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Tags: Jump | High-frequency | Trading | Money

Jump Trading LLC: A Case Study in High-frequency Trading, Big Money

Wednesday, 23 July 2014 07:40 PM EDT

Far from Wall Street in a Chicago neighborhood once synonymous with urban blight, two futures industry veterans are using secrecy and speed to mint fortunes.

Their firm, Jump Trading LLC, was all but invisible until it was among six companies subpoenaed in April by New York prosecutors. Jump has ascended the ranks of high-frequency traders during the past 15 years to become one of the top firms on the Chicago Mercantile Exchange, where $925 trillion of derivatives changed hands last year. Its annual revenue has exceeded half a billion dollars.

The company was founded by traders Bill DiSomma and Paul Gurinas, whose level heads caused them to stand out in the cacophony of a Chicago trading floor. Today, the pair parcel money among 20 or so teams, each guarding its computer models from the others to trade stocks, bonds and commodities with strategies that go almost as fast as light.

“Billy was one of the few upright, stand-up guys in the pits,” said Yra Harris, owner of Praxis Trading who knew DiSomma when they worked in the Chicago trading pits during the 1990s. “He had a very good presence. There were all kinds of games being played in the pits, but he wasn’t one of those who messed others around.”

Befitting its history of stealth, neither the firm nor its principals spoke for this article, and three people familiar with the matter said former employees were told not to speak with Bloomberg News.

‘Low Profile’

Jump’s reluctance to speak comes as arrangements between financial exchanges and HFT firms are being examined by New York Attorney General Eric Schneiderman and the U.S. Commodity Futures Trading Commission. Jump hasn’t been publicly accused of wrongdoing by any government investigator.

“Although Jump is well known and respected within the industry, they keep a very low profile beyond the narrow confines of electronic trading,” said William Sterling, former chief of UBS AG’s global equities electronic business who co- runs Headlands Technologies LLC, a quantitative trading firm.

Jump’s headquarters are north of Chicago’s financial district in an area once dominated by one of the nation’s most dangerous public-housing projects, the Cabrini-Green Homes, whose high-rises were demolished during the last decade. Its offices are in the former warehouse of Montgomery Ward, a remnant of the city’s days as the mail-order capital of the U.S.

Jump has about 350 employees who also work in offices in New York, London and Singapore, according to a version of its website that was deleted earlier this year. While the closely held company, which trades with its own money, makes few disclosures about its inner workings or finances, there are clues to its size.

Public Filings

Some of its financial filings are public. In 2010, Jump reported net income of $268 million and operating revenues of $512 million for that year, according to documents filed with the U.S. Securities and Exchange Commission. Profit amounted to $316 million in 2008, according to another filing with the regulator. At the end of March 2014, it owned U.S. stocks valued at $239 million, according to data compiled by Bloomberg from an SEC filing.

Last year, Jump paid CME Group Inc., the world’s largest futures exchange, $83 million in trading fees while receiving about $17 million for market making activities, according to a separate SEC filing that doesn’t identify Jump by name.

In April, Jump sought to force Twitter Inc. to reveal who was posing as one of its employees posting tweets. After Bloomberg News in April revealed that Schneiderman subpoenaed Jump as part of an industry investigation, the trading firm erased most of its website.

‘Made Billions’

“From what I understand, they’ve made billions in profits,” said James Koutoulas, chief executive officer of Typhon Capital Management LLC in Chicago, who said he has friends with ties to Jump. After the controversy stirred by Michael Lewis’s book “Flash Boys,” which said the U.S. stock market is rigged, “the high-frequency trading guys are trying to avoid any type of publicity,” he said.

Neither DiSomma, 49, nor Gurinas, 46, responded to phone or e-mail requests for interviews, and Jump didn’t respond to messages sent to its “media inquiries” e-mail address. The firm declined to meet with Bloomberg News on an unscheduled visit by a reporter to their offices in April. Subsequent meetings with Jump’s chief operating officer, Matt Schrecengost, arranged by Tessa Wendling, the firm’s general counsel, were canceled. She didn’t return phone calls or e-mails seeking comment.

Innate Humility

Humility is innate in Gurinas, according to his mother.

“He doesn’t like stories about him, and so wouldn’t want any of his friends to talk about him,” Nola Gurinas said in a phone interview.

While some high-frequency firms were created by computer programmers, DiSomma and Gurinas were pit traders at the CME -- the guys who shout and wave their arms to get the best prices. They met in 1992, and, as financial markets started migrating to electronic trading, they saw the potential of using computers to take advantage of price discrepancies in different markets, a tactic called arbitrage.

In 1999, DiSomma and Gurinas left to start their own firm, Akamai Trading LLC, partnering with John Harada. William Shepard, a board member of CME Group since 1997, bought a stake while agreeing not to get involved in management, according to a former Jump employee. Harada left to co-start rival Allston Trading LLC, and DiSomma and Gurinas changed Akamai Trading’s name in 2001 to Jump, a nod to how traders attract attention to themselves on exchange floors.

CME Link

Shepard is the only CME Group director without a photo next to his biography on the exchange’s website. His links to Jump require the exchange to disclose any financial relationship between the two companies because of his status as a board member. CME Group didn’t name the firm he works for in the regulatory filing earlier this year that disclosed the payments between Jump and the exchange. Shepard didn’t return phone calls or e-mails seeking comment.

CME Group’s conflict of interest policy prohibits board members from voting on matters where they could stand to benefit, said Anita Liskey, a spokeswoman for the exchange. She declined to comment on Shepard or Jump.

Jump hired scientists, mathematicians and programmers to build complex algorithms for trading U.S. and European equities, futures, currencies and bonds at speeds measured in fractions of a second. Unlike other firms that lease microwave towers to shave milliseconds off the time it takes to send trade orders in the U.S. and Europe, Jump buys them through a subsidiary, including one tower in Belgium that was once used by the North Atlantic Treaty Organization.

‘Industry Leader’

“We have become an industry leader, quietly setting the standard for sophisticated trading strategies,” Jump said on a now-erased version of its website.

Jump is one of the few HFT firms that have made the investment to become a clearing member at Chicago-based CME Group. That means it pays the lowest trading fees in return for maintaining preset capital minimums, according to CME Group’s rules. It also must contribute cash and securities to CME Group’s clearinghouse default fund.

DiSomma and Gurinas, who grew up in the Chicago area and graduated from the University of Illinois at Champaign-Urbana, are opposites, according to former employees. DiSomma is outgoing and cracks jokes, while Gurinas is reserved and prefers the quiet life, people who know them said.

‘Quiet Guy’

Scott Davis worked alongside Gurinas in the Standard & Poor’s 500 Index futures pit during the late 1990s. “He was not your typical loudmouthed, boisterous guy in the pit,” said Davis. “He was a quiet guy. He went about his business.”

DiSomma lives modestly by Wall Street standards. He sometimes drove to work in a pickup truck and owns a 111-year- old house in Chicago’s Oak Park suburb -- an area known for the diverse economic backgrounds of its residents. DiSomma bought his house, located a block south of railroad tracks, for $645,000 in 1999, according to county records. By contrast, the founder of another high-speed trading firm, Virtu Financial Inc.’s Vincent Viola, is selling his 19-room Manhattan townhouse for $114 million, real-estate listings show.

DiSomma also owns a 623-acre (2.5 square kilometers) farm in Cuba, Illinois, about 200 miles (322 kilometers) southwest of Chicago where he hunts for deer, pheasant and turkey and fishes for largemouth bass, according to photos on the property’s website.

Hospital Donation

His family foundation had $29.8 million at the end of 2012, according to the latest tax filings. DiSomma donated $25 million to a hospital and medical college in Peoria, Illinois, in 2011, according to the Journal Star, a newspaper in the city. The hospital had treated his daughter after she was injured in an all-terrain vehicle accident.

“At Jump Trading, what we do ... it’s not exactly God’s work,” DiSomma said in February 2010 interview with the Journal Star. “What you guys do down here is closer to God’s work,” he said referring to OSF Saint Francis Medical Center’s children’s hospital, which used DiSomma’s donation to build a training facility called the Jump Trading Simulation and Education Center.

Gurinas, whose wife is a recruiter at Jump, lives with his family in Lincoln Park, an upscale neighborhood on Chicago’s north side. He spent $3.1 million in 2006 on a 3,690-square-foot home, according to the Cook County Assessor. Gurinas also owns land and a ranch in Montana. A Jump affiliate has a microwave license in Missoula, Montana.

Government Reports

One of the firm’s specialties is trading quickly on the information contained in government statistical releases, according to two competitors of the firm and a former employee. Jump pre-loads its trading algorithms based on whether, say, the unemployment rate will rise or fall, then executes the strategy within tiny fractions of a second following the announcement, the former employee said.

The programmed trades often exploit price differences between exchange-traded funds based on the S&P 500 stock index and futures based on the S&P traded at CME Group, the former employee said. They follow this arbitrage across many equity indexes and futures, such as the Nasdaq or Russell groupings of stocks, as well as in markets in the U.K. and Germany, the person said.

To succeed in the U.S., Jump needed the fastest connection between the data center for the New York Stock Exchange in New Jersey and CME Group’s facility outside Chicago.

Saving Time

Then, as now, firms competed fiercely to shave milliseconds off the round-trip time. That meant if Jump had signed a lease on one fiber-optic network and then a faster one was built later, it would rent space on that one, too, the former employee said. At one point, the firm had access to four distinct fiber- optic lines, the former employee said.

The firm was also among the first to use microwave towers to send information between Illinois and New Jersey, according to executives at rival firms. Jump also uses microwaves in Europe, including a tower it bought last year that relayed messages for the U.S. military during the Cold War. Though it can carry less data, microwave can travel distances in roughly half the time of even the most advanced fiber-optic cables.

Jump guards its brand. In April, it filed a petition in an Illinois circuit court to compel Twitter to disclose who was behind an account using the name “jumptrading@algoswild.” Jump said the account was unauthorized and it needed the name of the account holder “who may be responsible in damages for impersonating Jump Trading and infringing Jump’s intellectual property, including its trademarks.”

Case Dropped

Without specifying why, Jump and Twitter requested that the case be dismissed at the end of June, which it was, according to court records in Chicago. The Twitter account is no longer active. Stacie Hartman, a lawyer for Jump listed on the petition, and Twitter’s legal representative, Jade Lambert, didn’t return phone calls requesting comment.

Jump’s industrial-style offices, which occupy two floors of the eight-story building, are a mishmash of concrete pillars, exposed overhead cabling and sleek lighting and glass doors.

The office atmosphere is akin to a Silicon Valley startup, with employees dressing casually. They have catered lunch every Friday, company-sponsored happy hours and sporting events. The firm holds annual summer picnics and holiday parties have been held at the Art Institute of Chicago and the Field Museum.

‘Highly Sought’

“Jump is among the high-frequency trading shops that is highly sought after by our candidates, who’ve often told us they have a very strong work-hard-and-reward-hard culture,” said Deepali Vyas, founder of VnV Partners, a recruitment firm in New York.

While Jump describes itself as having a “casual atmosphere and flat organizational structure,” according to a former version of its website, it has an unusual setup compared with rivals.

Jump rents out computers and other infrastructure to its traders, who are organized into independent trading teams. The groups operate as separate cost centers and are staffed by as few as two people or as many as about 20, according to two former employees. Some groups trade across markets while others focus on one.

Jump applies its secrecy ethic within the firm. The teams don’t share information about trading strategies with each other -- profitable groups are rewarded with more technology or money to trade with, former employees said.

Founders’ Teams

DiSomma and Gurinas sit with the traders and each have their own teams. Jump Core Strategies, run by Gurinas, caused resentment within the firm because of the growth of its assets, former employees said.

Among the successful teams are Statistical Trading Group, or STG, which has been run by former Citadel LLC traders Tom Gallagher and Satyanarayana Dharanipragada. Other groups have been led by Igor Pavlovsky, a Massachusetts Institute of Technology graduate who trades currencies, and ex-Citadel employees Ken Terao and Alexei Kamenev. Messages left for Gallagher, Dharanipragada, Pavlovsky and Terao weren’t returned, and Kamenev declined to comment.

An exodus of employees to Jump from Citadel was the subject of a clash between billionaire Ken Griffin’s Chicago hedge-fund firm and Jump in 2012. Citadel said former workers may have taken proprietary trading strategies and computer code worth hundreds of millions of dollars to Jump. Jump said that Citadel was misusing the courts to get information on a competitor.

James Chiu

An Illinois judge rejected Citadel’s bid to compel Jump to identify ex-employees who joined the firm since 2005, and any strategies they later developed. The case was dismissed in October 2012.

At Jump, James Chiu -- whom ex-employees said was in the trading firm’s Oceans group -- broke CME Group rules in 2010, according to a CME Group disciplinary memo from 2014.

A CME Group panel found that from Aug. 30 through Sept. 15, 2010, Chiu manually entered orders, supplementing trades that he had already placed, then canceling them before his other orders could be executed, the exchange said in a March 3, 2014, notice on its website. His actions potentially disrupted the market, the panel said.

The exchange said Chiu was employed as a proprietary trader by a member firm, but didn’t name Jump in the disciplinary action. The panel found that Chiu broke the exchange’s rule prohibiting “dishonorable or uncommercial conduct,” among others. Chiu, whose LinkedIn Corp. profile says he was a former team leader at Jump, settled with the CME Group without admitting or denying wrongdoing. He was ordered to pay a $155,000 fine and was suspended from any trading on the exchange’s markets for two months.

Predicting Future

Chiu, who now runs his own proprietary-trading firm, Vatic Labs, in San Francisco, said in a phone interview that CME Group issues disciplinary actions all the time and his was nothing out of the ordinary. Vatic is a word meaning something that describes or predicts what will happen in the future.

About two months after the CME Group rule violations that Chiu was later punished for, DiSomma, Gurinas and Schrecengost met with then-chairman of the CFTC, Gary Gensler. They discussed the definition of spoofing -- or illegally canceling bids and offers quickly after placing them in order to create a false impression of demand -- as well as high-frequency trading and the May 6, 2010, market plunge known as the flash crash, according to the market regulator’s website. The meeting was part of the regulator’s efforts to implement new market rules stemming from the Dodd-Frank Act.

As for his old firm, Chiu hewed to the company line.

“I’m not allowed to talk about my time at Jump,” he said.

© Copyright 2023 Bloomberg News. All rights reserved.

Far from Wall Street in a Chicago neighborhood once synonymous with urban blight, two futures industry veterans are using secrecy and speed to mint fortunes. Their firm is called Jump Trading LLC.
Jump, High-frequency, Trading, Money
Wednesday, 23 July 2014 07:40 PM
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