Renaissance Technologies will patent a new technology against HFT

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.

Most money managers route their orders to brokers, who in turn send them onto various exchanges or dark pools, depending on which has the best price.

But as the U.S. stock market has become more fragmented, critics say high-speed firms have exploited the minuscule differences in time for trades to reach various exchanges to step in front of large investor orders. Even presidential hopefuls have stepped into the debate, with Hillary Clinton proposing a tax on one controversial HFT trading strategy.

Its invention, developed by the firm’s co-chief executive officers, Robert Mercer and Peter Brown, first sends an order to a central server, which breaks it up into multiple smaller orders. Those are then routed to venues that offer the best prices and most liquidity, much the same as brokers do now.

But before that happens, the smaller orders are sent to servers located as close to the exchanges as possible, along with instructions on the precise times they should be executed. The co-located servers sync their transactions so HFT firms won’t have enough time to identify an order on one exchange and then race to another to trade against it.

A crucial part of the system is the optical, atomic or GPS clocks that will be used synchronize those orders. Renaissance says in its application that GPS clocks are accurate to within nanoseconds and any time differences between them are “too small to be perceived” by HFT firms.

Bloomberg

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