Published on: 03/10/2002
MOUNT PLEASANT - Steve Swanson and Jonathan Butler say their company, Automated Trading Desk, often is met with disbelief.
Its offices are located in Mount Pleasant, across the Cooper River from Charleston. The dull brick building is flanked by a strip mall, a Hardee's and Melvin's Barbecue restaurant.
On an average day, though, Automated Trading Desk, a 48-person firm, buys and sells more than $1 billion in stock. It's a jaw-dropping number Swanson and Butler say they have a hard time explaining to outsiders.
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"They come here and shake their heads," said Swanson, sitting in one of the company's small conference rooms. "It's got to be a scam operation. It can't be for real. They've got to be dealing drugs in the back."
Automated Trading Desk is not, Swanson assures, dealing drugs in the back. The company is making money - lots of money - applying a concept financial experts have talked about in theory for years.
In a state that hasn't had many successful technology companies, Automated Trading Desk shows the Palmetto State does have the brainpower to compete with the brightest minds in world, S.C. technology leaders say.
The company uses computers running complex software programs to buy and sell stock in massive volumes. About one out of every 25 trades placed each day on the NASDAQ stock market comes from the Mount Pleasant firm.
It attempts to beat human traders by making second-by-second predictions of where the market will move and then placing orders based on those predictions.
Automated Trading Desk, for example, bought Microsoft stock at $63.77 a share Friday morning and then sold it three seconds later for $63.79. The one- and two-cent margins the company typically makes on each share add up quickly when it's trading millions of shares a day.
"The stupid answer is we buy low and sell high," Swanson said. "It's really making decisions about when to buy and how many shares to buy. The whole driver in everything we do is based on making those decisions."
Stephen Brown, a finance professor at New York University's Stern School of Business, said the concept behind Automated Trading Desk is not new.
For at least two decades, firms have attempted to use computers to outwit human traders, said Brown, also managing editor of the Journal of Financial and Quantitative Analysis.
"It's been the holy grail for people to try to develop these kinds of trading systems," Brown said. "So far, they have not been met with a whole lot of success."
Whether Automated Trading Desk has found the "holy grail" of investing or just hit upon a lucky streak has yet to be determined.
What is for certain is that Automated Trading Desk has made a small group of mostly young Charleston-area residents extremely wealthy.
'A REAL CRAZY IDEA'
In the past three years, Automated Trading Desk has earned $153 million, more than $1 million a year per employee. Even in last year's difficult market conditions, the company made almost $50 million, down from its peak of $61 million in 2000.
Automated Trading Desk's average compensation per employee is $350,000 a year.
Its parking lot looks like a luxury car dealership. Porsches, Jaguars, BMWs, Audis and Humvees are lined up between its offices and the Melvin's Barbecue restaurant.
Julian Greim, a 21-year-old stock trader for Automated Trading Desk, has bought a home and a Porsche Boxter since starting with the firm two years ago.
"For my age," Greim said, "I'm way ahead of the curve of where I thought I'd be."
But for Swanson and Butler, Automated Trading Desk was not an instant success.
Swanson, a young-looking 34 with short sandy-blond hair, is the understated, but polished, chief executive officer of the company. Butler, 38 with floppy black hair, is the chief technology officer.
Swanson has a splash of nerdy tendencies in his persona, but "I swim in it," said Butler, who takes pride in being a programmer.
Swanson and Butler became Automated Trading Desk's first two employees in the late 1980s.
At the time, they were self-professed computer geeks who knew little about the stock market. They had been working together for a statistical software firm run out of the garage of College of Charleston professor Jim Hawkes.
After the stock market crashed in October 1987, Hawkes and Dave Whitcomb, one of Hawkes' former college professors, decided to start Automated Trading Desk. They said they saw an opportunity to make money in a chaotic market.
Whitcomb, then a Rutgers University finance professor, had been working on the concept behind Automated Trading Desk since the 1970s.
Whitcomb's idea was to use computers to monitor the minute moves of the market and then buy or sell stock on the basis of the trends discovered.
"I had a theory, a real crazy idea, that no one on Wall Street was faster than a computer," he said.
Swanson and Butler were hired to put the theory to the test.
In 1989, they rented office space in a dingy cinder-block building in Charleston's West Ashley district. They put up a satellite dish to download stock data and started writing programs for buying and selling stock.
Whitcomb would fax down trading models. Swanson and Butler would translate those models into computer code.
The pay was modest, they said. Whitcomb seeded the firm with $100,000 from friends and family. His wife's salary as a counselor at Bronx Community College kept Trading Desk afloat.
Swanson said he made about $20,000 a year in the first two years. Butler, still living with his parents, said he started at $30,000 a year. He soon cut his salary in half because the company was running out of money.
"We were trying to eke by because we thought there was a chance this thing would come through," Butler said.
In 1990, Automated Trading Desk landed its first client. Whitcomb convinced a Wall Street investment fund to use the computer trading system on a trial basis.
After brokers' commissions on the trades were paid, the system lost money, Whitcomb said. But if these commissions were eliminated, Automated Trading Desk was beating the market by almost three cents a share, he said.
That caught the attention of the New York brokerage firm placing the orders for the first client, he said. The brokerage soon started using Automated Trading Desk to make some of its trades.
Within three years, Automated Trading Desk was trading an average of a million shares a day. The company eventually formed its own brokerage in Mount Pleasant to take the broker out of the loop.
It now places trades for four major institutional investors. The company won't reveal its clients.
These clients pay Automated Trading Desk a commission that's typically based on the amount of money it makes or saves the client in each trade. (A third-party company measures how effectively Automated Trading Desk beats the market in getting an optimal price for clients.)
However, most of Automated Trading Desk's profits today come from making trades with its own money - more than $20 million that can be leveraged for up to $200 million in trading money.
Swanson and Butler won't say how much they've earned from the company. But "it grossly outweighs what we made in the first 10 years," Swanson said.
Whitcomb, still an adviser and chairman of the company's board, splits time between his New York home and Hawaii. He has an 8,000-square-foot home in Honolulu and a condo in a remote part of the Hawaiian islands.
"I'm having fun picking out art and landscaping for the home," said Whitcomb, fresh off a tour of Southeast Asia.
'POSTER CHILD OF TECHNOLOGY'
Automated Trading Desk has come a long way since its start in 1989. And with a $35 million headquarters in Mount Pleasant under construction, the company is banking on more growth.
Its offices today are modest. The company shares a building with a podiatry practice and a Century 21 agent.
A team of computer programmers packs the cubbyhole offices of Automated Trading Desk's second floor. These programmers write the computer models that provide the core decision-making system for trades.
About a dozen traders in their 20s and 30s pack a small first-floor trading room. These traders sit in front of computer terminals, buying and selling stock by the thousands of shares.
About 90 percent of Automated Trading Desk's trades are made automatically by a computer, but the traders oversee the trades. They also frequently make small trades on their own, testing out new theories so models can be updated or tweaked.
The trades constantly are monitored with a streaming count of the profits and losses for each trader and the overall firm. On a given day, an individual trader can make or lose thousands of dollars.
Scott and Travis Howell, 22- and 24-year-old brothers, have been working for the firm as traders for more than a year.
When they were growing up in Charleston, the Howell brothers said, their parents would keep up with their baseball statistics. Now, they want to know how much money they've made in the market each day.
"I think they're in a state of shock," Travis Howell said. "My dad keeps track of our P&L like it was our batting average."
A low-profile company for most of its existence, Automated Trading Desk started attracting attention in the last year.
Last spring, Gov. Jim Hodges attended the groundbreaking for the company's new headquarters.
"I gave the governor a ride in my Hummer," said chief technical officer Butler. "That was wild."
Harry Lightsey, president of BellSouth's S.C. operations, stumbled across Automated Trading Desk last spring when data and telephone service to the company's offices was temporarily cut.
Automated Trading Desk has high-speed lines connecting it to every major market in the United States and a few markets outside the country.
Hoping to ease concerns about future problems, Lightsey visited the company's offices. He said he was amazed by what he saw.
"This company is the poster child of technology in our state," said Lightsey, who chairs a state task force on technology. "You couldn't design a company that is a better example of a knowledge-based company that was homegrown."
Most people in the Lowcountry don't fully understand the firm, but Automated Trading Desk's reputation is growing, said Lisa Ryan, executive director of ThinkTec, started by the Charleston Metro Chamber of Commerce to deal with technology development.
Swanson and Butler, both College of Charleston graduates, have stayed home, proving South Carolina has the talent to compete in highly technical fields, she said.
"I'm their biggest fan," Ryan said. "They could have gone to Wall Street a long time ago, but they chose to stay in the Charleston area."
BUT DOES IT WORK?
Those who study financial markets, though, remain skeptical of the long-term prospects of firms like Automated Trading Desk.
Brown, the NYU finance professor, said many Wall Street investors have yet to be convinced computer models can replace humans and process all the subtleties of the market. Any gains are written off as temporary, he said.
"The mere fact that you've been having a good run over the last year or two doesn't tell you much about the future," he said.
Despite the skepticism, Nick Bollen, a Vanderbilt University finance professor, said the type of computer modeling done by Automated Trading Desk is gaining credibility.
Many firms probably are using these kinds of systems, Bollen said. They don't draw attention to themselves for fear of having their methods discovered, he said.
If other firms figure out the models used by Automated Trading Desk, they'll rush into the market and wipe away money-making opportunities, Bollen said.
"It's not clear that they have a sustainable competitive advantage," Bollen said. "The best and brightest on Wall Street are trying to do exactly the same thing."
In the early years, Swanson and Butler said, they were paranoid others would figure out their system. Now, they're confident their Mount Pleasant team of traders and programmers can go toe-to-toe with Wall Street, they said.
"We're in direct competition with the largest broker-dealers in the nation every day," Swanson said, "and we're beating them hands down."
The next major step for Automated Trading Desk is to raise its profile and add to its client list, he said. The new $35 million headquarters, set to be completed this summer, should help.
The building has been compared to a Noah's Ark in terms of design and function. Large wooden beams hold up a curved copper-roof that's lined with yellow pine on the inside.
A stream will flow through an atrium and empty into a reflecting pool outside. Every office will have a window overlooking a system of ponds and landscaping.
The building is supposed to survive almost any conditions. The hurricane glass used for the windows has been tested for winds up to 140 miles per hour.
The facility has enough back-up generators to keep it running for at least two weeks if power goes down.
Automated Trading Desk plans to use the building and a more aggressive marketing effort to go after more clients, Swanson and Butler said.
The company is targeting institutional investors who place large stock orders, they said. Automated Trading Desk would like to increase its client base from the four it serves to about 20, Swanson and Butler said.
The company's track record should help land clients, they said. The biggest challenge, Swanson said, is staying ahead of the curve and developing new computer models that exploit opportunities for making money.
"We have to continue to have that hungry edge," Swanson said. "If we lose that edge, if we lose that desire to keep pushing forward, it's very dangerous for the firm."
TRADING DESK TIDBITS
Automated Trading Desk started tinkering with a computerized stock-trading system in 1989 in a small, cinder-block office in Charleston. It now accounts for one out of every 25 trades placed each day on the NASDAQ. Some insights into the privately held firm's history, excerpted from its annual report:
In the beginning
The company's two principals were managing on their other incomes, and their two programmers were earning a little better than minimum wage, working 16-hour days, eating bag lunches out of an old college dorm-room refrigerator.
First client signs on in '89
Things didn't go well. After a couple of multiday test runs, ATD had to shut down trading because the commission costs on the rapid-fire trades mounted up faster than the profits.
When forecasters finally nailed down Hugo's track toward Charleston, (chief technical officer) Jonathan (Butler) packed the entire ATD computer arsenal into the trunk of his rickety Mustang and temporarily relocated the company's assets to his parents' home. . . . ATD was off-line for two weeks, a big blow to company confidence.
Finally, in November 1990 -still just ahead of bankruptcy -they signed up a second client. . . . Within three years, ATD was trading an average of a million shares each day in a portfolio of about 200 stocks.
On Sept. 1, 1998, the company had its first 10 million-share (trading) day, a record that rose to 20 million within 16 months, 40 million by November 2000, and 80 million in February 2001.
How it makes money
Just like conventional market makers, e-market making generates profits by buying at the bid and selling at the offer. A proprietary algorithm developed by ATD, and revised continuously since, predicts very short-run movements in prices.
How it pays
Each employee shares directly in ATD success through a system that earmarks well over 10 percent of profits to personal bonuses paid quarterly for quick feedback. . . . Total compensation per average employee in 2000 was over $350,000.
As unimaginable as the company's profit performance has been during the last half-dozen years, it may just be scratching the surface of the future.