Driven by advances in computing power and networking technology, high-frequency trading has become a force to be reckoned with in the financial sector. In his 2014 New York Times Best Seller “Flash Boys,” author Michael Lewis, best known for writing “The Big Short,” argued that these developments have rigged financial markets against regular investors in favor of high-frequency firms.
Alpha Labs, a Chicago-based trading technology startup, wants to open up high-frequency trading to a broader range of people.
CEO Sam Mehta doesn’t agree with Lewis’ conclusions that the markets are rigged, but he does believe speed gives big players a leg up.
“No one in the industry has decided to offer that speed advantage to everybody,” said Mehta. “So the people who have the speed advantage are the big trading firms and hedge funds — the professionals who can spend a lot of money to build it.”
Once Mehta's service is up and running, users will be able to log on to Alpha Labs’ cloud-based platform and write their own trading strategies in Python. These algorithms will automatically be translated into machine code to improve performance. Then, users can run simulations with real-time market data to see how their algorithms perform.
People who discover strategies that work can either bring the algorithms to their own brokers, or partner with Alpha Labs to put them into action. For users who decide to partner with them, the startup will supply the capital to execute the trades, and the two parties will split the earnings. If the strategy backfires, Alpha Labs takes on the entire downside risk.
Mehta said users retain the rights to the algorithms they submit. To that end, his team cannot see the inner workings of a user-created algorithm — only information about how it performs. But users who partner with the firm to execute their strategies are welcome to share their code to see if there are opportunities for additional optimization.
Alpha Labs is backed by CMT Asset Management, a financial services firm whose services range from trading to private equity and venture capital. Mehta said CMT originally built a high-frequency trading platform for internal use. But when the platform was ready to use, the firm decided to try something new: allowing external users onto the platform.
Mehta said one of the most appealing aspects of opening the platform up to the world is the opportunity to bring new perspectives into high-frequency trading, which he believes suffers from a lack of creativity.
“Everybody is fishing in the same pond, expecting to find something different,” said Mehta. “Everybody knows what everybody is doing. People just do it a little bit better, a little bit quicker.”
Moreover, Mehta said, most of the costs of setting up a high-frequency trading platform are fixed, regardless of how many users are on it. By adding more users, Alpha Labs can increase its trading volume without adding much to its overhead costs, and compete against much larger firms.
“A company like Citadel or JUMP Trading can’t go hire 50,000 quants because it’s too expensive, but the technology is very scalable — you can add more people,” he said. “It’s a grand experiment, and it hasn’t been done before. But we thought we’d actually try it.”
Alpha Labs’ target demographic, Mehta said, would be anyone with an interest in the field and the programming chops to devise strategies. Think engineers or academics who enjoy their day jobs but want to pursue trading on the side, college students pursuing STEM degrees, and skilled technologists from all over the world.
Mehta expects that the vast majority of users will be curious about algorithmic trading, but eventually deterred by the learning curve. If the platform gains enough traction and even one percent of users turn out to be highly capable traders, that alone would be enough to make the bet pay off, he said.
With a $5 million investment in the startup, CMT is Alpha Labs’ only institutional investor so far. The startup plans to launch its service in the summer of 2017.
At launch, the platform will connect to the big United States equity exchanges, which are the largest of their kind in the world. The team is also working on connectivity to futures markets like ICE and Chicago’s own CME. Although the startup remains lean for now, Mehta said his plan is to build out a bigger team in Chicago over time.
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