Regulators probing legendary hedge fund’s secret trading code
Regulators probing legendary hedge fund’s secret trading
code
Hedge funds face a crisis of confidence
By Kevin Dugan and Carleton English June 21, 2017 |
12:47pm | Updated
Federal regulators are probing the secret trading code at
Renaissance Technologies, the massive quantitative hedge fund run by James
Simons and Robert Mercer, The Post has learned.
The Commodity Futures Trading Commission has recently
asked to dig into the trading software at the $65 billion hedge fund, James
Rowan, the fund’s chief operating officer, told an audience of hedge fund
managers on Tuesday in New York, according to two people who were in the
audience.
But Renaissance, which is about as secretive as it is
lucrative, is pushing back against the CFTC’s request out of fear that the code
will “leak,” Rowan told the managers, according to those present.
A spokesman for Renaissance Technologies declined to
comment.
Jonathan Hitchon, chief operating officer of quantitative
hedge fund Two Sigma, which manages an estimated $40 billion, was also on the
panel echoing Rowan’s concerns. Hitchon is on the board of the Managed Funds
Association, which called out the CFTC for “overreaching in its authority” in a
letter sent last month.
The pushback by Simons’ firm is the latest sign that the
government is plowing into so-called “quant funds,” which use highly technical
trading algorithms to try to beat the market. It is a growing area in the hedge
fund space as more hedge funds, including Steve Cohen’s Point72, are
increasingly hiring more developers to build algorithms.
These algorithms are often black boxes, and are so
complicated that it would be nearly impossible to figure out what they’re
designed to do, or why they do it.
Regulators are concerned there could be an illegal
trading practice, like creating fake orders to move the prices of illiquid
stocks, which is known as spoofing.
Last year, the CFTC first outlined the regulations that
would allow it to scrutinize hedge funds’ algorithms. Other major funds, like
Citadel and Two Sigma, slammed the proposal, saying that sharing the code made
it more likely it could fall into the wrong hands.
Even the CFTC admitted last year that there are problems
with its plan to require quant funds to share code.
“This requirement has garnered an enormous amount of
attention from market participants concerned with the prospect of handing over
highly valuable, proprietary business source code to an agency of the US
government that has an imperfect record as a guardian of confidential
information,” CFTC Commissioner Christopher Giancarlo said in September.
Renaissance is complying with the CFTC’s request for the
code, and is exploring ways it can share the code in a secure setting but not
have it left sitting on a CFTC file where it could be vulnerable to hacking and
being leaked, Rowan said.
Trading algorithms are extremely valuable to financial
firms, and Renaissance isn’t the first to go to great lengths to keep its
source code secret.
In 2009, ex-Goldman Sachs programmer Sergey Aleynikov was
arrested for taking the bank’s proprietary code — a charge he has twice been
acquitted of, though he’s still facing charges on an appeal.
That code was Goldman’s “secret sauce,” New York District
Attorney Cyrus Vance Jr. charged in 2012.
The CFTC did not respond to requests for comment.
Comments
Post a Comment