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MARCH 22, 2010

SPECIAL REPORT

The Life of a High-Frequency Trader Seeking the Supergenius: Most People Dont Last Six Years
By John Dodge

hat types of securities lend themselves to highfrequency trading? They all lend themselves, says Igor Tulchinsky, 43, founder and CEO of WorldQuant, LLC., one of the larger firms practicing highfrequency algorithmic trading. Headquartered in Greenwich, Conn., the company employs about 100 people and has a New York office, affiliate offices in Beijing and Bangalore and plans to open offices in Tel Aviv and London. Tulchinsky spoke with technology reporter John Dodge about what life is like in a profession in which high-speed decision-making and trading operations are still being assessed by lawmakers and regulators (see sidebar). And where the approach to trading is not always that well understood in the securities industry itself.
SIN: Describe WorldQuant and how it operates.
Tulchinsky: Were a spin-off from Millennium

With Igor Tulchinsky Partners in 2007, and I guess if one word defines us, were very quantitative- and proWho are your investors? cess-driven, emphasizing efficiency and automated decisionRight now, I am under contract and am not able to talk making. We have a big research staff here in the U.S. and internationally. Were not a classic high-frequency trading about who the investors are. firm. Were mixed, [doing] a little bit of high-frequency Does that mean you are managing someone elses money? Is that the way most trading and a lot of statistical arbitrage. We trade mostly high-frequency trading firms operate? I dont know if its the way most operate. Theres a lot equities and futures worldwide. We have all kinds of things of little small independent shops (see chart.) You do not beneath the hood here.

Q&A

We develop mathematical models which describe how various instruments move and how to profit from these movements. Some are developed by researchers, some by traders and some are developed by machines scouring historical data day and night looking for patterns and inefficiencies. What we do is always simulated and back-tested. Theres really no human intervention going on here. We strive to quantify and automate everything, so as a result, its very quiet. You could fall asleep here. The money-making part does not really come from research in the traditional sense. Moneymaking comes from statistical research, in our case. In the case of stat-arb firms that are pure high-frequency firms, however, it comes from being connected to the exchanges and having very fast access, so you can act on the same alphas that everybody else has, but youre a little bit faster.
Illustration: Brad Walker

What is statistical arbitrage (stat-arb)?

need much capital [to start] highfrequency trading. Its very easy to set up a shop by yourself. We manage a fairly substantial amount of money, so its a different story.
How reliable are these models?

They are reliable for a while and work for a few months and sometimes for a year and then stop working for reasons we dont really know. Thats why a strong research function into new models is crucial, to keep finding new things.
Describe these models.

We look at anything that drives stock prices, which is quite a few things. Then we try to build a model for them. It could be like some kind of news- or technical- or price-related [thing]. It could be a fundamental thing where a company is trading at a discount. There are lots and lots of inefficiencies out there. The hard part is to piece the whole picture together and trade on a very risk-perfected basis, so you are not swinging all over the place.
Would these inefficiencies be impossible to recognize without mathematical models?

Pretty much, because they are very small, generally a few cents here and there. You cant just trade a few stocks. You have to see patterns and markets in the whole world and capture it that way.
Is there any particular type of securities that lend themselves to high-frequency trading?

They all lend themselves.

company. He talks to people. He understands it well and makes a prediction. Models dont really have depth, but they have breadth. Meaning you scan 5,000 [stocks] and see whats going on in the world. As a result, people make money both ways. People make money fundamentally and people make money quantitatively. Quantitative trading generally has a higher Sharpe ratio, meaning that the returns are favorable and less affected by market trends. Both methods are good and valid, but are different things.
How do you insulate yourself from things you cant predict?

Do you think theres going to be a shakeout in highfrequency trading firms?

I cant really predict that, but certainly returns have diminished recently due to overcrowding in high-frequency trading firms. I am not speaking about WorldQuant [here].
Is that the result of more firms doing the same thing?

Do you look at the whole market or individual stocks?

We look at a large number of stocks because [you] can see things you cannot see when you are looking at single stocks. Theres a lot of noise in a single stock, but when you look at things broadly, you get a different picture. We try to factor in everything that we can. There are thing we can predict and things we cannot predict. Things we cannot predict can still move stocks, [but] we try to remain neutral to them so movements of those things such as news, world conditions and interest rates do not affect us.
Compared to traditional research-based investing where you have analysts looking at company fundamentals, how reliable are these models? Old way versus new way, if you will.

You can do it mathematically. You build a model on how the things you cant predict move stocks. You make sure your portfolio is not disposed to [that] model.
Is that what all investors will be doing in a few years?

Thats quite likely. What used to take 10 computers and two people really cant be done anymore. Now we have hundreds of computers and a hundred people and hundreds times more research going on than we did five years ago. You have to keep running just to stand still.
What is the competitive picture among highfrequency trading firms other than for talent?

I think the kind of reliability is different. In the old way, you have an analyst with depth of understanding in a

I seriously doubt that all investors will be doing stat-arb with a little highfrequency trading. Some will be doing it. It sounds easy, but doing it well is hard. Its all in the details. Everybody knows how to make a car, but not everyone can build one. Its that type of thing. In a number of years, there will still be a wide variety of different types of trading. What made high-frequency trading very popular was that it did well in 2007-08 when there was a lot of chaos in the market. It became too popular and too many people went into it. The world corrects itself and gets back to equilibrium.

Competition is kind of indirect in that other firms try to do the same thing. Competition occurs through the market.

What does the future hold for high-frequency trading?

Its a question of consolidation. The less-efficient guys will go out of the business or get absorbed by the bigger guys. There was a time when you could go into [any] office building in the Stamford/Greenwich area and find a hedge fund. It was really crazy and thats kind of going through a consolidation.
Are you one of the bigger guys?

Im one of the big guys, but there are bigger guys out there.
What is the impact of high-frequency trading on the market as whole and those who hold stocks for the long term?

High-frequency trading firms seem very reluctant to speak with media. Why is that?

The impact is good, because in order to trade and for investments to make money in the long run, there has to be market that creates liquidity so you can buy and sell your investments when you want to. Somebody has to do that and whoever does risks their capital. They have [to make it their] career and be willing to absorb all these stresses and ups and downs. The ones that survive tend to do quite well and provide a function to give the market liquidity.
You mention researchers a lot. Do they write the models? Are they software engineers?

Its hard to speak for other people, but I guess theres fairly limited upside to broadcasting what you are doing. If they brag about themselves, other asset management firms might try to steal their talent. The upside is limited.
Why did you decide to talk to me?

Day in the Life of a Quantitative ReseaRcheR

A random days schedule for a researcher at WorldQuant might look like this:

9:00 - 9:30
On the way to the office, start the day by making short-, medium- and long-term plans and priorities

No one [from the media] ever called me before. I decided Ill try it and see what happens.
Many high-frequency trading firms have very little information on their Web sites, but always seem to publicly stress recruiting and the cultures at their firms. Why?

9:30 - 10:00
At the office, read e-mails, check market trends and fix the little problems that might have occurred during the night

They are both [researchers] and software engineers, but in a limited respect. Software is a language in which you describe whats going on. The strategy is to make money and programming skills do not have to be stellar for that to happen.
What language are these written in and do they run on everyday PCs?

Were not allowed to talk about anything else on the Web site except for recruiting talent. Building these models typically [requires] Ph.D.s and things like culture are important for hiring and retaining good talent. A [high-frequency trading firm] is made up of people. Its all about finding people and retaining them.
What can a trader make at a high-frequency trading firm?

10:00 - 12:30
Identify areas of the market where new ideas should be implemented and tested; read literature, search Google for open source components, look into the mathematical and IT details of the problem

12:30 - 1:00
Lunch break

They are written in C++ or mathematical packages like MatLab. They run on Linux servers. We use hundreds and hundreds of [servers]. We have a big technology staff that makes the whole thing run.
Do you use Microsoft Windows?

You can make millions, if you buy and sell the right things. Certainly not everyone does that. Its like trading in general. In the industry, there have been some making in the hundreds of millions. The rest make less. There are only one or two superstars. When its millions, its deserved.
I read where one made more than $2 billion in a year.

1:00 - 3:00
Shape the identified plan into tasks of reasonable complexity

sometime during the day

Interact with traders, other researchers and information technologists during the day

Theyre Linux applications. The reason we do not use Windows is that its not as convenient to write this kind of stuff.
Could high-frequency trading become a retail business where you take money for clients and invest it for them?

That sounds a little high.

3:00 - 5:00
Start bugging and debugging (i.e., programming and testing the code); try the procedures of some known or similar models and check consistency of the results

Who are the stars in your firm?

There are no stars. Its a big team of people. They are all stars.
At WorldQuant, you have 100 people. What do they do and who are they?

5:00 - 7:00
Finally, test new models and back-test various operations

Thats basically the definition of a hedge fund.

What is the relationship of high-frequency trading and hedge funds?

High-frequency trading is a type of trading. A hedge fund is a kind of investment vehicle. High-frequency trading can happen with or without hedge funds, but often the hedge funds [produce] people who go into high-frequency trading. Were not really a hedge fund. Were an investment management company.
Are there any high-frequency trading algorithms for sale off the shelf, if I wanted to start high-frequency trading?

They are mostly Ph.D.s with quantitative backgrounds. Numbers-wise, most people do research and maybe one fifth or fewer do actual trading. A trader is a senior member of the firm.
When you look for people, whos the ideal candidate? Are they just out of college or do they have a few years experience on Wall Street?

around 7:00
Catalog and memorize the issues of the day, especially if they were conceptual

Later at night
Sometimes, a solution for one of todays problems is found; if so, it will be implemented safely the next day
SOURCE: WorldQuant LLC

We look for people who are supergeniuses. Ideally, we like a combination of supergenius and some experience. Usually, if you find a supergenius, its raw talent that has to be molded.
Are they typically from Ivy League or the best engineering schools? How important is where they went to college?

They are proprietary.

It tends to be a pretty good predictor of how good they are, because why would anybody go to a bad school? We dont only look at the school, but its a predictor taken with other factors. For example, there are people who immigrate to this country, but who do not go to the best schools and are very smart. We weigh everything together. Ultimately, we are interested in the person and their abilities. School is just a factor, a data point.
Do you hire any history and English majors?

My parents [and I] emigrated in 1977 [from] Minsk.

On your Web site, you have what a researchers day is like working in a high-frequency trading firm. How rigorous is it?

Do you have to work?

No.

Do you have a family and what is the impact of your job on families?

Yes, but everything has to do with programming a computer, so they have to be able to do that. If they are a history major and can do that, fine, no problem. That tends not to happen too much.
What is your background?

Aside from the stress, its a relaxed day. People burn out a lot in this business. The physical aspects are no big deal. You come in and work on the computer all day and go home. But making and losing money and deciding how to allocate capital is very stressful and why most people dont last more than 5-6 years.
Is that because they are handling and risking large sums of money?

I have four kids. It puts stresses on family life because theres so much adrenalin for this kind of work. Every weekend, I kind of go through withdrawal. Another thing is people usually talk about what they do with their families, but I prefer not to because there are all these stresses and tensions [with] uncertain outcomes. I just sort of keep all that in a little compartment.
Why do you think there is a negative perception of highfrequency trading within the general public?

I have a masters in computer science from the University of Texas and an MBA from the Wharton School. Ive been doing this since `95.
Did you start at Millennium?

Its not even related to how much money they are handling. Trading in general tends to wear people out because you are up and down all day. Its a pretty hard job.
To what do you attribute your longevity as a trader?

I worked at Timberhill, which is now Interactive Brokers. Before that, I worked at Bell Labs and did all kinds of other ad hoc things from venture capital to advising on privatization when the Soviet Union fell.
Did you emigrate from the former Soviet Union?

I am pretty unusual. My longevity can be attributed to [the fact] I built this into a business and I am just not working by myself. Possibly its attributed to that.
What is the most money youve made or lost in on day?

There might be a negative perception because any time the economy is doing poorly and someone is not doing poorly, there will be negative feelings toward those people. All these people always trading provide the function to making the markets run.
How did you come up the WorldQuant name?

Ive had extremely bad days and very good days.

It was actually very difficult to come up with a name that was not used. Every Greek god I could think of was taken. It was an exhaustive process. But WorldQuant was not taken. We trade worldwide and we are quantitative.

The High-Frequency Trading Life

HIGH-TURNOVER STRATEGIES NOW DOMINATE EQUITIES TRADING ALTHOUGH MOST FIRMS TRADE UNDER 10 MILLION SHARES A DAY.

Percentage of equities trading attributable to high-frequency trading strategies:

2003 2009

22% 70% 28%

2004

average Daily volume (number of shares traded)

2005

number of firms
5 11 100 2,084

32% 61% 48%

2007

More than 250 million 50 Million - 250 Million 10 Million - 50 Million < 10 Million

2008

37%

2006

See the chart itself at http://www.aitegroup.com/reports/200902251.php

Source: Aite Group

PROPRIETARY TRADING IS THE BULK OF THE BUSINESS

Hedge Funds

BUT A THREAT TO MARKET STRUCTURE IS PERCEIVED.

Do not know enough to make a judgment

11% 31%
Broker/Dealers

Top 15 Independent Proprietary Trading Firms

19% 45%
Poses a threat to current market structures

30% 15%
Rest of Independent Prop Firms

36%
Is a positive for the market because it increases liquidity

13%
Wholesale Market Makers

Source: Aite Group

Source: Greenwich Market Pulse, 78 responses.

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