A little-known HFT firm started using its cutting-edge tech to help investors execute big trades, and one client says it 'outperformed the market by a noticeable margin'
- HFT firm Potamus Trading shut down its trading business in January 2018 to work as a broker-dealer for asset managers.
- The brokerage fills client orders by working both sides of the quote, like a market-maker, as opposed to only buying or selling the stock.
- Potamus doesn't charge a commission fee, taking a share of the profit made from the market-making done to fill the order.
Asset managers and high-frequency trading firms haven't always been the best of friends. The two sides, in many ways, are the polar opposites of each other.
The former, which often handles a large contingent of Main Street money, is not typically the most innovative with technology. It's slower moving in the markets and interested in long-term investments.
Meanwhile, HFT firms use some of the most cutting-edge tech, looking to shave milliseconds off how quickly they can trade. Unlike large investors, their goal is to move quickly in and out of stocks, never holding a large position one way or another.
But one former HFT firm has looked to cross the aisle, using its expertise and technology to partner with big investors trading larger stock orders without having the market move against them.
Potamus Trading shuttered its proprietary HFT business in January 2018, shifting its strategy and expertise to focus solely on serving asset managers as a broker-dealer.
"We are equipped with the tools neccesary to trade competitively and efficiently against HFT firms that the buy side feels takes advantage of their orders because they have a much superior technology approach," Kristin Linnell, chief financial officer and chief compliance officer at Potamus, told Business Insider.
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Potamus uses two-sided trading strategies that play to its stengths as a former market-maker. While most brokers typically use a one-sided algorithm to move the necessary amount of stocks - either buying or selling in various increments - Potamus will play both sides of the market.
As an example, if a client wanted 10,000 shares of Apple, Potamus might buy 50,000 shares and sell 40,000 shares in the process of filling the order. Doing so allows Potamus to fly under the rader.
"We find that the size of the client orders that we fill are much harder for the other HFTs out in the market to detect, because our system does not systematically send 1,000 shares every second that HFTs are built to seek out," Linnell said.
Potamus doesn't charge clients a commission fee, another uncommon practice amongst brokers. Instead, it takes a share of the profits made from the market-making that took place while handling the order. The client also gets a cut.
It's also worth noting the broker does no internal trading of its own, thereby eliminating any concerns clients might have about Potamus using information from its clients' orders to benefit its own trading strategies, Linnell added.
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It's still early days for the firm, which is a 20-person staff that has a roster of fewer than 20 clients. And to be clear, even as the company grows, Potamus' technique won't be appropriate for all trading strategies.
The customer needs to be willing to allow orders to be filled over a slightly longer period of time than typical, as Potamus needs time to play both sides of the market. Orders also can't be too large, or else Potamus risks not being able to make a market, Linnell added. The broker's sweet spot is 6-12% of the average daily volume traded in the stock.
Still, for those who have partnered with Potamus, the results have been good thus far. Mark Kuzminskas, director of global equity trading for $88.9 billion asset manager Boston Partners Global Investors, told Business Insider that while it has been a small sample size, the trades handled by Potamus have done well.
"The proof is in the pudding," Kuzminskas said. "The order flow that we have identified on our side as being eligible to trade over a slightly more protracted period with less urgency, those executions with Potamus have outperformed the market by a noticeable margin."