By Telis Demos and Alexander Osipovich
Every day, about 10% of all orders sent to the U.S. stock market
first pass through black boxes created by a 50-person technology
company, Hyannis Port Research Inc. in Needham, Mass.
HPR, whose boxes do risk checks on the trade orders, is little
known outside Wall Street technology departments. But it is at the
center of a high-stakes contest among big banks to keep their
trading arms relevant and profitable.
Wall Street stock trading has faced pressure from all sides in
recent years. Clients are paying smaller fees to trade, driven by
increased automation and a broad shift toward passive investing
strategies that require fewer high-margin services such as
research, which used to juice banks' trading returns.
At the same time, banks' need to invest in trading-related
technology hasn't slowed. Years since Wall Street began its shift
from the old-fashioned business of brokering trades by phone, the
speed and complexity required of trading desks is only
increasing.
Last year the dozen biggest banks globally generated $9.2
billion in core stock-trading revenue, a third less than they did
in 2009, according to the industry data tracker Coalition. But much
more of that revenue is generated by electronic trading than in the
past.
Some big banks, including Deutsche Bank AG, are exiting equities
trading. Others are staying in largely so they can service their
trading clients in more-lucrative businesses, such as lending.
While HPR's major competitors are the in-house systems of major
financial institutions, many banks are managing the rising
technology needs of their trading operations by turning to HPR or
other outside partners such as Pico, which connects banks to
trading venues, or Cloud9 Technologies LLC, which provides
voice-communication software.
HPR builds computer devices about the size of a pizza box. Banks
such as UBS Group AG place them in data centers connecting to
exchanges and other trading venues, and trade orders are analyzed
before they are sent into the market.
Using the same chips that power hyperrealistic videogames, HPR's
Omnibot devices need just 360 nanoseconds, or billionths of a
second, to perform more than 65 risk checks.
In a fraction of the time it takes for an eye to blink, the
devices check whether a client is allowed to buy or sell short a
particular stock; that a client won't exceed its bank credit limit;
and that the order wasn't a "fat finger" error. If the boxes detect
a problem with an order, they can kill it without stopping others
from going through.
The consequences of a botched trade can be severe. Traders still
wince at the memory of the 2010 "flash crash," in which a blizzard
of erroneous trades caused the Dow Jones Industrial Average to
plunge close to 1,000 points, only to rebound, within minutes. In
2012, the former Knight Capital Group lost more than $400 million
from trading software gone haywire.
Banks' focus on this area sharpened when the Securities and
Exchange Commission adopted a 2010 rule requiring banks or brokers
to do risk checks on trades before they are sent to the market.
Some banks have been penalized for violating the rule.
Big banks have historically built such systems themselves. But
several banks have decided that the cost and time needed to match
the fastest speeds is too much.
"Clients have become more sophisticated and gained access to
more electronic trading tools," said Joanna Fields of consulting
firm Aplomb Strategies. "It's a struggle for firms aiming to
service these clients to maintain the technology expertise required
to keep up."
When banks' technology partnerships work, banks are able to
deploy the latest technology at much lower costs. But outsourcing
key functions can sometimes go wrong, and such relationships
require banks to do extensive diligence on partners. Regulators
typically hold the bank, not the vendor, responsible for any
slip-ups.
UBS has extended its use of HPR from the U.S. and Europe to Asia
as well. Bank of America Corp. has worked with HPR and is planning
to expand globally, and Credit Suisse Group AG is starting to work
with HPR, said people familiar with those two relationships. And
people familiar with the situation said Goldman Sachs Group Inc.
has had discussions to potentially work with HPR.
HPR's chief executive and co-founder, Anthony Amicangioli, began
his career designing switches used to route telecommunications
network traffic. An engineer by training, Mr. Amicangioli moved
into finance in the 2000s, working with a high-frequency trading
firm.
In 2011, he and a partner raised $2 million from UBS to start
HPR, with the Swiss bank becoming his first customer.
"We are standing in front of the Hoover Dam," Mr. Amicangioli
said. "It only takes a few microseconds for something to blow
up."
Write to Telis Demos at telis.demos@wsj.com and Alexander
Osipovich at alexander.osipovich@dowjones.com
(END) Dow Jones Newswires
August 27, 2019 09:09 ET (13:09 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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