Michael Stonebraker, MHT All-Star in 2008, is at it again with another startup

Of the five startups Michael Stonebraker has helped to launch in recent years, three of them — including a new company brought out of stealth mode this week — are involved in an arcane segment of securities trading that has become the focus of keen interest, both by investors eager for reliable returns, and regulators concerned about market impacts.

High-frequency trading — also known as algorithmic, or black-box trading — lets investors beat the market by a hair. Proprietary algorithms crunch market data to predict small, short-term moves in stock price, then execute trades automatically, within milliseconds — before the rest of the market has time to react.

Stonebraker’s new startup, VoltDB, helps high-frequency traders assess and hedge risk during blink-of-an-eye transactions. He compared high-frequency trading’s gains to a nickel unearthed from a field by a fleet of bulldozers: High-frequency trade operations vie to be the fastest to run into the field and grab the nickel, he said.

Sounds dangerous — but the strategy proved a moneymaker in 2008, garnering new attention from investors. The New York Stock Exchange is now building a large New Jersey facility dedicated to the practice. High-frequency trading is the exchange’s future, an NYSE official told the Wall Street Journal last month.

With success has come public criticism and regulatory scrutiny. Both the U.S. Securities and Exchange Commission and its London counterpart, the U.K. Financial Services Authority, are now investigating how the practice might systemically affect equity markets. On Monday, Nobel prize winner and columnist for the New York Times Paul Krugman wrote that high-frequency trading levies a de facto tax on the average trader, by giving an unfair advantage to those who can afford cutting-edge technology.

Software made by two of Stonebraker’s prior companies, Vertica Systems Inc. and Streambase Systems Inc., is part of that advantage. The new company, VoltDB, is out of stealth mode with another tool high-frequency traders can use to gain an edge. High-frequency trading desks use Streambase to run algorithms and execute trades in real time. Vertica is used to test traders’ theories, back-testing algorithms against historical market data. VoltDB, still in alpha testing mode, may be used by firms to hedge exposure during the millisecond when 100 trading desks all take the same position on a security.

“Instead of getting market tics, you’re simply getting a list of trades that every desk in your company makes — and you just want to assemble the complete position of the entire company and then ask questions about it,” Stonebraker said.

Stonebraker, a 2008 Mass High Tech All-Star who is known as the “father of the relational database,” for his role on the Postgres project at the University of California Berkeley in the 1980s, explained VoltDB’s innovation. It is startlingly simple. The product is an online transaction-processing system that, unlike legacy systems, pays no attention to concurrency control, resource contention locking, recovery logs, queues or disk management. “We just get rid of all that stuff,” Stonebraker said. “That allows us to go wildly faster.”

[For the rest of Stonebraker's comments to Galen, check out "Net Gains" in this Friday's print edition.]