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15 Minutes of Fame: MarketFactory Basks in the Limelight

Julie Ros: When you first told me you’d resigned from EBS last year (in fact, on the day of our Forex Network New York conference), you said you couldn’t tell me much beyond the names of the two other co-founders. Did you at that point know what your plans were?

James Sinclair: When the three of us left Icap, the only thing we knew for sure was that we wanted to work together. We worked together effectively as a team at Icap – I was looking at the product in the future, Ed was looking at the architecture, and Darren was selling it. So the real starting point was that we wanted to work together, but at that point we didn’t have a strong idea about what we wanted to do.

JR: I get the tie-in with Warhol’s Factory studio theme for the party, but what’s behind the company’s name?

JS: We got some of the way down the track of working out what we wanted to do – but then knew we needed a name. Someone hosted a branding session for us to brainstorm names, but we also looked at what we wanted to do, our business plan and our core values. We had a whole series of names but wanted a name descriptive of the types of things we wanted to do, rather than a name that defined what we were going to do – which is to help people set up markets. So MarketFactory was descriptive and gave us the scope to do a lot of things…and it’s a flexible name, it plays well into what we’re doing today.

At the same time, we had to build up the company. Recruitment has been a major focus. After all, this is where we began – by saying that we wanted to work together, that it’s all about the people – and if you get good people together, then good things will happen. We are just shy of 20 staff now, and everybody in the company except for three of us (Darren and I and one person who does administration), are all technologists.

We’re a tech company, so the people we have hired come from EBS, Reuters, banks, and other marketplaces, Nyfix Millennium and so forth. But they are all developers.

JR: What’s the first order of business? You told me you have a product in beta tests now…is it foreign exchange-based or another asset class?

JS: As we talked to people in the market, we began to realise there was a particular issue that they were increasingly dealing with. As markets, in a number of different instruments, are moving much more quickly, the markets themselves are much more dispersed on a global basis. So the distances involved are becoming more and more significant. In the old days, when we were all doing manual trading, the fact that London is far as it is from New York was not as significant as it is today. What has essentially happened is that the market has grown faster and faster, but there is this rather stubborn constant which hasn’t changed – and that’s the speed of light – which governs the time it takes for a signal to travel, and London isn’t getting any closer to New York. As the market has grown faster, these latencies become far more important and particularly so in FX, because it’s an especially global and distributed market. So we started building a product that helps people deal with these global latencies. The fact is that in a dispersed market you have to somehow overcome or compete with the speed of light, and that’s what we’re doing.

In terms of the product, Whisperer, yes, we’re in beta now with several banks and funds, and are bringing it out in a series of releases through late summer and early fall. It’s cross asset, but FX is certainly the beginning because that’s where there is a very clear and present demand given the dispersed nature of that market. But yes, it applies to other markets – anywhere there’s a distance involved.

JR: Tell me about the actual product, what it does and who it’s aimed at – banks, algo traders?

JS: What it is, is software and what it does is help institutions cope with these latencies. In essence, it helps them beat the speed of light by working out what’s happening in other parts of the world, without having to wait to be told. It’s a series of algorithms that improve the ways orders are routed.

JR: Is there a degree of guesswork or anticipation of price movement that is taking place through the software, such that a trading message can be sent almost before the price action reaches a particular level?

JS: Well, that is asking us to really open up the box! It is a set of algorithms and heuristics to improve P/L (the very subject of your magazine!) Basically, the purpose of the software is to help people overcome distance latency issues and improve fill ratios. I guess you could say it’s a combination of actual, definite knowledge and some predictive.

JR: In terms of competitors, would it come from say, Icap revamping its EBS software to be faster or would it be complementary to that type of venue?

JS: It is definitely complementary to the venues that are out there – the issue is that they are dispersed around the world, so it helps people get better access to the venues and helps people get better access to the market generally. Frankly, the better global picture traders can get, the more volume and business they’re likely to do, so it’s complementary to the venues.

JR: So it gets people closer to the origin of the price?

JS: Yes, you get a better picture of what the prices are – and therefore get the proverbial better execution. People increasingly want to know where the exchange is, because they want to get as close to it as possible. To get speed these days – particularly if you’re a trader on an algo basis – they try to collocate their model next to an exchange – but the problem is, in an instrument like FX where the market is distributed globally, you’ve always got a long leg out there. In the old days when you were clicking with fingers, those differences were not as significant as they are today when you have a very fast computer working.

JR: And competitors?

JS: Everyone has competition, whether direct or not. Any real opportunity does. We’re operating in a relatively new part of the world. I’m sure there will be different ways of addressing it, but what we’re doing really supplements everything else that people are doing.

JR: How did you fund the company?

JS: We started with ourselves, and then found a lot of people who knew us and liked what we were doing, so basically, we raised funding from individuals. The party we’re doing tonight is something we wanted to do to thank the people that helped us get this far, and we also realised that a lot of our friends and family haven’t seen a lot of us, so we thought it might be fun to do this sort of event – the first half is for clients and investors, and then later, we open up to friends and family so we can all reacquaint ourselves, and have a bit of fun doing it.

JR: You and Ed were with EBS from the beginning. Do you see any similarities between launching your own company now, and that of launching a new business paradigm in the early ‘90s?

JS: It was a similarly hard slog at the beginning, finding customers and building liquidity. But towards the end, I was focused on research and strategy, which was really exciting because that’s when we were working on EBS Prime.

JR: That’s when the issue of latency really came into its own.

JS: To be frank, I realised it especially after we left Icap and began talking to people with a fresh face. We could ask “what are your biggest issues” and they would honestly tell you – and that was a very revealing experience.

JR: The users in beta testing, are they all using it for FX?

JS: FX is the place to begin with; the customers that are using it now are all using it for FX. But none of them are exclusively in FX.

One of the things I have always been interested in at your conferences, are the lessons to be learned for FX from other asset classes and what simply did not apply. People used to say FX was following the equities model – but that was not necessarily true – there are huge differences.

Compared to FX, equities is a series of more centralised markets, clearly a regulated market with a far greater retail accent to it. And it’s an asset class in which people buy equities because they really want to buy equities, but FX is often a byproduct needed in executing other asset classes.

JR: Are people looking at your product for that aspect? FX as a by-product?

JS: The aspect we are most looking at now is related to fixed income, but we are talking to people who come up with different ideas. We spent a lot of time ensuring we weren’t building a specifically foreign exchange product and that we have a strong, general base.

JR: What is the main interest in the product by those using it now?

JS: The issues have to do with algorithmic trading.

JR: What other markets are ripe for this type of software?

JS: The more active fixed income markets. As a company, we are very interested in other markets that are not quite as liquid – and early on, we looked at markets where there are alternative matching algorithms. The architecture that we’re building could be used in a lot of different markets.

JR: Can you talk about pricing?

JS: We charge broadly on a ‘pay-for-performance’ basis, depending on which product the customer wants. It aligns the incentives appropriately – the incentive is there for us to continually refine a product so it meets the needs of the customer and the customer receives something that provides benefit.

JR: What do you see as your biggest challenge?

JS: Assembling the correct team in the right positions is what I regard as the most important thing. That is key to execution. It’s all about having the right team to understand and meet customer needs as well as to execute most effectively.

JR: Would you consider a sale if a firm were to come along and say, “this software is brilliant, we don’t want anyone else to have it” – and made you an offer?

JS: That hasn’t presented itself as a topic at this stage. One could make the caveat that the ability to access markets is beneficial to the market as a whole. The more you improve – and I think we’ve all seen this over the past few years – the more the market thrives because people have better access. So I think products like this are good for everyone.

MarketFactory Launches Whisperer

The firm’s first product has been named Whisperer after its debut on this display, a rendition of Warhol’s take on the Brillo box.

The issue in global FX:

The foreign exchange market is dispersed with trading locations and exchanges spread across the globe.
The best price may be on any of these exchanges, often in a location far from the trader.

The FX market is opaque; timing issues around price distribution make it difficult to understand whether a price on one venue was actually sourced from another.

The market moves so fast that a price sent from London may be out of date by the time it arrives in New York.
A failed attempt to trade on a distant exchange may result in a significant opportunity cost.

Banks and hedge funds need to:

Improve foreign exchange execution quality; measures include reduction in slippage and increased fill ratio.
Improve market price discovery.

‘Make sense’ of the market given its somewhat opaque nature and timing issues that makes one platform appear, but not actually, lead another.

Improved ability to conduct trades where one leg is on one exchange and another leg is on another exchange (eg, cross currencies; basis trades between instruments).
For a bank or institution that has customers, to improve its pricing to customers.

MarketFactory Whisperer:

MarketFactory Whisperer is software which aims to beat the speed of light by providing an improved picture of the current and future order book.

MarketFactory’s Whisperer unique software connects to whatever middleware is used within a bank or fund.
A bank or fund can run Whisperer at each of its trading locations and models, as well as close to the exchanges on which they trade. In practice, institutions begin by installing in a limited number of locations.

Whisperer uses algorithms to build an improved picture of the current and future order book at each external exchange, and at any distant locations within the institution, without waiting for all the data to arrive from the distant locations.

Whisperer can be used in markets other than FX, including for basis trades across instruments where one or more legs are in foreign exchange and one is another instrument.

The Founders:

James Sinclair
Co-Founder and CEO

Sinclair leads strategic direction at MarketFactory. He was previously head of research and strategy for Icap Electronic Broking where he was involved with strategy and corporate development for the foreign exchange and fixed income markets. As part of the $847 million EBS acquisition by Icap, Sinclair held a number of executive positions at EBS since its inception in 1991 when, as head of Asia/Pacific, he launched the business in the region and implemented its merger with Japanese competitor, Minex. He was later head of sales for the Americas, global head of product management then head of research and strategy. Prior to EBS, Sinclair was a vice president at Citibank and a consultant at a financial services consultancy.

Edward Howorka
Co-Founder and CTO

The original architect of the EBS system and later its CTO, Howorka created a unique distributed matching architecture assuring high performance and reliability across a global market spanning 40 countries. He was later appointed chief business risk officer in which capacity he oversaw market controls, business integrity and market microstructure. A pioneer in the computer industry, Howorka founded a software company in 1984 to develop tools for artificial intelligence, compilers and interpreters for PCs. Widely published in the field of mathematics and economics, he was Professor of Computer Science and Applied Mathematics at the University of Virginia.

Darren Jer
Co-Founder, Head of Sales and COO

Jer manages marketing, sales and operations for MarketFactory. As director of new business sales in the Americas for Icap Electronic Broking, he established EBS’s algorithmic trading and market data business amongst hedge funds and other prime brokered customers. Before EBS, Jer was a sales executive in IBM’s Banking, Finance and Securities practice, responsible for key Wall Street accounts. He began his career in financial technology as a consultant at Price Waterhouse developing e-commerce systems. Following Price Waterhouse he worked at Internet consultancy Viant, as well as his own digital media firm which developed an online marketplace for streaming video content and rich media advertising.

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