Trouble In HFT Land Continues To Grow
Trouble in HFT land continues to grow. This time the story revolves once again around Infinium Capital. You probably remember Infinium from their “glitch” in October 2009 when their trading programs went out of control and started selling e-mini contracts on the CME and from February 2010 when their algo went wild and caused oil futures to rip higher . These glitches resulted in $850,000 worth of fines from the CME but Infinium “neither admitted nor denied” the violations.
Infinium is back in the news and is being sued by a group of ex-employees over a loss of $4.1mm of the employees money. Arash Massoudi of the FT broke the story yesterday and included some valuable links from the court documents in his story. Before we get to the links, here is the story which sounds like a scene right out of “Boiler Room” or “The Wolf of Wall Street”:
“Former employees of Infinium Capital Management have accused six of its leaders of tricking them into sinking their personal money into the Chicago automated trading company while hiding its struggles to stay afloat.
As a result, the 31 employees said they collectively lost $4.1m – including the life savings of some – after being persuaded to convert loans they had made to Infinium into equity later rendered worthless. Some employees were then fired, according to a civil complaint filed in an Illinois federal court this week.”
How bad were the finances at Infinium that they had to borrow money from their own employees? The FT story contains links to the financial statements which were obtained from court documents for Infinium for the past 3 years. These financial statements give us a very rare look into the finances of a large HFT firm (the last time we saw financials from a private HFT firm was from GETCO when they merged with Knight). And based on Infinium financials, things were not very good.
Revenue Expenses Net Income
2011 $203mm $165mm $38mm
2012 $142mm $147.6mm $(6.6)mm
2013 $59mm $66.3mm $(6.1)mm
(7 months ending 7/31/13)
Apparently, based on these numbers, Infinium’s 11 year old market making franchise which offered “fundamental arbitrage strategies across Commodities, Energies, Equities Fixed Income, and FX”, is not working so well anymore. These numbers prove that the HFT business model is suffering from increased costs and increased competion. The profits which had come so easily during the high volatility years of the financial crisis are now proving to be very elusive.
The bigger issue here is one of risk. Infinium is still running a $1.7 billion balance sheet comprised mostly of derivative assets. As we have all painfully learned from the 2008-09 financial crisis, derivative instruments have a way of spreading risks to many different firms which could quickly create a contagion effect. And since Infinium surely doesn’t qualify as a too big to fail bank, what risk is the market bearing by having a firm like Infinium at the center of so many derivative transactions? Is a firm that is struggling so bad financially likely to cut corners on risk controls ? We wonder if our regulators have concerns about a firm being at the center of so many financial transactions that has a track record of computer glitches and is now getting sued by its own ex-employees?