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More Spy vs Spy: SXP vs Quantlab

14

May, 2012

We have just been reading about FBI Raids, criminal investigations, corporate espionage, code stealing, and bankruptcy. No… we were not reading the script of the latest Bond movie; we were reading an article in the Milwaukee Wisconsin Journal Sentinel detailing the fight between two high frequency trading firms: SXP Analytics and Quantlab.

You may remember a debate in Trader’s Magazine between Quantlab’s Cameron Smith and Sal back in 2010: Cameron’s HFT defense here, and Sal’s rebuttal here. Cameron remarked in that article how they were magnanimously “providing liquidity” to the market place as a service, and yet HFT was getting all this criticism – he likened it to a mother, upon watching a stranger save her drowning boy, asking the stranger why he didn’t save her son’s hat. In retort in his rebuttal, Sal asked Cameron to please not relieve himself on our shoes and tell us it’s raining.

Cameron is certainly not a stranger to the world of electronic trading. Before he became chief counsel for Quantlab, he was counsel and Chief Strategy Officer at Instinet, as well as counsel at Island, and before that as a lawyer working at the Securities and Exchange Commission. He knows the laws, the regulators, what they look at, the exchanges, their code, their data feeds, and he knows the art of HFT, which is the business he is trying very hard to protect.  Quantlab is partnered with a few other HFT firms, including  Richard Gorelick’s RGM, in an HFT lobbying group called the Futures Industry Association (FIA). In this group they lobby US rule makers to protect “their turf”, and they flat out cut checks to US lawmakers. Nice.

Anyway… back to the crime novel! Apparently during the eve of the debut of Reg NMS, SXP’s Mamalakis, a Milwaukee lawyer and businessman, upon meeting Vitaliy Godlevsky at a corporate retreat, hired him and another fired Quantlab PHD mathematician, Andriy Kuharsky. They made millions. And while they undeniably had Quantlab HFT code on their computer hard drives, seized in 2008, it has taken prosecutors nearly 3 ½ years to decline to prosecute any case against SXP.

Ok. So what’s the big deal? Don’t these legal battles go on all the time? Remember the Goldman Aleynikov case? Or UBS’s code theft case against 3 employees? Well, they do…. Especially in our Call of Duty Video Game Markets that we gamble in today. What’s different in this case are the allegations of illegal front-running that SXP is claiming that Quantlab routinely does. In fact, Andriy Kuharsky –ex SXP employee AND Quantlab employee filed a complaint with the Securities and Exchange Commission questioning the legality of Quantlab’s trading practices. Also, Quantlab was fined six times from 2002 through 2008 for problems with reports it was supposed to file to provide an audit trail of its trades.

We do not purport to know and understand Quantlab’s business. Do they also sell technology and access to the markets to other HFT firms, aside from running their own HFT operation? We don’t understand that part of the Journal Sentinel article. We do understand very well, however, the attempts of these firms to describe their automated stepping ahead of investor orders as “providing liquidity”.

When will enough be enough?

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