Steve Swanson: Renaissance Man
Automated Trading Desk, an upstart from South Carolina, started the revolution in electronic market making on Wall Street, and founding member Steve Swanson led the charge.
When Automated Trading Desk (ATD) opened in a small strip mall in Mount Pleasant, S.C., in 1988, the computer-driven trading firm was an outsider on Wall Street in more ways than one. "At the time, people were trading with hand-written tickets. It was our belief that the entire trading process could be automated," recalls Steve Swanson, ATD's former CEO, president and a founding member of the firm. "It was truly a revolutionary concept."
Swanson says David Whitcomb, a finance professor at Rutgers University, devised the original idea for ATD and developed its initial algorithms, with James Hawkes, a computer engineer and Whitcomb's former student. Hawkes, who was Swanson's statistics professor at the College of Charleston in South Carolina, hired Swanson to work at his software company.
In the early 1990s, ATD developed a series of quantitative computer programs that "were predicting stock prices 30 seconds into the future," according to Swanson. "The price predictor was of such short duration that it was analogous to a human trader's sense of where the stock is going to go," he says, explaining that the underlying algorithms analyzed 100 market factors for each stock.
But, "Wall Street wasn't ready to embrace what we represented," says Swanson. "We certainly had many doors shut on us in those early days." Fortunately, ATD gained the support of a major bulge-bracket firm that allowed ATD to use its principal account and SuperDot lines, adds Swanson, who declines to name the firm, though he says it still exists today.
While ATD focused on proprietary trading in the early years, it soon developed an institutional trading business that received order flow from the buy side. On the institutional side, ATD focused on the small block orders, in the 5,000-share range, ignored by major execution providers. By breaking up those blocks into 700 orders executed throughout the course of the day, Swanson says, ATD was able to pioneer guaranteed VWAP executions, a technique that the bulge bracket then adopted.
Then ATD turned its innovative technology loose on the retail brokerage industry. In 2001, the equity market structure was changing radically due to decimalization and ATD saw an opportunity to become a market maker dealing with "held retail flow," Swanson says. "We took a snapshot of the bid-asked spread," he explains. "If we internalized the [retail] order, we would price-improve the order. If we were routing, we would use our superior technology to seek and find liquidity for the customer."
In July 2007, Citigroup acquired ATD for $680 million to use the trading firm's technology to expand Citi's electronic equity trading on exchanges and dark pools. Over the 18 years preceding its acquisition, ATD had grown from a small stock trading entity into one of the largest wholesale electronic market-making firms in the United States.
Swanson, who was named co-head of Citi's global electronic trading, spent the first six to nine months post-acquisition integrating the companies' technologies. "Part of the opportunity was to bring the ATD flows and the Citi order flows together," he says. "We had a much deeper pool for our customer base to interact with."
Along with his former ATD partner, Peter Kent, who was head of broker-dealer execution services and sales at Citi, today Swanson is busy building a new electronic trading venture, Eladian Partners, this time with a focus on executing multiple asset classes. The firm's trading and technology are based in New York, but it maintains a small office in Charleston, S.C.
Watching the regulatory climate, Swanson says a lot of asset classes will be forced to clear centrally and that the next logical step would be electronic trading on exchanges. "We think we're going to see a renaissance of new asset classes beginning to be traded electronically," he relates.
Initially, Swanson adds, like ATD, Eladian -- which in Latin means "to transform with expertise" -- will trade with its own capital. But then it will go after retail and institutional customer flows across asset classes. "We're in the early stages; we're building the team right now," he reports, beaming with excitement over the next phase of his career. "We think we can transform those asset classes with expertise, having lived through it before."