After JPMorgan Chase & Co.’s shares plunged 21 percent in the opening minutes of trading on Aug. 24 last year, the world’s largest investment bank sought out an unlikely ally, Virtu Financial Inc., to help it understand what happened.
The lion was turning to a mouse for help navigating the jungle where it has long been king. JPMorgan spends more on technology in six months than Virtu’s equity is worth. It has 240,000 employees to Virtu’s 148.
Yet Virtu is so advanced in the arms race of electronic trading and order routing that JPMorgan executives wanted its appraisal to either confirm or deny the bank’s own analysis, according to people familiar with the situation who asked not to be named.
Virtu Chief Executive Officer Doug Cifu met that fall with Matt Zames, JPMorgan’s chief operating officer, and confirmed the bank’s explanation of the event, the people said. What Virtu brought was an authoritative, microsecond-by-microsecond review of the complicated mix of trading halts, delayed openings and problems with exchange-traded funds that roiled the U.S. stock market that day, causing the bank’s stock to briefly crater.
It wasn’t long after that Virtu won an important job from JPMorgan: Overseeing the trading of its stock at the New York Stock Exchange’s iconic Manhattan floor. And the relationship blossomed further last week, when JPMorgan agreed to use Virtu’s technology to trade in the $13.4 trillion U.S. Treasury market.
The New Wall Street
Welcome to the new Wall Street. In this neighborhood, a group of smaller, nimble firms have leveraged cutting-edge technology to emerge as the preferred purveyors of trading systems that make it easier and cheaper to buy and sell currencies, Treasuries and fixed income assets. While this has long been the bread and butter of the world’s largest securities brokers, and will continue to be, the increasingly complex and cutthroat world of high-speed electronic trading has created an opportunity for specialists like Virtu, Citadel Securities, Global Trading Systems, Jump Trading and XTX Markets to supply the pipes to these lucrative markets.
“Banks have been squeezed from two different directions: on one hand, they have a changed regulatory environment and higher capital requirements,” said Matt Andresen, an executive at quantitative trading firm Headlands Technologies Inc. “On the other side, they’re trading in markets that have gone through a shift to become more electronic.”
Following the financial crisis, banks have been left shrunken, battered and withdrawn, partly due to new regulations, but also because making money in this new world is much harder.
The extent of the shift becomes clear when you flash back to Black Monday -- the market crash of October 1987. President Ronald Reagan summoned officials from Wall Street, the legal profession and academia -- including representatives from JPMorgan, Merrill Lynch, Salomon Brothers and IBM -- to sort out why stocks had plunged. Banks were still the keepers of markets then. Now, to understand when things break, bankers and U.S. regulators are increasingly reliant on this new crew of firms that dedicate every resource to mapping and understanding the minutia of market structure in service to their goal of providing the fastest and best prices.