Renaissance Technologies, the $32 billion algorithmic hedge fund, has applied to patent on a high frequency trading execution methodology, raising a thorny issue. Will a patent on breathing air follow?
Renaissance appears to piece together various processes in a unique fashion using an atomic clock to syncronize simultaneous transactions
The patent, submitted in February, provides detailed analysis of a system generally in use at various levels throughout the high frequency trading world.
The trading and execution process, first reported by Bloomberg, uses an atomic clock as the cornerstone to synchronize trade execution among multiple servers to the microsecond. The atomic clock, which is not a new invention, is said to provide significant speed advantage to the firm using what is known as a “latency arbitrage” strategy. With such strategies, investment managers use speed as the primary differentiator in how profits are generated from the market.
The primary application for this patent, however, could be in how it is used on behalf of institutional traders to execute large block transactions across multiple trading venues. The Renaissance program could essentially out-fox other HFT firms by not allowing an them to “step in front” of an institutional trade order. Using its computer servers co-located next to the exchange, the Renaissance system allows for the quickest trade execution possible. Existing latency arbitrage strategies see a trade coming into one of the nearly four dozen stock exchanges and dark pool trading systems and then rush to put their trades in front. Because Renaissance uses an atomic clock as a micro-coordination method for world-wide simultaneous trade execution, and the firm has co-located exchange servers, it is at least as fast if not faster than other HFT firms.
Is Renaissance patent a business process or true innovation?
TABB Group’s Terry Roche, Principle and Head of Fintech Research at the firm, would not speculate on the chances of the Renaissance patent being approved. He does note that while much of the technology mentioned in the patent is currently being used, at least in part, by other HFT firms. He said what is relevant is whether or not the totality of the technology and business process is novel or an inventive step with no prior art known or available to the general public or market place.
High Frequency Trading critic Eric Hunsader, president of trading software firm NANEX, questioned the uniqueness of the Renaissance patent. While he is not a patent attorney, he said he is “not sure how it could be patent-able.” Much of the technology and methodology is currently used to various degrees and in the public domain. “This is how news services such as Market News International), Dow Jones and (Business Wire) release news at a preset time.”
In order for the system to have market impact, Hunsader says it would need to be widely adopted. The Royal Bank of Canada, which previously employed “Flash Boys” star Brad Katsuyama, first introduced a similar system to execute simultaneous trades on multiple exchanges. The system, titled “Thor,” did not receive widespread adoption because it was too expensive relative to the small amount of money it saved on trade execution.
Latency arbitrage, once hidden, is now subject to a patent
Hunsader said the patenting of what is essentially a latency arbitrage-based trading method benchmarks a new era for high frequency trading. At first the industry said latency arbitrage didn’t exist as a strategy and now Renaissance has come full circle and patenting a concept around the method.
Renaissance, founded by mathematician and computer programmer Jim Simons, has found a profitable niche in a high frequency world where the blink of an eye is an eternity. Its flagship Medallion Fund delivered investors average annual returns of 71.8 percent, before fees, from 1994 through mid-2014, Bloomberg reported.
High frequency trading firms, which account for nearly half of all stock trading, have run into hurdles lately.
The powerful political lobby recently lost a key battle with the IEX Exchange over a method created to slow down HFT trading. Further, an early release of the Democratic party platform said that traders may be subject to a transaction tax, which could significantly curtail the practice.
This article was originally published in ValueWalk.