Mark Gorton is sitting in the Zen garden on the roof of his office in downtown Manhattan, squinting into the sunlight and telling me he's not evil.
"If you listen to some of the rhetoric in the press recently, you'd think we were killing babies," Gorton says, in between sips of organic blood-orange soda as he leans forward in a wicker chair. He's upset that his business is being "tarred" by the bad publicity plaguing the rest of Wall Street. "What we're doing is a net positive for the world."
This is an interesting complaint because in many ways Mark Gorton is the new face of Wall Street. Gorton is a high-frequency trader. His company, Tower Research Capital LLC, with its 275-person global staff of engineers and computer science and physics majors, is part of an industry that today is responsible for more than half of all stock trading in the United States, according to the Tabb Group, a financial markets research and strategic advisory firm. Gorton's is an industry under scrutiny.
People like Gorton are increasingly replacing the traders in traditional stock exchange pits -- those nervous-looking people in vests, furiously hand signaling buy and sell orders in a sort of rapid-fire sign language. But instead of huddling on the floor of an exchange, high-frequency traders sit at their computers tweaking and retweaking algorithms that do the buying and selling electronically far faster than any human can.
The idea behind high-frequency trading (HFT, as it is known) is that if you can buy and sell stocks, bonds and derivatives at the speed of a supercomputer -- literally executing trades by the millisecond -- you can make money off each of the tiny little movements in price. Taken individually, each trade nets only a few pennies. But some high-frequency trading firms can trade as many as 100 million shares in a single day, according to Manoj Narang, who runs such a firm in New Jersey called Tradeworx. Those pennies add up.
Gorton's job then is not to buy and sell stock, but rather to oversee a business filled with programmers who devise the algorithms to automatically trade those stocks, bonds and futures far faster than his competitors. "What we do is try to identify patterns and trading strategies that might work in the market, and if we find something that works, we deploy it," Gorton says matter-of-factly. "We're really an engineering company. We have a lot more in common with Google than we do with one of the big banks."
But try as Gorton might to distance his firm from the rest of the finance industry, high-frequency trading has attracted unwelcome attention. In recent weeks, critics and regulators have been scrutinizing Gorton's company about as closely as they might Goldman Sachs. In February, for example, Mary L. Schapiro, chair of the Securities and Exchange Commission, told reporters that high-frequency trading "worried" her and floated the idea of implementing new curbs on the practice -- such as charging a fee every time a high-frequency trader cancels a trade.
That was followed by news that the SEC had reportedly launched a formal investigation into the relationship between some major high-frequency trading firms and the electronic exchanges that host their trades. Gorton says he is not involved in that SEC inquiry. (The SEC declined to comment on the matter.) At the same time, Gary Gensler, chair of the Commodity Futures Trading Commission, has said that his agency might begin monitoring high-frequency trades much more closely than it has before and could start considering new rules by July.
Critics of Gorton's industry have taken the newfound regulatory interest as an opportunity to slam his business, arguing that high-frequency trading firms -- which range in size from relatively small shops like Tower to major hedge funds -- can cause mayhem in the markets and put average mom-and-pop investments at risk.
"We call them parasites," Joseph Saluzzi, a founder and a partner at institutional stock and bond brokerage firm Themis Trading, says about high-frequency traders. "They've "turned Wall Street into a hyper-speed casino." Saluzzi complains that people like Gorton -- computer people -- are taking all the humanity out of what used to be a very human business. "There's no accountability," he complains. "No one knows who they are ... There's no faces; they're just machines."
Gorton, 45, is trim with dark curly hair and rimless glasses. He favors rubber-soled shoes that he can wear on a bicycle (Gorton is an avid cyclist whose passion outside of business is advocating for more bike lanes in New York) and seems to prefer slacks and buttoned-down shirts to suits.
He speaks with the thoughtful skepticism of a young Ivy League professor, and when he is unconvinced of an idea or a criticism, he wrinkles his brow -- squints, really -- and shrugs. In recent weeks, Gorton has had a lot of opportunity to squint and shrug. "I feel like there are a lot of criticisms [of what we do] and most of them are invalid," Gorton insists. "I'm not saying high-frequency trading is perfect, but I feel like … this whole idea that everything is a disaster is just not true."
Gorton thinks a lot of the recent anger directed at his industry stems from the fact that high-speed trading represents something new and different from the way trading used to be done. And new can be threatening. Modern stock trading has been transformed by people who might identify more with, say, Egon, the laconic inventor in "Ghostbusters," than Gordon Gekko of "Wall Street" fame.
And yes, the computers -- programmed by folks like Gorton -- are taking jobs away from traditional traders. "There are some people in the market structure whose jobs are being automated, and people are speaking up," Gorton says. "A lot of those people are claiming that the public is being harmed when really what's happening is it's costing a lot less to trade stock. And some highly paid guys on Wall Street are not collecting the giant checks that they used to."
Bryan Harkins, chief operating officer of DirectEdge, an electronic stock exchange, puts it this way: "The floor of the New York Stock Exchange is basically a television studio right now," he says, meaning that most trading today is done by computer, making the floor of the NYSE somewhat like a CNBC soundstage.
Harkins, who certainly has a business interest in writing the epitaph for traditional stock exchanges, says that much of the ire directed at high-frequency traders results from a lack of understanding of what they do exactly and from a resistance to new competition and a change in the business model. "What became unprofitable for a human became profitable for a computer," Harkin says. "If you go over a bridge and they have E-ZPass now, people complain you're eliminating jobs of toll takers. That's true, but what about the people making those E-ZPass machines?"
Gorton was the captain of his math team in high school. He has a bachelor's in electrical engineering from Yale University and a master's degree in the subject from Stanford. For a time after graduate school in California, Gorton worked as an engineer at an aeronautics company.
But Gorton has a background in finance, too. His first job in the industry was at the proprietary trading desk of First Boston (which later became Credit Suisse), where he worked in a back room using advanced math to devise new investment strategies. But even in the booming 1990s, Gorton was never part of the finance culture there, he says. "We didn't interact with customers; we didn't interact with the rest of the bank. We were just sort of sitting there doing our own thing," he recalls.
"When we were at First Boston, we saw some of that," says a former First Boston colleague of Gorton, Robert Heine, about the Wall Street culture. "It's not that appetizing."
Now a trader of government bonds, Heine says Gorton "is an engineer. He likes figuring things out. He likes to be around smart people. He's intrigued to see how things work."
In 1998 Gorton left First Boston and two years later launched LimeWire, an electronic peer-to-peer music service. An eventual successor to Napster, LimeWire allowed people to trade files -- including copyrighted media like music albums -- for free over the Internet. After a recording industry lawsuit all but shut down Napster in 2001, LimeWire’s popularity exploded. By the mid-2000s, the service was bringing in an estimated $20 million, according to reports.
LimeWire brought Gorton his first brush with vilification. In 2006, the Recording Industry Association of America sued Gorton and LimeWire. People called him evil. "He's the Bernie Madoff of Internet crime," the association's CEO, Mitch Bainwol, told The New York Times in a rhetorical flourish after a federal judge ordered LimeWire to pay $450 million for violating copyright law. "He was thumbing his nose at the rule of law to profiteer enormously."
As he also says about the founding of Tower, Gorton says that his motivation in launching LimeWire was to develop an interesting computer system -- not necessarily to challenge the fundamentals of the way an industry had been doing business for the last 50 years. "When I started LimeWire," he says, "it would always shock me that we got any press for anything. We were a bunch of guys sitting around doing neat things with computers."
Push Gorton on the subject long enough and one can begin to catch fleeting glimpses of some sort of unifying philosophy in his work -- although Gorton takes great pains to argue that there really isn't one.
Of his battle with the recording industry, Gorton complains that copyright laws were preventing "a lot of the natural market efficiencies from taking place." He adds, "You had people doing a nice cushy thing collecting nice paychecks for maintaining the status quo, and they reacted very strongly when someone was upsetting that status quo."
He uses similar rhetoric to describe the net effect of high-frequency trading."This is what happens when markets get efficient," he says. "This is the creative destruction of capitalism."
Superior technology, in other words, makes things more efficient. And even if people don't like it in the short run, efficiency often makes the world a better place.
The question at the heart of the current debate about high-frequency trading is whether the automation of trading -- and in Tower's case, the ability to maximize profits by executing trades faster than anyone else -- really does make the world better.
On May 6, 2010, the Dow Jones industrial average suddenly tumbled 1,000 points in a matter of minutes in an event later dubbed the "flash crash." By the end of the day, those losses had been recovered -- but the crash shook the markets and left a lot of experts scratching their heads. A joint SEC-Commodity Futures Trading Commission postmortem determined there wasn't much evidence to suggest that high-speed traders like Gorton caused the event that day. That dubious distinction went to a computer at a Midwestern mutual fund that dumped a massive amount of derivatives all at once, flooding the markets. But high-speed traders seem to have helped magnify the problem, turning one computer's software flaw into a stock-market-wide tailspin.
Gorton insists that high-frequency traders weren't to blame. "What the flash crash showed us was the need to have limits on fat fingers, limits on robot execution algorithms" like the one used by the mutual fund, he says. And in any event, Gorton says the high-frequency industry "doesn't have the muscle to push a market one way or another."
But critics of the industry, use the flash crash of 2010 as a cautionary tale -- evidence of the havoc high-frequency trading can wreak on the rest of the stock market if not properly regulated. "What was most disturbing about May 6 was we went down in 15 minutes and rallied back in 15. And everyone shook their head and said, 'What the heck was that?'" says Themis Trading's Saluzzi. The flash crash, he says, was "all about high-frequency traders. There was no human intervention to slow [the tanking market] down."
After the May crash, stock exchanges put certain protections in place, including "circuit breakers" to shut down trading in the event of market instability. The aim, according to the SEC, was to to stave off another massive automated sell-off.
For some, those changes don't go far enough. "People are afraid to put money into the market because they're worried their life savings is going to fall by 30 percent in a day and they won't understand why," says Marc Pado, a markets strategist at the investment advisory firm Dow Bull.
"The problem is computers don't think," he says.
A few weeks after our rooftop chat, we’re sitting in a small meeting room-cum-library, surrounded by books ranging in subject from C++ coding to Rupert Murdoch, on the main floor of his tomb-silent downtown offices -- quarters that he says he has never referred to as a trading floor.
"Markets have been getting more efficient and there's less volatility," Gorton says, when asked if high-frequency traders can cause mayhem. "Empirically it seems that way to me … in the last few months volatility has been very low."
The conversation switches to how he fits into the rest of the finance world. What about the loss of trust -- for both the general public and some traditional traders? Or that some people think firms like Gorton's are capable of wreaking havoc? And that some traders think people like Gorton are turning the stock market into a swarming hive of automatons?
Mark Gorton is squinting again. He insists he doesn't think he represents anything new. The difference between high-frequency trading and traditional Wall Street is not much more than "a difference in skills," Gorton says. "It used to be that firms would want to hire economics majors and now you hire computer science majors." That much is different, he allows.
But, he says, for all the faceless computers and soulless algorithms that companies like his employ, it's still a human business. "You look at high-frequency trading firms, there are some that are run by super great people that you'd trust," he says. "And there are others you wouldn't want to shake hands with."
Gino Vicci: Deal With It: A Veteran Trader's Take on High-Frequency Trading
Man Vs. Machine: Seven Major Players in High-Frequency Trading ...
Lime Brokerage LLC: Private Company Information - Businessweek
Wedbush buys Lime Brokerage - FT.com
Financial News: Fight To Block High-Frequency Trading Escalates
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Posted: 04/18/2012 8:15 am Updated: 04/19/2012 5:10 pm