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July 2, 2013

Flexing Their Mathematical Muscles

Two Sigma Securities' Dave Weisberger and Simon Spenser Make Headway in Wholesaling with a Quantitative, Disciplined Approach

By Peter Chapman

It's been eight years since there was a significant challenge to the established order in wholesaling. Back in 2005, upstarts such as ATD and Citadel Securities, deploying data-driven computer trading models, came out of nowhere to grab market share from incumbents such as Knight Capital Group, UBS and Bernard L. Madoff Investment Securities.

The old-line wholesalers scrambled to adapt. Out the door went hundreds of market makers. In came super-fast computers operating sophisticated trading models geared to produce high-quality executions for retail brokers.

Dave Weisberger and Simon Spenser, Two Sigma

When the dust settled, both Citadel and ATD had pushed their way into the top five, splitting the market with Knight, UBS and G1 Execution Services (formerly E*Trade). There they have reigned for the past eight years, competing on the quality of their executions, pricing and customer service.

That world is starting to change again. A trio of trading heavyweights-Goldman Sachs, Credit Suisse and Two Sigma-is challenging the incumbents. Goldman is building its effort from scratch. Credit Suisse hired former Madoff pros to build a market-making system from scratch.

Perhaps the least-well-known of the three is Two Sigma Securities. Leveraging the technology infrastructure and trading expertise of its buyside parent, Two Sigma Investments, Two Sigma Securities is making inroads into the business of filling orders for retail brokerages with firm capital.

"We view ourselves as a technology company," Simon Spenser, a Two Sigma Securities' senior vice president, told Traders Magazine. "We have the ability to apply a technology focus to wholesale market making. That will give us a distinct advantage, as well as confer benefits on our broker-dealer clients."

The offspring of the highly successful quantitative money manager, Two Sigma Securities entered the wholesaling business in earnest just 18 months ago. Since then, it has racked up impressive gains, partly due to its relationship with two of the larger order flow providers, Fidelity Brokerage Services and its affiliate National Financial Services.

In the first four months of the year, Two Sigma Securities traded 2.1 billion shares on behalf of retail brokerages, placing it seventh among the top 10 wholesaling outfits, according to data from Thomson Transaction Analytics. That was up 40 percent from the same period in 2012, when the broker-dealer processed 1.5 billion shares. (The data comes from Two Sigma's Rule 605 reports, mandated by the Securities and Exchange Commission.)

Making markets in nearly 7,000 securities, the wholesaler is gunning for a place in the top five. To get there, it has adopted the data-driven systematic approach to investing and trading used by its parent.

Silicon Valley

More Silicon Valley than Wall Street, Two Sigma Securities operates out of a sleek building in New York's fashionable Soho neighborhood, far from the financial enclave of Midtown. Its narrow elevators are packed with casually dressed young technology workers discussing the latest gadgets.