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.
Asset managers, which often handle a large contingent of Main Street money, are not typically the most innovative with technology. They’re slower moving in the markets and interested in long-term investments.
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 necessary 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, the chief financial officer and chief compliance officer at Potamus, told Business Insider.
Potamus uses two-sided trading strategies that play to its strengths 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. Doing so allows Potamus to fly under the radar.
“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 flat commission, another uncommon practice among 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.
It’s still early days for the firm, which is a 20-person staff that has a roster of fewer than 20 clients. And 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 is 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% to 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, the director of global equity trading for the $88.9 billion asset manager Boston Partners Global Investors, told Business Insider that while it had been a small sample size, the trades handled by Potamus had 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.”