Hull Trading Company
Encyclopedia
Hull Trading Company was an independent algorithmic trading
firm and electronic market maker
. Known for its quantitative and technology-based trading strategy, it was acquired by Goldman Sachs
in 1999.
developed an empirical options
pricing model independent of Black–Scholes. Realizing that computers would lead to automated exchanges and mathematical securities pricing, he founded Hull Trading Company in 1985. The firm grew to over 180 employees including financial engineers, physicists, almost 100 software engineers and computer support staff. At its peak, Hull executed over 7% of the index options traded in the United States and 1% of the shares traded on the New York Stock Exchange
. In 1999, Blair Hull sold the company to Goldman Sachs
for $531 million.
. The firm employed complex mathematical models to analyze short-term options and equity pricing discrepancies while hedging
against overall risk exposure. It employed mathematicians and physicists to design algorithms and a large number of software engineers to implement systems based on these algorithms.
The company's proprietary technology allowed it to it to execute tens of thousands of transactions daily.
Equity partnership interest was widely distributed among employees. At the time of the merger into Goldman Sachs there were over 20 employee partners holding about 25% of equity interest, with the remaining interest held by members of the Hull family.
Algorithmic trading
In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the...
firm and electronic market maker
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
. Known for its quantitative and technology-based trading strategy, it was acquired by Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
in 1999.
History
In the late 1970s, Blair HullBlair Hull
M. Blair Hull is an American businessman, investor, Democratic politician, and philanthropist.Hull founded Hull Trading Company in 1985 and served as the firm’s Chairman and Chief Executive Officer before selling it to Goldman Sachs in 1999 for $531 million...
developed an empirical options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
pricing model independent of Black–Scholes. Realizing that computers would lead to automated exchanges and mathematical securities pricing, he founded Hull Trading Company in 1985. The firm grew to over 180 employees including financial engineers, physicists, almost 100 software engineers and computer support staff. At its peak, Hull executed over 7% of the index options traded in the United States and 1% of the shares traded on the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
. In 1999, Blair Hull sold the company to Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
for $531 million.
Investment strategy
Hull Trading was primarily an equity options market makerMarket maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
. The firm employed complex mathematical models to analyze short-term options and equity pricing discrepancies while hedging
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
against overall risk exposure. It employed mathematicians and physicists to design algorithms and a large number of software engineers to implement systems based on these algorithms.
Technology
The company was a leader in the application of computer technology to listed derivatives trading. A proprietary and large scale reliable distributed system architecture was developed by company programmers, providing automatic real-time pricing, risk management, market making and interconnection with automated options, futures and stock exchanges as they became available. Hull's massively scalable software technology was deployed to cover both domestic and international markets as electronic, on-line exchanges became available, while innovative hand-held computer technology was employed at exchanges still requiring execution by floor traders.The company's proprietary technology allowed it to it to execute tens of thousands of transactions daily.
Pay structure
The company was also known for its emphasis on teamwork and democratic pay structure, in which employees awarded each other bonuses. Since pay was based on nominations received, the system has been described as highly meritocratic.Equity partnership interest was widely distributed among employees. At the time of the merger into Goldman Sachs there were over 20 employee partners holding about 25% of equity interest, with the remaining interest held by members of the Hull family.