Getco to offer proprietary algos to outside traders

Getco, the pioneering US high-frequency market-making firm, is for the first time making its proprietary algorithms available to outside traders.

The new product, called GETAlpha, will use Getco’s technology and trading software to execute customers’ orders in tiny pieces at high speeds, much as the marketmaker itself does.

The trades will be sent both to exchanges and to dark pools, including the company’s Getco Execution Services pool, which has been rebranded as GETMatch as part the expansion of Getco’s offerings to outside clients.

It is among the first algorithms, including one by Deutsche Bank earlier this year, that aim to allow traditional “buyside” firms such as hedge funds and mutual funds to directly mimic the methods of high-frequency traders.

However, Getco is unique in that it is itself a high-speed trading firm that makes money by using its algorithms.

Getco, launched in 1999 by two floor traders on the Chicago markets, has been at the leading edge of an electronic upheaval in US stock markets, as technology-heavy high-speed trading firms have come to dominate trading, accounting for as much as 70 per cent of the market by some measures.

The firm has kept close counsel, preferring not to discuss its methods in great detail publicly, so the move to sell some of its expertise is a significant departure.

“We saw an opportunity to grow Getco and leverage the infrastructure and experience we have to create new business lines,” said Daniel Coleman, head of business development at Getco. “Several clients asked us to get into this business.”

Mr Coleman said that Getco’s algorithms, which will be directly marketed to a small segment of buyside groups, carry the advantage of using Getco’s software rather than newly developed code.

“This is what we do. It’s an infrastructure that is pretty extraordinary,” Mr Coleman said. “It will have many of the attributes of how a high-frequency trader might trade, with respect to taking in a lot of information and understanding near-term alpha very well.”

The algorithm will be able to be programmed to execute so-called “parent orders” quickly in large blocks, or in tiny pieces called “child orders”, in order to best hide the trades from other algorithms that can detect big moves.

Fund managers have in the past clashed with firms such as Getco. Matt Simon, analyst at the Tabb Group, said that in the group’s surveys, buyside firms cite the impact of high-frequency traders as their top concern.

“The algos they’ve been using have become less effective in the marketplace. If you can’t keep up, why not copy it?” said Mr Simon.

Mr Coleman, the former head of UBS’s global equities business, made a high profile move from the bank to Getco last year. In the past two years, Getco has expanded beyond its core trading business, launching a dark pool and buying a designated market maker business that gave the firm a visible presence of the floor of the New York Stock Exchange.