Someone asked me last week what I considered to be the biggest change in the FX industry over the past decade and were somewhat surprised at my response – the influence of the legal profession. I think they were expecting something deep and meaningful but hadn’t realised it’s way too early in the year for that.
I have, in the past, been accused of being against the legal profession, but in reality I am not – I may not like some of the ambulance chasing characteristics, but to paraphrase Winston Churchill, the legal profession is the worst way to sort out intractable arguments, save for any other method out there.
Don’t get me wrong, some of the things that have happened in FX markets over the past decade or so probably deserved to end up in the courts, however I do not see why any of them should carry a jail sentence.
Someone once said to me that lawyers are willing to argue that the sky is green and the grass blue if there is a cheque in it for them and while that may seem harsh, there is little doubt that some of these firms have mined a rich seam amongst certain FX market participants. I wonder if we are at the advent of, to continue the analogy, another mine for these firms to open, for while it is not expressly about FX markets as such, the lawsuit served by Citadel Securities on GSA Capital over alleged theft of proprietary information in December raises the spectre of more cases of employment-based lawsuits.
The gist of the case is that GSA, in the course of trying to hire a Citadel Securities trader (although coder is probably more accurate), sought information on, or access to, the details of one of the firm’s strategies that reportedly cost the firm $100 million to develop and was responsible for $50 million a year in revenue (and one hopes it wasn’t a correlation strategy, they don’t often last long enough to recoup that cost!).
Now the cynics amongst you may be asking exactly how different these strategies can be? As I noted, there are correlations that typically come and go (the more people know about them, the shorter the lifespan), so maybe this is a strategy that spots, or creates, correlations across different markets. It could also be as simple as the strategy operates in different markets to others, but is that really likely? After all, there are a lot of HFT firms out there all looking at the same markets and applying similar techniques, as well as investing in the resources to optimise opportunities.
The cynical observation is that the only difference is in the cleanliness and efficiency of the code and the possession of infrastructure like microwave towers – in other words, how fast it is. Citadel Securities is claiming that one of GSA’s enquiries during the interview process was about how fast the trading process was – obviously this could be a straight question about how fast the (most likely arbitrage-based) strategy takes to trade, but it could also reflect one of the key questions facing a hiring firm in today’s tech heavy markets – the level of infrastructure behind the trader – either way, it’s still about speed. A “great” latency arbitrage strategy is probably next to useless in US equity markets without microwave towers, for example.
This is where ambiguity raises its head, much to the delight of the legal profession which thrives on such fodder. How is a knowledge of code different to a knowledge of an institution’s client base? If the people concerned physically take a list of clients or a copy of the code, then that is obviously wrong, but what if it’s in their head? At what stage does trying to stop staff members with knowledge of your business from leaving become restraint of trade?
Citadel is undoubtedly one of the most successful market makers and traders in US equities markets, but has it really found a different way of trading or is it really a question of it leveraging the sheer scale of the business it has managed to build up? Is it in that position because it has the best infrastructure? If it is, then wouldn’t that infrastructure be fairly obvious to most of its peers?
Of course, to reiterate, if someone is trying to walk out of the firm with a metaphorical briefcase full of code, then something needs to be done, but it is also fair to wonder if Citadel is coming to terms with something that big firms the world over have had to deal with for decades – smaller, aspirational firms trying to build their capabilities to compete by tapping into the bigger firms’ talent pools? It’s a price of success in many eyes.
This isn’t the first time that such a case has been brought, but a source in the recruitment industry tells me that legal considerations are taking up more and more of the process around employing someone and that the number of cases is rising. I recall an occasion when a junior salesperson, without any deep relationships, tried to walk out of a firm with a computer printout of the client list. The person concerned was contacted, realised the game was up, and returned the list – problem solved (although not for them, they didn’t last long at their new employer). Nowadays, and someone over the weekend suggested it was merely the result of the propensity to take more entrenched positions in a post-truth social media world (no, me neither!), these cases inevitably seem to end up in court with law firms making the big bucks.
It will be interesting to see how the next decade works out – for sure employment contracts are going to get even longer and more complex, which means the employment process becomes even more tedious. The best (worst) I have heard of is a person taking a senior FX role at a bank, who had to go through 34 interviews to get there – imagine if they then have to meet lawyers – especially if the latter are on the clock. It could take a year to move jobs!
This could especially be the case when it comes to coders, after all, you can sit across a table from someone and get a feel for who they are and how they operate during the course of a normal conversation, which is fine if you are looking for someone in sales, relationship or even risk-taking roles. It is a lot harder when it comes to how well someone can code and manage strategies. Of course there are tests that can be taken, but I struggle to see how someone can develop and code a strategy for a new firm without leaning on their experience from a previous employer.
So it will be interesting to see how this case pans out, assuming it is not a simple case of theft, in which case Citadel was merely protecting its interests, as it should. If it is not, then the decision of the law courts could have quite an impact, because at some stage a precedent is bound to be set. If that is the case, then it is probably in everyone’s best interests if the decision is come to quickly and unequivocally.