As the technologies used by the financial markets grow more sophisticated, so too do the potential disruptions to trading activity and the broader business world.
The phrase “stock trade” used to conjure an image of a frenzied horde of humans shouting at each other on exchange floors. But these days, many of those trades are handled by silent computers that perform the actions in microseconds. The advent of high-frequency trading powered by data-crunching machines means trade orders get filled more quickly, often with lower transaction costs for investors, supporters say.
But such automated technology also brings risks to the investing world—from new avenues for hackers and fraudsters to wreak havoc or game the system, to potential glitches that could wipe out billions of dollars in market value in minutes.
That’s where companies like Hyannis Port Research see an opportunity to sell technology that is, essentially, “supercomputers that watch supercomputers” for security and regulatory compliance purposes.
Newton, MA-based Hyannis developed a connected device the size of a pizza box that sits between financial firms’ servers and stock exchanges and monitors transactions in real-time. Some of the system’s software capabilities include stopping erroneous trades before they reach the market, flagging potentially fraudulent trades for a client to review, and acting as a firewall against security breaches, says Hyannis co-founder, president, and CEO Tony Amicangioli.
“We were founded in response to new regulations that basically outlawed direct access between market participants and exchanges without sponsoring brokers having some kinds of controls between traders and the stock exchange,” Amicangioli says.
The SEC adopted those rules in late 2010, the year before Hyannis was founded. The new rules were in response to the rise of electronic and automated trading on securities exchanges. New system controls, Amicangioli says, are partly meant to guard against incidents like the so-called “flash crash” of May 6, 2010, when the Dow Jones Industrial Average fell by 1,000 points in 30 minutes, before quickly recovering. There’s been some debate over the causes of that temporary market disturbance, but its impact seems to have been amplified by high-speed electronic trading.
Regardless of the cause, the flash crash illustrated how quickly markets can swing in this era of computer-powered trading. And such technology has raised concerns among regulators and financial firms about instituting not only trading safeguards, but also cybersecurity measures.
“The overall awareness of the need for enhancing cybersecurity is everywhere,” Amicangioli says. “So, firms that are evaluating their networks and where they need and want security, they’re looking at every physical and logical port in and out of their organization and asking, are we safe?”
Hyannis isn’t the only company that seems to have found a sweet spot at the intersection of fintech and cybersecurity. Its competitors include London-based Fixnetix, which was acquired by Falls Church, VA-based CSC (NYSE: [[ticker:CSC]]) in August.
Hyannis has built a profitable business serving customers like UBS and other large financial firms that Amicangioli declines to name. He says company sales will more than triple this year, compared with last year. Hyannis’s technology currently monitors about 3 percent of the daily trades across the major U.S. equity markets, and it also has customers who trade on Australian stock exchanges, Amicangioli says.
The company, which has raised $2.85 million in equity and debt funding, employs 15 people. It plans to grow to 40 staff members over the next year and a half, Amicangioli says.
Its early success, he says, is in part due to picking the right problem to solve and executing its vision. “Many startups often set sail in a given direction and have to course correct as they figure the market out. With us, we were very lucky that it evolved the way we wanted it to,” Amicangioli says.
Of course, developing a quality product was also hugely important for Hyannis. “Building a piece of technology like this one, where it’s in essence supercomputing pipeline technology—that’s not easy stuff to build,” Amicangioli says. The MIT-educated electrical engineer would know—he came up with the idea and filed for a patent on Hyannis’s core technology in late 2010, he says.
Amicangioli predicts the market for companies like his will only grow. High-frequency trading is spreading across different types of markets (not just equity, but futures, derivatives, and so forth) and geographic locations. That will undoubtedly spawn new ways to manipulate markets, and a need for new tools to police them, he argues.
“All markets globally are moving toward algorithms and electronic systems interacting with the markets,” Amicangioli says. “If you create that infrastructure, which is inevitable, then controls between the trading systems and exchanges, and protections around them, are a necessary component.”
