berkshire Hathaway. (Both Barclays and GTS declined to disclose the sale price.) For GTS, nabbing a spot on the floor took it a step toward doing deals directly with corporations.
That’s been a focus for GTS’s co-founder and chief executive officer, Ari Rubenstein. For the former commodities trader, the move to the trading floor was inevitable. “Amidst the pandemonium of the floor there’s this natural elegance,” says Rubenstein, 44, who has a boyish appearance and an affinity for pocket squares. “You have this commotion, this history, this intensity—yet there’s this purity of buyers meeting sellers that’s happening and playing a pivotal role.”
The son of two schoolteachers, Rubenstein grew up on Long Island and has an accent to prove it. He caught the finance bug on a visit to the NYSE floor just before his senior year at the University of Vermont, where he was studying psychology and philosophy. (He found business “too boring” in the classroom.) Enamored by the experience, he joined the New York Mercantile Exchange in 1994 as a runner, the lowest rung on the ladder. It was there that he found Robert Ahrens, an independent market maker, who became his first mentor and gave him a job as a clerk.
“He was always asking me for the secrets of trading success,” says Ahrens, now 66 and retired. To teach Rubenstein the art of trading, Ahrens helped him apply the same precision and patience needed in fly-fishing. “It’s an art,” he says. “You have to decide what the appropriate fly is.”
Years later, working in the cash equities business at Pax Clearing, Rubenstein met David Lieberman and Amit Livnat. The trio co-founded GTS in 2006, reasoning that computers would be nimbler and better suited to their job making markets—the fast-paced business of offering to buy from sellers and sell to buyers—than humans could ever be. It was a shrewd bet. Now GTS trades 3 percent to 5 percent of the U.S. cash equities market, according to its estimates, a sizable chunk. “Trading on a computer requires a much different skill set than open outcry,” Ahrens says. “That was a leap of faith.”
Because GTS is closely held, details on its size and profitability are kept secret. The company declined requests to provide information on its annual trading revenue and ownership structure. While GTS began as an equity-trading operation, it’s expanded to other assets in the past 10 years. It began trading futures in 2009 and currencies about three years ago.
Rubenstein also declined to provide GTS’s daily turnover in the foreign exchange market, saying only that it’s many billions of dollars. (Traders buy and sell $5.1 trillion worth of currencies a day, according to the Bank for International Settlements.) One of the few facts the company has disclosed is that its foreign exchange volumes in the first half of 2016 more than doubled from the first half of 2015. And over the four weeks during and immediately following the U.K.’s referendum to leave the European Union, currency trading volume spiked. GTS traded about three times as much as it had in the four weeks before the vote, it says.
The company employs a crew of just 106 people. A significant chunk of that head count is the 25 employees at its NYSE floor operation, most of whom came with the Barclays floor unit purchase. Over the next year, Rubenstein says, he plans to add five more new hires to focus primarily on foreign exchange. In another cultural shift on the new Wall Street, the CEO can’t say for certain how many of his people trade currencies. There’s a free flow of work, he says, such that an engineer might spend three months on a foreign exchange project and then pivot to something new—a contrast to the distinct lines drawn between trading desks at banks.
Rubenstein sees the Barclays acquisition as a natural next step for GTS and a chance to branch out. Using its prowess in equities trading, the firm can cozy up to the corporate giants whose stock it manages at NYSE, providing reams of juicy data on how the companies’ shares trade throughout the day. “That was a big thing that we were attracted to with this purchase,” he says. “It completely changed our ability to promote or show them what we could do.” Ultimately GTS wants to offer those mammoth companies other services, too, including opportunities to trade foreign currencies and fixed-income products such as Treasuries, helping them hedge risk on their balance sheets.
Acquiring a spot at the NYSE was a bit of a coming-out party for GTS, a way to throw off its veil of anonymity. Rubenstein wants corporations to know GTS’s name and associate it with fast, “efficient trading.” To do so, it must build clout with businesses that may not know it exists—hence the floor presence, which is essentially a marketing exercise. The trading data are something like a fly to help hook potential corporate clients. “The same quantitative analysis we do internally to analyze markets, that same data is very valuable to listed companies,” Rubenstein says.
When GTS took over from Barclays managing the stock of Core Laboratories, a $4.9 billion oil- and gas-services company, CEO David Demshur had never heard of the electronic trading firm. Soon GTS was winning him over, delivering data to his in-box at the beginning and end of each trading day, with richer and more customized information on his company’s stock than he’d been getting from Barclays, he says. These daily reports include details on where Core Labs’ stock is expected to trade throughout the day, who the biggest buyers and sellers are, and what’s causing volatility in its price. They also have forecasts for prices of various commodities. “We find that invaluable,” Demshur says. “Their experience in market-making we’ve found to be superior.”
The big shift, Rubenstein says, is that just a few years ago, banks and his firm were, in a sense, rivals on electronic markets. Now GTS is courting C-suite executives at some of the world’s best-known companies and sees Wall Street as a necessary partner to boost its revenue along the way.
Building this kind of a business could prove a delicate balancing act. Banks are becoming partners to high-speed traders themselves—a shift underscored this summer when JPMorgan Chase agreed to use Virtu’s technology to trade in the U.S. Treasury market. But an upstart selling services directly to a slice of bank customers could rankle the giant institutions. That means an electronic trader encroaching on a bank’s turf must tread ... carefully. “They’re trying to steal from the same model banks have been using for decades,” says Greg Gibbs, a veteran of currency trading who runs Amplifying Global FX Capital, a research and money management firm based in Breckenridge, Colo. “They’re impinging on the banks’ territory.”
Rubenstein says GTS wants to include banks in the process, not replace them. Helping corporate customers trade in asset classes such as currencies would call for a bank’s involvement. “We want to include the whole ecosystem,” says Rubenstein, who concedes it’s still early and the road ahead is fraught with challenges.
Even having a business model so dependent on algorithms comes with risks. A single trading error can end in disaster for a smaller firm. Knight Capital Group lost $440 million in 2012 after one of its algorithms ran amok. The isolated trading mishap crippled the company and paved the way for its takeover by Getco in a matter of months, forming KCG Holdings. Besides the risk, success isn’t guaranteed. Executives of publicly traded companies are rarely well-versed in the nuances of market microstructure, which could make it more difficult to persuade them to use a small, private high-speed-trading company like GTS for services they’d typically just bring straight to their bank.
Even if GTS succeeds in making inroads with corporates, it will hit a ceiling in how far it can push that business, says Matthew Duch, a former portfolio manager at Calvert Investments. Unlike the world’s largest banks, firms such as GTS can’t offer corporate bond allocations or repo trades or financial research to various markets, all services banks use to keep clients happy. “I see great value in the banks continuing to be intermediaries and market makers,” Duch says. “If you’re a one-stop spot, it’s sort of ‘use us and then good luck.’” Then there’s the possibility that Wall Street buys what it can’t compete with. “If GTS looks to become such a competitor, we’ll probably see an acquisition,” he says.
Even at this stage in his career, Rubenstein remains a student of the floor. He visits NYSE about once a week to learn from veterans like Murphy and persuade companies on the cusp of going public to choose GTS to manage their stock. On this September day, as prices for companies glow overhead, Rubenstein gazes across the room. It’s clear he relishes being on the front line of one of the most important markets in the world. Day in and day out, GTS pushes and pulls in the vital process of pricing stocks.
Despite all the Ph.D.s he’s hired and algorithms he surrounds himself with, Rubenstein still relies on the skills he honed on the commodities trading floor early in his career. “That helps me navigate the business,” he says.
The NYSE empties out within minutes of the close. Garbage is swept aside on the floor. The market will be back in session tomorrow at 9:30 a.m., and GTS will be in this little booth, ready to take on the world all over again.
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