The fastest guns in the market
By Michael Evans | smh.com.au | 06 November
To some, it's the geeks' revenge. "These are the guys who can calculate 42 times 832 in their heads," one insider says.
To others, it is the dark side of share trading – proof that the dice are loaded against the average investor. However you look at it, it is being used to get filthy rich. Quickly.
They are the new breed of derivatives traders: they have no clients, they trade their firm's own money using high-powered computer programs like F1 – Formula One, so-called because it is so fast – based on secret algorithms.
US sharemarket officials and Congress are mulling bans on some of their tricks. And it is so profitable, the big banks are using it.
The New York Times and The Wall Street Journal have devoted pages to the dark arts of "high-intensity" and "low-latency" trading and the world of "dark pools".
Little over a decade after the demise of the chalkboard trading room floor, technology is outpacing regulatory attempts to keep a level playing field and fair market.
And the advent of superfast computers and programs has given rise to high-frequency trading whereby the game is outrunning other investors, and leading to a "technological arms race".
The local market regulator, the Australian Stock Exchange – which makes money from every trade on market – has issued a discussion paper with the objective of "identifying improvements" in trading rules.
And in the meantime the likes of 32-year-old Dinesh "Danny" Bhandari (right), from Kensington, are making millions of dollars. Most start-ups take a few years to turn a buck.
Not Tibra Capital. In 2006, fresh from parting ways with his Dutch-based rival Optiver, the South Australian-born derivatives trader Bhandari put $2 million into a new business venture.
Reflecting the nature of his split with Optiver, it was originally called FTD – or F--- the Dutch.
A handful of former colleagues at Optiver plus some fresh investors joined him, using their private companies with creative names such as Begg, Borrow and Steal, Impropriety Unlimited and Rottengarabaldi to chip in a further $4 million.
They set to work, seeking to profit on tiny price differences by buying and selling shares, futures, bonds, derivatives and options, trading in the hundreds of millions of dollars per day.
High-frequency traders test prices by issuing buy or sell orders that can be withdrawn in milliseconds, giving traders an idea of the market's willingness to trade at those prices.
They can also earn tiny profits millions of times over from rebates provided by exchanges for being a market maker, or by being willing to buy and sell when there is a shortage of other traders.
Incredibly, in its first full year Tibra turned a profit of $14 million. The following year it made a profit of $57 million.
And accounts just lodged with the Australian Securities and Investments Commission show that, despite the global financial crisis, Tibra posted a $77.5 million profit last year.
Revenue nearly doubled, to $271 million. Between them, the salaries of the six key executives were $6.8 million. Tibra's extraordinary growth led to Bhandari's debut on the BRW Young Rich List this year with a personal fortune conservatively estimated at $40 million.
Last year he was named the young entrepreneur of the year by Ernst & Young. But Tibra's success has been called into question.
Private investigators have been used to gather evidence before a myriad court actions by Optiver over the past three years amid claims Bhandari and his colleagues are profiting from software that belongs to their former employer.
Tibra denies the allegations. "We believe there is no basis to these claims and we will take all appropriate steps to vigorously defend our position," a company spokeswoman told BusinessDay yesterday.
Over recent months the darker side of high-intensity trading has been the subject of regulatory scrutiny in the US.
"Powerful algorithms – 'algos', in industry parlance – execute millions of orders a second and scan dozens of public and private marketplaces simultaneously," The New York Times said in July.
"They can spot trends before other investors can blink, changing orders and strategies within milliseconds."
Some estimates put the volume of trade performed by algorithms on US markets at more than half. Joseph Mecane of NYSE Euronext, which operates the New York Stock Exchange, told The New York Times: "It's become a technological arms race, and what separates winners and losers is how fast they can move."
High-volume traders argue they provide liquidity to the market but one federal prosecutor noted in a recent case of a former Goldman Sachs programmer – accused of stealing secret computer codes – that the software could "manipulate markets in unfair ways".
In another case in the US, the Commodity Futures Trading Commission accused Optiver of manipulating the price of oil. Transcripts and taped conversations included in the commissions's case reveal that traders in Optiver's Chicago office talked openly among themselves of "whacking" and "bullying up" the price of oil.
When called to account by officials of the New York Mercantile Exchange, they described their actions as "providing liquidity".
"We have created a market that best serves those who don't want to hold anything," Tim Quast, an investor relations executive, told a conference in Denver last month.
In Australia most of the big investment banks also conduct proprietary trading using algorithms.
But it's the likes of Tibra – with operations in Sydney, London, Hong Kong and Amsterdam and the US next on the list – which had been quietly making millions from a standing start, that has the market talking.
Already its staff of 200 has more IT people than traders – 80 to 75. Its operations spilled into the public sphere not only with Bhandari's appearance on the BRW Young Rich List.
Tibra has been battling its way through the courts in a series of clashes over the past three years. Optiver alleges Bhandari and his colleagues used its confidential information to help set up Tibra's programs.
It is also suing for copyright infringement and seeking damages for Tibra "flagrantly" and "recklessly" using its confidential software.
One claim states how, in 2004, Optiver employees wrote a a piece of programming code to improve its trading speed from 80 milliseconds to between 0.5 to 1.5 milliseconds – speeds with which mere mortals cannot compete.
In late 2005, according to one court claim, Optiver "terminated" Bhandari's employment. By the middle of the following year further trading and technology employees quit to join Bhandari at Tibra, including Glenn Williamson, Tim Berry, Andrew King, Martin Nickolas and Kinsey Cotton.
Optiver's boss, Robert Keldoulis, "became suspicious at the speed with which Tibra had moved from a newly incorporated company to a successful competitor" and discovered emails sent by one former employee, Andrew King. It is alleged that suggestions were made on how to improve the speed of the Optiver F1 system.
This will be examined when the case returns to court this month. Tibra says the claims are baseless and will be vigorously defended. When BusinessDay approached Tibra seeking an interview with Bhandari, a Tibra spokeswoman said he was overseas on extended leave until March.
In a recent interview after he was named the young entrepreneur of the year, Bhandari gave an insight into his business.
"Our aim essentially is to trade in other people's risk and trade with a view to keeping our positions relatively neutral," Bhandari said in the interview, hosted on CommSec's website. While a Warren Buffett takes a view on an industry, a sector or a company, Bhandari is different. "We don't generally take a view on the market," he says.
"What we're doing is a lot of transactions, many many thousands of transactions a day, and obviously just trying to make a small profit on each or on some of those trades."
It's the volume traded, not the direction of markets, where they make their money. "Our business is somewhat immune from the directions of financial markets."
But the global financial crisis brings fresh challenges, including government and market supervisory interest. The importance of technology to the company's profit is clear:
"We are very much a technology company. And we integrate trading strategies and trading operations with what we call cutting-edge technology to give us an advantage.
"Our advantage is not our position in the market or the size of our company but the technology we're able to bring to our operations."
Online chat rooms are filled with tales of young graduates wanting to work for companies like Tibra. They talk of an aptitude test that demands lightning-fast problem-solving.
The firm's culture draws much attention, too. Staff wear thongs to work and drive sports cars, one insider says. Bhandari portrays himself as a modest, sport-loving guy.
"For me personally, I enjoy a lot of sports, motor sports, cricket and football, all the great Aussie sports, and travel.
My wife and I have been to many dozens of fantastic places together so that's something we really enjoy doing.
"It's nothing glamorous; we just like getting the job done, and the rewards aren't necessarily obvious to everybody but they're certainly obvious to us."
First published by Smh.com.au on November 06 2009
Visit smh.com.au for the latest news updated throughout the day
