It won’t be easy. A Dutch speed trader, Flow Traders NV, that last year kicked off a similar US expansion, is having trouble. (Reuters)

A tiny London firm with no human traders made its name last year beating banks to climb up the currency trading ranks. Now, it wants a bite of something new: the $27 trillion US stock market. XTX Markets Ltd. is only two years old, but its executives say it has what it takes to compete with more established American trading Goliaths in the world’s largest, most complex and most saturated equity market. The firm is prepping a new Manhattan office, lining up the necessary regulatory nods and scooping up a big-name hire: Eric Swanson, who helped Bats Global Markets Inc. become the nation’s second-biggest stock exchange operator. With Swanson, who joined this month, XTX can “go from having a toehold, to being a more significant player in the US,” says Zar Amrolia, co-chief executive officer of XTX who formerly ran digital technology at Deutsche Bank AG. “We are just rolling out what we think is a successful quantitative research-driven approach to market making.”

It won’t be easy. A Dutch speed trader, Flow Traders NV, that last year kicked off a similar US expansion, is having trouble. The choppy, scattered nature of the market has few parallels. Firms that want to compete will have to connect to 12 national securities exchanges, scour constantly for trading risk, suck in proprietary data feeds and ward off any behavior that could run afoul of regulators, all at once. For the fastest firms, trading strategies can be made or broken by millionths of a second.

‘Smart, Not Fast’

Amrolia’s not fazed by speedier rivals — he says his goal is to be “smart, not fast.” Taking its name from a mathematical expression, XTX uses technology to forecast where prices for securities will be in a matter of minutes or hours. Amrolia contrasts this strategy to some North American firms that rely on the speediest networks for getting information, and carrying out trading decisions based on it. Virtu Financial Inc. and Citadel Securities LLC will soon be among XTX’s biggest rivals. XTX’s focus on machine learning puts the firm “at the forefront” of trading technology, Swanson said. Their strategies will be put to the test in the U.S., which hosts more than one-third of global equity trading value, and holds a complex web of big-name exchanges and dozens of smaller private dark-pool venues. “That presents a challenge for everyone,” says Swanson, Americas CEO at XTX and the former general counsel at Bats, which is now owned by CBOE Holdings Inc. “We’re up to managing that challenge.”

XTX made its name last year after managing to leapfrog big banks to place fourth in spot currency trading. The firm repeated the spot-trading feat in the 2017 Euromoney Institutional Investor Plc survey, despite slipping to 12th in this year’s rankings for overall trading.

Avoiding Bad Trades

XTX says its technology and the way it sends orders into the market allows its systems to be alerted quickly when things go wrong, giving them the ability to make lightning-fast pivots to avoid bad trades. The firm employs just 78 people, according to spokesman Tim Moxon. “They have a good combination of ability to manage their own risk and create really good prices,” said Steve Grob, global director of group strategy at Fidessa Group Plc. Its Amesterdam rival Flow, the largest trader of European exchange-traded funds, pushed into the US late last year, hoping to profit from buying and selling ETFs that no one else will touch. Addled by calmer markets, Flow’s first-quarter profit slumped. Trading income in the Americas over the three-month period dropped 23 percent.

One part of Flow Traders’s strategy was clinching regulatory approval to trade directly with large U.S. investors. That may also be a winning option for XTX if the firm can nab similar permissions, which in some cases would allow the firm to bypass public exchanges. “That’s where you can be disruptive, if you’ve got the right technology behind you,” Grob said.

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The spread-out nature of the US stock market can pose obstacles for any newcomer to the region, said Michael Beller, chief executive officer of Thesys Technologies LLC, a company that sells market-structure technology to help firms manage that vast trading network. “It’s complicated,” Beller said in an interview. “You can’t walk in, start trading and get results.”