Jay Biancamano, the new head of the former Pipeline Trading Systems, admits his company will have a difficult time over the next year, and changing the firm’s name to Aritas Securities isn’t going to solve all its problems.
“It’s going to be a tough row to hoe,” Biancamano said as he sat down with Traders Magazine yesterday. “We have a lot of work ahead of us.” But the name change represents a break from the firm’s past, he added.
Pipeline received a black eye last October when the Securities and Exchange Commission hit the electronic broker with a $1 million fine. The company had failed to disclose that orders in its dark pool were filled by an affiliate brokerage firm. Pipeline—and now Aritas—got hit with a crisis of confidence. It is now trying to start over and win back customers’ trust, which is essential in the trading business. Only then can it hope to become profitable again.
In November, Pipeline named Biancamano, the former global head of marketplace and corporate strategy at Liquidnet, as its new executive chairman. This month, the company officially changed its name to Aritas. Now comes the hard part: getting clients back to using its products.
When the SEC announced its settlement with the company, some clients turned Pipeline off completely, unplugging their FIX connections, according to Biancamano. Most, however, simply stopped using Pipeline, not only for its dark pool, but also for its algorithm switching engine and companion Alpha Pro product. Many in the industry wondered whether Pipeline would be able to survive.
Pipeline’s block trading business in the U.S. represented about 30 percent of its revenue, while the Alpha Pro product and switching engine brought in far more money.
Now, the rebranded Aritas is trying to re-engage clients, attempting to woo them back after many got spooked by the SEC’s announcement. It also hasn’t helped that the firm’s ordeal came at a time when trading volumes have been down significantly, Biancamano said. Customers have been scarce.
“It’s still a handful,” Biancamano said. “On any given day, we can have anywhere from one or two clients, to four or five, up to six or seven.”
The first step in attempting to regain confidence was to shut down Milstream Strategy Group, the affiliate that at times filled more than 97 percent of the orders in Pipeline’s dark pool. Biancamano said the majority of clients made it clear that if the company wanted to deal with them, Milstream would have to close.
Aritas also has a scaled-back sales team, with only four people globally, down from a team of about a dozen prior to the revelations by the SEC. While the company’s dark pool is still operational, it has been deemphasized. Artitas has been focusing on its algorithm switching engine and Alpha Pro, which was considered the company’s growth engine, anyway.
Biancamano said while many firms looked for alternatives to Alpha Pro and the switching engine, clients told him that they have found it difficult to replicate the company’s system.
True to its name, the switching engine allows traders to switch from one algo to another depending on which is most likely to capture alpha during short-term market conditions. Alpha Pro then provides an additional layer of analysis, suggesting certain strategies and algorithms, though the trader can still over-ride the system’s selection.
“Our goal at Aritas is to partner very closely with clients to reduce their trading costs,” said Stephen Marchini, a managing director at Artitas who worked with the company’s research team to help develop Alpha Pro. “We don’t have investment research. We don’t have IPOs. We don’t have capital that we can offer. But if people are really interested in lowering trading costs, this can help them with that.”
Marchini said now that Aritas has shrunk back its operations, the company has also brought down the number at which it can break even. The goal now is—over the next two to three months—to get back to about 75 percent of the company’s business prior to the SEC bombshell.
Aritas is majority-owned by a private equity firm, which has signaled it will continue to support the company as it tries to rebuild its business. Biancamano said the company is well positioned financially at least into the second half of the year.
“I think our pain is behind us,” Biancamano said. “Our clients have looked me in the eye and said, we want to trade with you, but we want to see new management—we want to see a change in direction. We’re doing all of that, and clients are opening their doors.”
Meanwhile, a trading industry that was shocked by allegations about the company last year is watching closely to see how it will fare in the year to come.
