Introduction and Overview
Hudson River Trading (“HRT”) was founded in 2002 by Jason Carroll (Computer Science @ Harvard), Alex Morcos (Computer Science @ MIT), and Suhas Daftuar (Mathematics @ Harvard), who were algorithm developers from Tower Research.
According to the official website, HRT is a data technology company composed of engineers and researchers, dedicated to solving difficult problems trading millions of shares a day on the world’s financial markets (providing liquidity support in more than 100 markets around the world, and conducting stock, futures, options, currency, fixed income products, and cryptocurrency trading). HRT is the first and foremost math and technology company. We are engineers and researchers working as one team to solve difficult problems trading millions of shares a day on the world’s financial markets – From HRT Official Website;
According to Growjo data, HRT currently has 864 employees worldwide, with an estimated revenue of $274 million in 2022, or $317,800 per person.
Information from: growjo.com
To date, HRT has been trading in more than 200 traditional trading markets around the world, processing nearly 10% of the daily trading volume of US stocks. In addition, since 2017, HRT has provided liquidity services in more than 20 exchanges as an important Market Maker in the Crypto market, and its VC investment business has also gradually started in 2021.
Ownership Structure
According to data disclosed by the SEC and FINRA, similar to the situation with Jane Street, Jason Carroll is currently the only founder remaining in HRT (as shown below), and is the controlling shareholder of HRT with an absolutely overwhelming shareholding ratio.
Co-founders Alex Morcos and Suhas Daftuar left in 2011 and 2012 respectively, and co-founded the cryptocurrency research and development organization Chaincode Labs in 2014, focusing on developing and supporting BTC or other peer-to-peer distributed payment projects;
Information from: HRT Execution Service LLC Annul Report, HRT Financial LP Annul Report, FINRA Report, JZL Capital
Core Staff
After the departure of two co-founders, HRT continued to maintain the configuration of three "core personnel". Jason Carroll, the only founder in office, was responsible for trading strategies. The other two were Oaz Nir, who was responsible for algorithms, and Prashant Lal, who was responsible for market development.
Information from: HRT Official Website, JZL Capital
Business details
Information from: HRT Official Website, JZL Capital
HRT owns two SEC-registered broker-dealer companies, namely HRT Execution Services LLC (formerly Sun Trading, acquired by HRT in 2018) and HRT Financial LP;
Information from: HRT Execution Service LLC Annul Report, HRT Financial LP Annul Report, FINRA Report, JZL Capital
HRT Financial LP (“HRTF”)
1) Main business: Providing liquidity to financial markets and trades financial instruments utilizing a proprietary electronic trading system.
2) Financial data: HRTF’s Annul Report disclosed by the SEC confirms HRTF’s asset-heavy business operation model, using its own balance sheet to provide liquidity for financial market transactions. The asset side is mainly financial assets measured at fair value (Financial instruments owned, at fair value), mainly due to its Market Making business;
Information from: HRT Financial LP Annual Report
HRT Execution Service LLC (“HRTX”)
1) Main business: Operating a trading platform that routes US equities orders as agent for registered US broker-dealers and HRTX only routes such orders to HRT Financial LP for execution.
2) History: HRTX was formerly Sun Trading, a high-frequency quantitative institution that provides liquidity for the stock, fixed income and foreign exchange markets in more than 115 exchanges around the world. In 2018, HRT acquired Sun Holdings LLC, the parent company of Sun Trading. The acquisition combined HRT's expertise in on-exchange trading with Sun Trading's expertise in over-the-counter trading to create a stronger and more diversified company. After the acquisition, HRT integrated Sun Trading's business into HRTF. HRTX only provides an electronic trading platform for institutional users and retail customers, and provides execution orders for HRTF;
3) Financial data: The total asset size of more than 10 million US dollars is several orders of magnitude smaller than that of HRTF. Cash and cash equivalents account for 77.84% of total assets. Accounts receivable mainly come from affiliates, which indirectly confirms that the HRTX trading platform is the main business and provides trading order services for HRTF.
Information from: HRT Financial LP Annual Report
Ventures
1) Leveraging HRT’s expertise in financial products and its influence in the crypto market, HRT provides value-added services in trading, technology development and operations to growth-stage projects that focus on solving financial and technical problems; 2) HRT Ventures’ investment areas are mainly infrastructure projects, focusing on asset management platforms, exchanges and lending platforms that are highly relevant to its market making/liquidity provision business. Since 2022, HRT Ventures has gradually deployed Defi and Trading-focused Blockchain projects, paving the way for its participation in market making and lending businesses in the decentralized field;
Information from: HRT Official Website, JZL Capital
Operation model and school cooperation
Operation model: 1) Although HRT’s founding team and current management team have a strong background in Tower Research, they do not implement the PM model like Tower Research and Jump Trading. On the contrary, HRT does not have an independent PM operation model, and the internal operation mechanism is more collaborative and flat, reducing the asymmetric information within the company. HRT’s business model is much more collaborative, flat, and much less asymmetric information across the company (no PM structure).
School cooperation
1) HRT mainly focuses on the advantageous majors of leading colleges and universities and launches targeted campus recruitment activities;
Information from: HRT Official Website, JZL Capital
2) In addition, Grainstone Lee, a well-known analysis agency, conducted a survey on the educational backgrounds of technical employees at 90 of the world's top hedge funds and proprietary trading companies (see the attached table for details). Eight American universities and two British universities were shortlisted. Drexel University's inclusion is mainly due to the fact that 90% of its alumni are from the SIG technical team, a leading quantitative agency on Wall Street.
Position Setting
1) HRT front-office positions are composed of 4 departments: Strategy Development, Systems & Networking, Trading Operations and Software Engineering. HRT internally refers to Quant and Trader as Algo Strategy Development (AD);
Information from: HRT Official Website, JZL Capital
2) In terms of personnel composition, it is similar to other leading quantitative institutions (such as Jane Street Europe, where traders and developers accounted for nearly 74% in 2021), with 38% being traders/investment personnel, 37% being technical development teams, and the remaining 25% or so being made up of back-end support departments.
Information from: JZL Capital – Jane Street Institutional Research
Technology Stack
HRT’s two main programming languages are C++ and Python. We use C++ for anything latency sensitive that sits on the critical trading path, and we use Python for everything else. With Python we monitor live trading, build our distributed computing platform, process large amounts of data, and write all of our internal tools. – From HRT Official Website
Institutional Ratings
On August 31, 2022, Moody's updated HRT's corporate family rating (CFR) and outstanding debt rating, with the corporate family rating (CFR) downgraded from Ba1 to Ba2, and its outstanding $225 million revolving mortgage rating downgraded from Ba2 to Ba3. Moody's also downgraded HRT's outlook rating from stable to negative.
Compared with Jump Financial LLC's Ba1 Corporate Family Rating (CFR1) and Ba22 Outstanding Debt Rating, HRT has a negative impact on Financial Profile (Liquidity & Funding, Profitability and Risk Appetite & Leverage), Operating Environment (Macro Level Indicator, Maturity of Capital Markets and Competitive Dynamics) and Business Profile (Business Diversification, Opacity and Complexity and Corporate Behavior).
Moody's believes that the rating downgrade reflects HRT's recent risk appetite and risk management problems. Factors including its evolving trading strategy and expansion of regions and/or asset classes outside its core areas make HRT more vulnerable to trading losses and unforeseen events, greatly increasing its risk exposure. The outlook rating was downgraded from stable to negative, reflecting the continued credit risk brought about by HRT's increased risk appetite;
From the beginning of this year to the rating date, the average decline of the three major US stock indexes reached 16%, and the price of BTC fell by more than 50% from the beginning of the year. Combined with the fact that more than 75% of HRT's balance sheet is financial assets measured at fair value (Financial instruments owned, at fair value), with a total amount of nearly US$1.9 billion, HRT had a difficult time in 2022;
As of the date of publication, HRT has one outstanding loan with a total amount of US$225 million in revolving mortgage loans, which is used to increase trading capital. The loan size is smaller than that of Jump Trading, which was established at the same time, and is far lower than Jane Street's outstanding debt of US$3.05 billion.
Information from: S&P Global Market Intelligence, JZL Capital
According to Bloomberg data, the loan has been designed by an investment bank into an asset-backed securitization product CLO (Collateralized Loan Obligation) and sold to institutional participants. Institutional investors holding CLO include Madison Park Funding Ltd (managed by Credit Suisse Asset Management), Bain Capital Credit CLO Limited, Calyle Global Market Strategies, Credit Suisse, etc.
Moody's upgrades Hudson River Trading LLC's ratings:
1) Control risk appetite and have a high level of risk awareness and risk management capabilities;
2) improving profitability and the quality and diversity of cash flows by developing high-volume, low-risk ancillary activities; and
3) Increase retained capital and liquidity while reducing exposure to major prime brokerage relationships outside of U.S. equity trading