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May 23, 2016

A New Spin on HFT

Domeyard LP leverages diverse expertise sets to push boundaries in high-frequency trading.

Eric Brown

The technology world has grown accustomed to stories of successful startups emerging from garages and dorm rooms, but it’s still a rarity in the financial world. Domeyard’s humble dorm-room origin story is only one reason this Boston-based high frequency trading (HFT) firm is turning heads from Wall Street to Silicon Valley and beyond.

Christina Qi
Partner, Domeyard LP

“The support from the finance, technology, and academic communities has been phenomenal. We’ve increased our firm’s value from zero to nine digits, less than a year after launch,” says Domeyard co-founder Christina Qi, who graduated from MIT in 2013.

It helped that the dorm room was at MIT and that other Domeyard founders and early employees came from Harvard and MIT — a union alluded to by the company name. It also helped that other key members of the team have worked at Google, Apple, and Microsoft Research, as well as financial firms such as Goldman Sachs, Virtu, and GETCO.

Qi credits the MIT Startup Exchange for being “a huge help in starting our company.” Last year, Domeyard exhibited at a MIT Startup Exchange R&D conference where the co-founders met a number of clients and partners. One of Domeyard’s lead investors was an MIT Industrial Liaison Program member. “He started his hedge fund from scratch almost four decades ago, after someone decided to take a chance and help him out. Now he’s paying it forward,” says Qi.

In its less than three years of existence, Domeyard has moved on to close multiple rounds of investment. Investors include the founder of one the largest quant funds in the world, the CEO of a global consulting firm, one of the biggest private equity investors in the world, and one of the pioneers of China’s Internet industry, says Qi.

Investors both in the company and in Domeyard’s services are attracted by some of the fastest trading technologies in the world. “To be even a millisecond or a microsecond faster makes a huge difference in many industries, especially in finance,” says Qi. “We have focused on performance, an area in which we could potentially be the best in the world.”

Beyond Flash Boys – the changing face of HFT
The term “high frequency trading” was only coined around 2007. HFT describes a segment of the financial services world that specializes in rapid algorithmic trades using fast servers and networks, marked by high order-to-trade ratios.

The irony of Domeyard’s rapid success is that it was founded only months before the publication of Michael Lewis’ scathing critique of the HFT industry in the best-selling “Flash Boys: A Wall Street Revolt.” The controversial book alleged that trading markets were rigged by HFT traders who specialized in front running orders, a practice that uses extremely high-speed infrastructure and sophisticated algorithms — the sort that Domeyard possesses — to cash in on advance knowledge of pending orders in the market.

HFT’s reputation had already been drawn into question by the “Flash Crash” of May 6, 2010. A $4.1 billion trade on the Chicago Mercantile Exchange initiated with a bank’s automated execution algorithm resulted in the Dow Jones Industrial Average losing over 1000 points before bouncing back to near the previous value, all in a matter of fifteen minutes.

The 2010 Flash Crash, as well as an October 2013 Flash Crash in Singapore, in which $6.9 billion in capitalization vaporized, led to a feverish rethinking of HFT. Exchanges and regulatory bodies began to implement new rules to add some human oversight into HFT, sometimes adding latency in the process. Regulators have also attempted to make trades more transparent in order to expose potentially illegal or destabilizing activities.

“We started Domeyard at a very interesting and eventful time,” says Qi. “The timing was ideal for us because we were forced to confront long-term issues early on, tackling the adversity that large companies face. We looked at the bigger picture of what we’re doing, the impact of our trading strategies, why we’re doing it, and whether it’s good for society. We stayed true to our founding belief that a sustainable business must provide some form of service to the community.”

Domeyard gambles on in-house tech
In addition to rethinking how quantitative trading should be practiced, Domeyard’s management chose an interesting approach to implementing technology. While most software-oriented tech startups take advantage of third party cloud-based services for much of their infrastructure today, Domeyard went for an in-house strategy.

“Unlike other trading firms, we built most of our technology in-house rather than outsourcing to third party vendors,” says Qi. “Most HFT platforms are still new, and not quite as developed as we would like. Going in-house also saves a lot of money. What we have built is of higher caliber and greater value than what is currently on the market. It would cost thousands of dollars per hour on the cloud to spin up the amount of storage and computational cores that we have today.”

Like most HFT-oriented firms, Domeyard takes advantage of physical proximity to glean every last speed advantage. “We co-locate our servers next to the exchanges’ matching engines in locations like New Jersey, enabling us to receive data at a much faster rate,” says Qi. “This is especially true when receiving raw data that you have to clean up and process really fast. Finding signals in data is one feat, but turning them into profitable opportunities takes a tremendous amount of skill and teamwork.”

Increasingly, running an HFT firm requires a lot more than speed. Co-location, fast servers and algorithms, and the latest networking technologies are essential, but “we also need to generate great signals to trade on the marketplace,” says Qi. “Finance is becoming more intertwined with technology. We want to take more of a scientific approach to trading, so it’s not so much based on rumors and gossip, or researching a specific company, but rather about using mathematical models and very deterministic algorithms. We’re eliminating the element of chance. You can’t make tens of thousands of lucky trades in a day.”

Another reason why Domeyard is looking beyond sheer performance is that future improvements in the near-term are likely to be minor. “We are very close to the latency threshold of what’s physically possible,” says Qi. “While we have one of the fastest trading systems around, we are also focusing on more sophisticated strategies. Our edge is in creating smarter strategies without compromising speed.”

Managing the tradeoffs between speed and intelligence is core to Domeyard’s mission. “Running sophisticated algorithms can equate to being slow, so for each situation we have to strike the right balance between speed and complexity,” says Qi. “Our decision depends on intraday market conditions, the markets we’re trading in, and the rules and regulations in each market and jurisdiction. We tailor and revise our strategies every day.”

Domeyard is also notable for being diverse, both in terms of ideas and the people behind them. “Many HFT firms have a common lineage, branching from one of the ten largest firms in the industry,” says Qi. “In contrast, our founding team came from different companies and industries. We had different majors in college. We weren’t fraternity brothers or best friends growing up. Instead, we found each other because of our mutual career interests and goals.”

“When a new hire joins the team, we encourage them to avoid repeating the ideas that their previous firms have implemented,” Qi says. “Just because a large competitor chose a specific solution doesn’t mean that it’s the best solution for us.”

Domeyard has attracted a competitive talent pool thanks to its tech startup atmosphere, academic environment, and flat managerial structure. The latter is still far from the norm in the tech world, and pretty much unknown in financial services. “The goal is that everyone can contribute their ideas openly regardless of age, experience, or background,” Qi explains.

Qi’s main goal for Domeyard is to stay on track and optimize core competencies. “There are a lot of distractions out there, such as new markets we could be trading in, or networking events every other day,” she says. “But we try our best to focus on what we’re doing now. It takes a balance of focus, creativity, and feedback to become the best in the industry.”

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