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High-frequency trading firm Tower Research Capital is planning to launch a fund for external investors as it looks to shift beyond the ultrafast strategies that have made it a big player in global stock markets.
Tower’s fund will hold investment positions for hours or days at a time rather than the slivers of a second common in the industry, said people familiar with the matter. It would mark one of the first examples of a large high-speed proprietary trading shop opening a product for outside investors.
The New York-headquartered firm, which was founded in 1998 by former Credit Suisse fixed-income trader Mark Gorton, plans to launch the fund later this year, said one of the people.
Tower declined to comment.
Tower and other highly secretive trading firms including Citadel Securities, Jane Street and Jump Trading have become a dominant force on Wall Street after tough regulations put in place after the 2008 financial crisis prompted banks to pull back from market making activities.
Most use complex algorithms to exploit small price discrepancies and also take advantage of patterns in equities and options that can last for as little as 10 millionths of a second, placing huge volumes of very small trades. Citadel Securities alone handles more than $450bn in trades every day, including almost a quarter of all US stock trading.
Some of the biggest trading firms have in recent years expanded into markets for government and corporate bonds. But so-called mid-frequency strategies in equities trading are beginning to account for a larger share of their revenues, with firms increasingly holding positions for tens of minutes, hours or days before closing out.
“If you’re a firm that gets really good at mining gold, why stick to just mining gold?” said David Lariviere, a professor of financial engineering at the University of Illinois who previously worked at US market maker GTS.
“As markets get more efficient the knowledge of how to do [high-frequency trading] gets diffused,” he added, removing the barriers that existed around niche, lucrative trades and forcing companies such as Tower to expand their businesses, mimicking multi-strategy funds including Millennium Management.
“There’s just a finite [limit] to the amount of money that you can make with the really high-frequency strategies,” said a person close to Tower.
They added: “It’s a high fixed-cost business and I think all firms are looking at ways in which they can leverage that cost base to apply the quants and the models and the systems to more [parts of the market]. It makes logical sense for a firm like Tower that was solely focused on the short-term end to incrementally move down [the] spectrum.”
Before founding Tower, Gorton developed the LimeWire file-sharing platform that was shut down by US authorities in 2010. More recently, he has donated money to New York’s pro-congestion pricing campaign and backed a super political action committee that supported Robert F Kennedy Jr’s short-lived run for president.
