To those who have followed the rise and fall of the HFT industry, and certainly the far more dramatic rise and fall of one former Goldman trader and programmer, Sergey Aleynikov, the names Misha Malyshev and Teza Technologies are very familiar.
Malyshev founded Teza – named for a river in his native Russia – in 2009. The high-frequency trading group used automated programs to vault to the top ranks of participants on venues such as the CME and BrokerTec, a marketplace for US Treasury bonds once dominated by banks.
Malyshev, who has a doctorate in astrophysics from Princeton, made more than $1 billion for hedge fund Citadel In 2008 while serving as its head of high-frequency trading. Shortly after, Malyshev quit to start Teza, whose profile rose after it hired Sergey Aleynikov, a programmer who was convicted, and later exonerated, for stealing trading software codes from his former employer, Goldman Sachs.
Fast forward to today when the same Malyshev, who became one of the biggest and fastest traders in financial markets, announced he was abandoning his core business after its revenue engine stalled, a sign of the challenge of adapting in markets that unfurl in nanoseconds. As the FT reported, Teza Technologies plans to exit its proprietary trading business in the next six months to focus on building up a quantitative hedge fund that manages more than $1bn, company executives said.
The reason for the dramatic pivot in the business model is that revenues at the company’s core, prop trading business, in which historically HFTs have been used to frontrun other orders under the guise of “providing liquidity”, and which trades with Teza’s own money, steadily declined from about $250 million four years ago to $80 million in 2015, as increasingly more HFT competition ate into revenues and margins, while HFT-free trading venues like IEX have doomed the high frequency frontrunning business model. In 2016, the business has struggled to make a profit, the people added.
“Generally, it is harder to make money,” Misha Malyshev, Teza chief executive, said in a rare interview.
As the FT, which interviewed Malyshev said, Teza’s situation reflects broader pressures within the industry, where increasing sums are spent on telecoms infrastructure, computer algorithms and exchange fees in order to be an instant faster than others. Chopper Trading, another HFT group, quit the arms race last year when it sold out to competitor DRW.
The Teza payroll expanded from about 45 employees in 2013 to peak at 117 about a year ago. It has dropped to 93, Mr Malyshev said.
Hoping to raise some money before it is too late, Teza in July began approaching investors with potential deals including purchasing equity in the core proprietary business, licensing its technology and becoming a partner in the fund business. It is unclear if anyone has invested in this melting icecube business model, which was a slamdunk in 2009 but is now utterly commoditized.
Meanwhile, the hedge fund, Teza Capital Management, started managing outside money in October 2014 and contained $1.1bn as of February, according to a regulatory filing. “The future of Teza is the asset management business,” Mr Malyshev said. Well, clearly it’s not in the frontrunning of retail orderflow business as everyone else also does it now.
The filing warned Teza Capital’s computer models could fall short, including by making “assumptions regarding the existence of relationships that appear to hold true or in fact held true in the past but that may not exist or hold true in the future”.
But one specific thing caught our attention: speaking a day after Donald Trump won his long-shot bid for the US presidency, Mr Malyshev added: “One thing we know is that in financial markets, six-sigma events are happening with the frequency of two-sigma or even one-sigma,” the lower numbers being statistically more likely. So about that market crash that can never happen…