(The following is part of a content series themed around the Equities Leaders Summit, which takes place Dec. 3-5 in Miami.)

ELS Spotlight: Potamus’ Unique Zero-Commission Model Sparks Investor Interest

The hippopotamus gets its name from the Greek word for “river horse.” The large African mammal can often be found sleeping in rivers or lakes as their skin texture means they become dehydrated without dipping in and out of the water. Because of this they are well-adapted to living in the water. When they submerge themselves their ears and nostrils fold shut to keep dry, while the density of their body means they can walk underwater.

Like its namesake, Potamus Trading has adapted to its environment.

After developing one of the industry’s most sophisticated HFT platforms, in 2018 the firm pivoted its business to become a broker-dealer (BD) that allows asset managers to leverage its cutting-edge technology platform to more effectively interact with the market’s most tech-savvy liquidity providers.

“We consider ourselves an execution partner to the buy-side trading desk, and we believe that our interests are aligned while executing orders on their behalf,” said Managing Partner and Co-Founder Kristin Linnell. “Our objective is to level the playing field for institutions relative to more technologically advanced HFT market participants by leveraging technology and market-making tactics in handling large orders.”

Potamus was founded in 2012 by a team of investment professionals who had previous experience building a quantitative systematic hedge fund business from the ground up. The Boston-based firm’s leadership team is comprised of several boldfaced names from the trading community. Linnell was previously a senior executive with at systematic hedge fund PhaseCapital, while her fellow Managing Partner, Paul Govereau, co-founded several technology companies prior to Potamus after stints at tech giants Microsoft and Oracle early in his career. The firm’s Director of Business Development, Tim McCooey, held senior sales and trading positions at Citi and Société Générale, and was most recently a Managing Director at SenaHill Partners, a fintech investment bank.

A Different Path

With the HFT space growing crowded by the mid-2010s, and frustration rising on the buy side about the quality of their executions when trading against the most technologically sophisticated market makers, Potamus felt there was a unique opportunity to go to market with an offering that would bridge these two worlds.

Potamus offers its services for no commission cost. Instead, it takes a portion of the spread it captures when working the order, with the client also getting a piece in the form of price improvement. Potamus also ended its prop trading business, reducing any concern of information leakage or conflict.

“Since we do not charge our clients a per-share commission, our interests are aligned in that we do not make money on the trade if we are not also doing well for them. As a significant portion of the market making profits is extended as price improvement on the volume weighted average price of the trade,” Linnell said.

She added: “As far as we know, there are no other providers offering a service like this. Over the last two years we’ve begun trading for a number of high-quality buy-side clients, and so far the response has been great.”

Potamus’ clients range in size from low single billion-dollar hedge funds to trillion dollar-plus asset managers, all of whom see a fit for this type of trading.

Mark Kuzminskas, Director of Global Equity Trading for Boston Partners Global Investors, told Business Insider in May that his firm has been pleased with Potamus’ performance.

“The order flow that we have identified on our side as being eligible to trade over a slightly more protracted period with less urgency, those executions with Potamus have outperformed the market by a noticeable margin,” he said.

The Road Ahead

For the highly adaptable Potamus, a strategic investment by pioneering Japan-based financial services firm SBI Holdings in mid-2018 was a seminal moment that will ultimately help Potamus deliver on its significant ambitions.

Linnell said that SBI shares Potamus’ vision of delivering conflict-free execution to the buy side and signaled that the partnership may enable the firm to trade in Asian markets “at some point in the future.”

“We also believe our trade would work in FX and futures, as well as European markets, but at this point our focus is strictly on the US. Expansion to other asset classes or markets would be driven by demand from our existing clients,” she said.

The firm is also weighing the possibility of developing an outsourced trading or trading technology offering as an increasing number of asset managers look for ways to manage the costs associated with new regulations and rising competition from passive investing.

“We feel that we have many of the key components to be an outsourced trade desk and certainly see increasing demand for this. The same is true for technology licensing. There are quite a few things we could do with our platform, but at this point we really are focused on continuing to succeed with our institutional US equities offering and helping our buy-side clients meet their execution performance goals,” Linnell said.

Produced in association with Forefront Communications.