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Reports US

US stock market daily report (April 03, 2014, Thursday)

April 4, 2014, Friday, 05:08 GMT | 00:08 EST | 08:38 IST | 11:08 SGT
Contributed by Millennium Traders

Founders of SXP Analytics LLC are accused of stealing the algorithms of a powerful Houston high-frequency-trading company, Quantlab Financial LLC, who maintains a low profile. Headquarters for Quantlab is located on one floor of a redbrick building located in Houston's low-rise Montrose neighborhood, known more for mansions and museums. The firms name appears in small text on a board near the elevators, sandwiched between a law firm and a life coach. Tim McInturf, general counsel for Quantlab says the defendants "engaged in a massive, surreptitious and systematic theft of the company's intellectual property." Allegations by Quantlab include that during 2007 when they dismissed two Ukrainian PhD researchers, the pair took with them, algorithms and other code to use at SXP. A federal civil suit has been filed by Quantlab against SXP's founders, referring to the code as, "the lifeblood of Quantlab." In the Quantlab case, Judges and lawyers refer to the code as the "philosopher's stone" and its "secret sauce". The case is expected to go to trial in 2015.

Wilbur "Ed" Bosarge, Jr. and Bruce Eames founded Quantlab as a hedge fund in 1998. Bosarge is a 75 year old oil-company executive and Rice University mathematics professor and Eames is a 59 year old businessman from Wisconsin.

Seven years ago at a monastery in Florence, Arizona, a Ukrainian physicist who aspires to be a monk, met with a Milwaukee lawyer and the pair began planning a firm - later named SXP Analytics LLC after St. Xenia, an 18th century Russian who gave the poor her possessions - whose profits from rapid-fire stock trades would mostly be donated to charity. Based on court filings and Federal Bureau of Investigation records, SXP offices and employees' homes in seven states were raided by over 70 FBI agents. In the raid, FBI agents seized computers, servers and flash drives in search of computer code belonging to a Houston firm, Quantlab Financial LLC. Companies such as SXP often hire researchers, some with a PhD, to create an algorithmic code to give them even the slightest edge over rivals.

During 2001 Quantlab hired Ukrainian, Andriy Kuharsky a 44 year old mathematician who earned his PhD at the University of Utah studying blood coagulation who had never worked in finance before. During the same year the firm hired Vitaliy Godlevsky, the Ukrainian physicist who would eventually plan his own company under the monastery gazebo. The two men teamed up to write algorithms that based short-term-price predictions on analysis of vast amounts of data that include details of all bids and offers on stocks at any given millisecond. Their code snatched up tiny profits on sometimes millions of trades per day, using 'signals' programmed in data that was largely hidden from slower-moving value investors. Algorithmic code is highly guarded.

Although Kuharsky and Godlevsky had high-five digit figure salaries plus, hundreds of thousands of dollars a year in bonus, the pair felt they were underpaid and not receiving their fair share. Sometime during 2006, the pair inquired about the compensation plan of Quantlab and challenged some operational matters to their bosses, resulting in the termination of their positions.

SXP was founded by Kuharsky, Godlevsky and others in July 2007. To assist in their development of a high-speed trading firm with algorithms, they brought in computer scientists and mathematicians and planned to trade in markets such as Brazil to find an edge. The relationship didn't last with the two and per court documents in January 2008, Kuharsky sent an email to Eames at Quantlab - under cover - and said that SXP was using Quantlab's code. Kuharsky later recanted his assertions, saying they were an attempt to get Quantlab to end its dispute with him. In 2012, SXP closed their doors after allegations of misdirected funds.