Patent application no. 14/451,356 has one goal: to outrun the speed demons of Wall Street.
The 16-page document was quietly published by the U.S. Patent and Trademark Office in February. Replete with schematic drawings, the filing describes a novel way for “executing synchronized trades in multiple exchanges.” The invention consists of not only sophisticated algorithms and a host of computer servers, but atomic clocks -- precisely calibrated to vibrations of irradiated cesium atoms -- to sync orders to within a few billionths of a second.
And if it works as advertised, one of the most illustrious names in the hedge-fund business could gain exclusive U.S. rights to a weapon capable of thwarting even the most predatory of high-speed traders.
The application belongs to Renaissance Technologies, the ultra-secretive and highly profitable $32 billion firm founded by mathematician and former code breaker Jim Simons. And the lengths it’s been willing to go to build and patent its own computer-driven technology -- at a potential cost of tens of millions of dollars -- underscores just how big a threat high-frequency traders have become to the industry’s largest and savviest players.
Those HFT firms, vilified in Michael Lewis’s best-seller “Flash Boys,” have in recent years come to dominate U.S. stock trading by using supercomputers to pick off profits across dozens of electronic markets in less than a blink of an eye. Along the way, the shops have also drawn criticism from those who say they’ve gamed the system at the expense of everyone else.
“Hedge funds, especially the ones with greater turnover, are focusing much more on doing their own routing,” said Larry Tabb, the founder of the Tabb Group, a research firm that specializes in capital markets. More and more, they have started to “employ high-frequency trading technologies.”
Jonathan Gasthalter, a spokesman for Renaissance, declined to comment.
There’s plenty at stake. At Renaissance’s campus in East Setauket, New York, PhDs in fields from astrophysics to number theory labor over algorithms that analyze reams of data to predict changes in prices of stocks, currencies and futures. Those calculations, which the firm uses to make hundreds of bets in what’s known as statistical arbitrage, have helped its flagship Medallion Fund generate average annual returns of 71.8 percent, before fees, from 1994 through mid-2014.
That’s more than seven times the average annual gain for the S&P 500.
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