For His Next Trick, Barefoot Genius Aims to End Broker Rip-Offs
Ryan Hoerger and John Detrixhe for Bloomberg
The man who helped revolutionize high-frequency trading greets guests to his Paris office in his bare feet.
“I apologize for not dressing up,” said Stephane Tyc, 54, whose scheme to send trade data via microwave towers in the U.S. and Europe has paid off for his company, McKay Brothers International SA, and its flash-boy customers. “I wish I’d known you were going to wear a tie.”
In the cagey world of split-second trading, where firms so zealously guard theiranonymity they refrain from putting their names on their offices, the casually dressed Tyc (pronounced TITCH) stands out for his transparency.
His next project is to shine disinfecting sunlight on markets. Flip the balance of power to investors from their brokers. Create a system that allows everyone to check trades to see whether they’re getting ripped off. And make it portable enough to fit on a thumb drive.
“The things that you want to remove from the system are not gaming or alleged rigging,” Tyc said. “You want to remove undue cost and the lack of transparency which induces anxiety and miscomprehension from people who don’t know what’s happening.”
If anyone has the experience and depth of knowledge to take on an industry that profits from secrecy, Tyc would seem to be the man. A Harvard physics Ph.D. who worked in quantitative trading at Paris-based BNP Paribas SA for 17 years, he holds patents on power transistors for microwave radios and superconducting logic devices. He’s spent the past few years building the infrastructure of modern trading — a network of microwave towers that transmit buy and sell orders faster than fiber-optic cables.
Under Tyc’s proposal, a central data repository would record trades at all U.S. venues to a 10-microsecond level of accuracy. Furthermore, the market where a trade takes place would be tallied — a major overhaul for the U.S. equity business, which is spread across more than 50 markets but currently only applies such scrutiny to the 11 official exchanges.
Investors would also be able to tell which trades on the central feed were theirs, helping them evaluate whether their brokers got them a reasonable price. The service would be free, though not available in real time.
Right now, “data with highly precise time stamps, which is what you need to evaluate a lot of questions about high-frequency trading and whether we have the right financial market design, ranges from hard to get to totally impossible to get,” said Eric Budish, an economics professor at the University of Chicago’s Booth School of Business who has his own proposal for market-structure reform. In Tyc’s plan, investors would be able to see whether they traded “at a price that 10 millionths or 100 millionths of a second later would have been very different.”
Combing through lengths of tape to examine execution quality may only be worthwhile for large investors, not retail traders, said Larry Glosten, a Columbia University Business School professor.
“Am I going to do that? No,” Glosten said. “But his notion about having much more transparency about where transactions take place I think is a great idea.”
Tyc’s plan has limitations. With data collected only on completed transactions and not on quotes, it would do nothing to track down certain market-manipulation practices such as spoofing, in which a trader makes a flurry of orders designed to alter a security’s price, but without the intent to actually follow through on those requests to buy or sell. Adding quote data would make detection easier but would also complicate Tyc’s proposal, Budish said.
After October’s wild price swings in the $12.7 trillion U.S. Treasury market, U.S. authorities are talking about expanding public reporting of trading activity.
For stocks, the U.S. Securities and Exchange Commission has a proposal on the drawing board called the Consolidated Audit Trail. It would collect more data than Tyc would, but not be publicly available.
Tyc would also do away with the order-protection rule. Adopted in 2005 as part of the SEC’s sweeping Reg NMS reforms, it requires trading sites to route orders elsewhere if a better price exists at a different venue. But because of the speed at which orders can now be sent, Tyc said the rule makes the market too complex. He said he prefers the analysis of his data to be the safeguard against abuse instead.
Not everyone is on board with that. “Removing order-protection rules without implementing other protections for investors would increase conflicts of interest and risks for investors,” Tyler Gellasch, executive director at Healthy Markets Association, an investor trade group, wrote in an e-mail. “Relying exclusively on the invisible hand of arbitrage without regulatory mandates or safety nets sounds great, but the reality would be far more opacity and abuses at the expense of investors.”
Back in Paris, amid the white boards and clutter of the McKay Brothers office, Tyc and his company are facing a challenge from a new ultra-fast sub-Atlantic cable called Hibernia Express. It would enable trade data to move faster than McKay Brothers’ network, Tyc said. In the interests of transparency, he said he told his clients they might want to take their transatlantic business elsewhere.