"Look," says Sergei Tchetvertnykh, pointing at a flashing spreadsheet on his desktop's screen. "I just made $82,000 in one second."
The co-CEO of the Toronto-based electronic trading firm Infinium Group isn't exaggerating. A second is now a very long time in financial markets, thanks to computer algorithms. Traders can gather and interpret market data, and buy or sell securities in response, in milliseconds (thousandths of a second) or even microseconds (millionths of a second).
Not every second is that successful, of course, and there can be many reversals over a few hours. On a typical day, Infinium, with offices in Toronto, San Francisco, London and Barbados, executes between 500,000 and one million trades of stocks, options, currencies and other financial instruments worldwide. Measured by volume of shares, it is often the largest single trader of major companies listed on the Toronto Stock Exchange-more active, in other words, than any of the otherwise dominant investment dealers owned by Canada's Big Five banks.
The paradox is that Infinium is still very small and very young, with 70-odd employees spread over its second-floor headquarters in a block of 19th-century buildings near Toronto's historic St. Lawrence Market. (Its other three offices account for another 40 staff.) Tchetvertnykh and co-CEO Alan Grujic, who are both 42, founded the firm in 2002. Unlike old-style investment dealers, Infinium is a pure proprietary trading outfit-it trades only its own money, none for clients.
As a specialist in high-frequency trading, Infinium is one of a handful of cutting-edge firms in Canada, alongside dozens more based in the United States and Europe, that have overwhelmed and revolutionized financial markets over the past few years. By some industry estimates, these hotshot dealers-along with Goldman Sachs and some other established firms that have also jumped into the high-frequency game-now account for about a quarter of daily stock trading volume in Canada, and as much as 60% to 70% south of the border.
Many of the strategies used by the high-frequency traders are traditional, such as arbitrage, which takes advantage of price anomalies in different markets. If, say, Barrick Gold is trading at $40.04 a share in Toronto and $40.05 in New York (a huge price gap these days), the high-frequency firm quickly buys in Toronto and sells in New York before the gap closes.
The high-frequency traders' speed and volume is scaring the daylights out of many regulators and traditional investment dealers, who think this new wave threatens to swamp the very foundations of financial capitalism. In November, Paul Myners, financial services secretary to the U.K. Treasury Department, told an interviewer that "the danger is that nobody really seems to think of themselves as owners." How can management be accountable to investors who change every few seconds? Thomas Caldwell, CEO of Caldwell Securities Ltd., a mid-sized Toronto dealer that has large investments in the NYSE Euro-next and other stock-exchange holding companies around the world, worries that "a lot of trading these days is disconnected from any economic reality or the fundamentals of companies."
"Banks cannot compete with an innovative, nimble company" Sergei Tchetvertnykh
High-frequency traders say that, far from bringing on the apocalypse, what they are doing is very safe and useful. If they buy and sell almost instantaneously at virtually the same price, the risk of massive losses is tiny. Moreover, they argue that huge benefits accrue to average investors in particular. "There's more liquidity and tighter spreads," says Grujic. "How can that not be better?" More liquidity means anyone can get an order filled almost immediately at the market price. (The "spread" is the formerly wide gap between the high price traditional brokers would quote to clients who wanted to buy a security, and the lower price they would offer to investors who wanted to sell.)
People forget, argue Tchetvertnykh and Grujic, just how clubby and antiquated stock and bond markets were as recently as the early 1990s, when the two of them entered the business. In those days, the Toronto Stock Exchange still had a trading floor, and the New York Stock Exchange (NYSE) accounted for more than 80% of all trading in the United States.
Of course, even Tchetvertnykh and Grujic had little idea of what the future of the markets would be when they got acquainted in 1992. The meeting place was the CAMI automotive factory in Ingersoll, Ontario. Grujic, who had graduated from the University of Toronto in 1990 with a bachelor's degree in electrical engineering, was programming and monitoring robots on the plant's assembly line. However, he'd decided to go to the University of British Columbia for an MBA, and was helping management look for his successor. One candidate was Tchetvertnykh, who had graduated from the Kiev Polytechnic Institute with a degree in cybernetics in 1990, and had come to Canada from Ukraine to enroll in the MBA program at the University of Western Ontario's Richard Ivey School of Business.