Strateer Blog

This year went by fast. It feels like we just started, squatting in a friends office in Midtown beginning of January.

In February we attended Money:Tech ‘08, anxious to discover potential competition. Having received good feedback and encouragement we continued and built our first prototype of Strateer. This prototype allows to visually build and backtest trading strategies in a matter of seconds. And more important it got us really excited about the prospect of having such a tool to better invest in the stock markets.

The prototype allowed us to raise our Angel round that finally closed in June. We started building a world class development team which ended up being distributed between China, Pakistan, Belarus, Germany, France and the US. With this team at our hands we built our first public product that launched in November: Alerts4all.com.

Alerts4all is the first easy-to-use real-time stock market alert tool for the individual investor. Wall Street tools for Main Street - Chapter 1. Blog reviews were positive and we landed articles in Barron’s and Marketwatch.

The meltdown of credit markets, stock markets and the overall economy was unsurprisingly the most affecting development for us. It affected our funding environment (-), the access to talent (+) and most important our customer (?).

In 2008 we saw a proliferation of financial blogging and the use of Twitter. Stocktwits is probably the most exciting development. Community driven investment discussions and decisions will be key for what we are up  next year with Strateer.com

We would like to thank all those people that supported us with their ideas, their feedback, their contributed time and of course their check book last year. Without you we would not have been able to get that far.

2009 will be a challenge. We believe that Strateer is a child of the changes we see on the capital markets. 2009 will be about non-nonsense and getting things done on a tight budget. But 2009 will yield as well opportunities for small, innovative, fast and hungry companies. We are looking forward to continue to build this company with the enthusiasm and support of all the people around us.

There are many reasons why New York should be the center of the universe (it has been to me since I moved here in 2002) but in terms of tech startups, New York seems to struggle compared to the usual suspects on the West Coast or even Boston.

One reason that is always thrown into the discussion amongst NY based startups is the tech brain drain by Wall Street. For many engineers the job security and lofty salaries paid by banks and hedge funds made joining a startup seem a dumb idea. Furthermore the lock-in effect of end-of-year bonuses created a timing-problem. When looking for that great engineering candidate, a startup does not have 6 months time to wait.

This problem might have gone away – at least for some time.

Risk of joining a startup
Amidst the financial meltdown we now see major Wall Street firms cut headcount in IT. In earlier downturns we saw headcounts in administration and on trading floors shrink but IT always seemed to be excluded. Not this time. I have friends at Merrill Lynch that got all projects stopped right now and that have been told to wait for the announcements what will happen after the merger with Bank of America. Whose platform will the bank consolidate on (I heard Merrill’s might make the race)? What about the teams that work on the discontinued platforms?

Janco Associates, a management consulting firm, earlier this fall declared that the financial firms’ woes will glut the IT job market. According to them and based on interviews with sources within Lehman Brothers and Merrill Lynch it has been confirmed that a large number of IT professionals in both organizations will lose their jobs by the end of the year. More than 230 IT professionals at Lehman Brothers who make $250,000 or more a year will be out of a job by year-end. At Merrill Lynch, more than 180 IT professionals making more than $250,000 a year will be without work as well. And let’s not forget all those hedge funds that will blow up over the next couple of months. A friend of mine just left his position as Head of Software Development at a midsized Quant Hedge Fund ($400M in assets) to start his own tech startup. According to him, most funds below $1B in managed assets will not survive the next 6 months.

So the relative risk of joining a startup, right now, has been reduced significantly.

Salary
For those engineers that do not loose their jobs as part of the downsizing, there is still the salary aspect. It is true that most startups probably will not be able to match the salary levels enjoyed on Wall Street. But next years bonuses are quite uncertain right now. This removes already one lock-in reason to join a startup right now.

But there is another reason that might make the salary question become less important. In the last weeks I spoke to quite some engineers from investment banks and hedge funds - we are hiring financial service engineers right now. None of them liked their job in financial services too much from a technology perspective. Some guys from Lehman Brothers were fed up having a very narrow scope in terms of technologies and relevance of their projects. The  same I heard at Merrill Lynch. They are looking for the satisfying experience of being part of designing and implementing and application end-to-end across all layers. Something a tech startup  is all about.

Eventually great engineers want to use interesting technologies to solve challenging problems. Wall Street’s huge IT departments with headcounts of a couple of thousands in each major firm did not do a good job to provide an environment that is interesting to work in. In the end great things are achieved by a small team of great engineers. As an example a major investment bank used to have a problem with their equities execution platform, which had become a piecework of many different platforms acquired over the years. When it came to build a new global equities execution platform they set up a team of only 10 engineers to build it. That leaves many engineers with boring maintenance and life support for legacy systems.

The financial crisis removes a major obstacle for the development of the NY tech startup scene. Engineers from Wall Street are joining startups – Josh Koppelman created a website for them (www.leavewallstreetjoinastartup.com) - or founding their own startups. Strateer is one of them, somebody else is working on build a discount consumer platform to trade government bonds and another company was founded to compete with rating agencies for better credit ratings, using mathematical models and natural language processing. There are many more.

Unfortunately though, this is only one (positive) effect of the financial crisis for NY tech startups. At the same time when hiring tech talent becomes easier, it be comes extremely challenging to raise money. VCs, in anticipation of a nuclear winter, are keeping much more cash in their funds (I heard a number of 40%) to help provide liquidity to their existing investments during the next year if needed, and Angels are preserving cash for what ever comes next year. But that topic has been covered already extensively during the last weeks.

Today the stock picking site Kaching announced that they have become an SEC registered investment adviser. I believe other stock picking sites like CoVeststor have done or will do the same. Becoming a registered investment adviser points into the direction social investment communities are heading: Taking on the Mutual Fund industry. We will provide as well alternatives to the Mutual Fund industry who is bloated, too expensive and performs mostly worse than the market does. However I do not believe stock picking is the right way to do that. I repost a comment to stock picking I left on Techcrunch:

“‘Of the 350,000 portfolios on kaChing, 1,500 have actually generated positive returns…’ The problem with ranking is, that it does not contain positive information value. When you rank, you always get winners - question is whether this is luck or skill. Not the performance but the risk adjusted performance of a portfolio is relevant. All these ‘winner portfolios’ have huge Beta’s. Another problem with ranking fantasy portfolios: What if a user generates two portfolios, one bullish another bearish. One of the strategies will win but this does not mean that the owner of the portfolio is a good stock picker. Having said that, I believe social investments and taking on Mutual Funds is very interesting. But there are problems attached on how to identify long term winning strategies.”

I believe following arbitrary stock picks is not providing real value to individual investors. It the strategy, the systematic investment that creates long term winning investors. That is what we are focusing on with Strateer.

Alerts4all, our first product that brings Wall Street technology to Main Street, is up to a good start. We released the site on November 18th (see here for our blog post). Even though we have not performed any search engine optimization or started our search campaigns we see a steady stream of accounts created every day.

We are proud that within 2 weeks of our launch we got an article in Barron’s (print and online), probably the most important publication in our space (we are still working on Investor’s Business Daily). The article generated quite some attention from potential customers, strategic partners and other journalists. Furthermore as these days a movement of 5% up or down in the S&P500 is no front page news anymore, we get a lot of interest for what we do: Bringing Wall Street tools to Main Street and democratizing institutional technology for the individual investor.

Alerts4all got great coverage online from blogs such as Silicon Alley Insider, MarketWatch, the Amazon Webservices Blog and other publications. On MarketWatch, Alerts4all was described as an “easy-to-use stock market alert tool that brings institution grade investment technology to individual investors.” And Financial Content asked “How cool is that?!”

Now you can help us to spread the word:

Sign-up for Alerts4ll, if you haven’t done it yet. Then, let me know in case you know:

• a distribution partner for Alerts4all (Online Broker, Stock market news site etc.)
• a journalist / blogger that writes about financial markets and technology
• a customer that would be able to provide feedback (every customer counts)

Alerts4all is the first product that we have launched and the market response has been great. This gives us confidence that we are working on something big. We cannot wait to show you what our next product will look like - but you will have to wait until next year.

After 3 month in private beta (thanks to all the testers), we are finally releasing Alerts4all today for public use!

Alerts4all is the first product that we are launching which brings Wall Street technology to Main Street. With Alerts4all investors benefit from real time stock market alerts that can be easily setup in minutes to automatically monitor the stock market and protect investors’ portfolios.

Individual investors often miss the right time to buy or to sell because they are too busy to actively monitor the stock market. This leads to frustration and bad investment performance. Alerts4all was created to solve this problem and help individual investors to find the right time to buy and sell. In today’s economic climate individual investors keep being hit in the current markets, and ultimately will need better tools and methods to get on their feet again.

Have a look for yourself at http://www.alerts4all.com.

To us Alerts4all so far helped us to prove a couple of things:

Technology Stack
Alerts4all runs on the technology stack that will eventually power Strateer.com. We wired different open source frameworks together and successfully embedded our CEP library (complex event processing) into it. Alerts4all runs on Amazon Web Services end-to-end. All in all the platform has been running like a charm - no crashing, no inconsistent behavior. Quite boring. Our operation guy spends no more than 1-2 h a week on it. Congrats to our development team for build such a stable platform.

Real-time market data and historic market data
We are right now processing real time data streams from AMEX, NYSE and NASDAQ. We had to overcome some hiccups but by now we feel this topic is well under control. Currently we throttle the market data to one price update per symbol per second. Our current infrastructure can process up to 1,000 messages per second - with tons of options left to scale. At the same time we had to solve the problem of building our own in-house historic stock price data base (10 years for all traded symbols) as well as an intraday 1-minute bar database. Both databases and the real time data streams are stable and will be part of the core infrastructure for Strateer.com

Cost of Development
The development costs for Alerts4all were quite reasonable, given that this is a full-grown real-time data processing enterprise application. We outsourced most of the development to China and Belarus. Only UI design and core technology was built here in New York. The core technology parts (CEP, J2EE architecture, component design) were developed by Matthieu, our CTO, and another very smart French guy. UI was developed with an external local agency. This cost efficient structure will help us as we move on to build our next product iteration. Given the difficult funding space, it is crucial to keep costs low.

Go-to Market
This has just started, so no real conclusion yet. All we can say so far is, that our private Beta worked out very well. We got some financial blogger to test our product, give us feedback and help us expand our private beta via their blogs.

We are quite proud about Alerts4all - but this is only the beginning. We will add some more very exciting functionality to Alerts4all in the next months. More important: We are working full steam on our next product scheduled for launch in Q2 next year. Stay tuned…

We are expanding our private beta of Alerts4all. Get your account at Silicon Alley Insider, Clusterstocks or the Amazon Web Services Blog.

Roger Ehrenberg wrote a great post about ’short-termism’ (see here).

Similar to the ‘weight-loss’ self help books that Roger refers to, there is no easy and fast way to get rich by investing in the stock market. All books, all newsletter or websites that suggest they have the right method to get rich fast exploit an inherent impatience and greed that is probably the biggest factor for investment failure for individual  investors. It is striking, that today the launch of triple-leverage ETFs has been announced. Apparently current volatility is not enough. Given that the double-leveraged ETFs are more popular than their non-leveraged cousins I am sure there will be plenty of demand for the new ‘Basement Bomb-Building Kits‘.

Instead of chasing the dream of getting rich fast and getting ripped of in the processes of trying, investors will have to learn to be realistic.

Individual investors need a good system (Diversification, Risk Management, Profit taking), the right investment horizon and discipline to follow it through. Unfortunately as most individual investors are busy, they do not have the time to follow such a system manually. So they ‘outsource’ this job to mutual funds or index certificates. Unfortunately those strategies have not served the individual investor well in the last couple of years.

The vision of Strateer is to empower the individual investor with better, easy-to-use institution grade tools. This will help the individual investor to become a better investor and generate better returns.

However, in a recent discussion the question was raised, whether the individual investor should invest in individual stocks at all. The best strategy for an individual investor is supposedly a well diversified portfolio with a long term investment horizon and with few trades. But that is not what individual investors do. Recent economic literature actually identified that contrary to the normative prescriptions retail investors hold concentrated portfolios with only a handful of stocks and they trade actively those stocks.

So why do individual investors buy individual stocks (there are 34M retail brokerage accounts in the US)? Are individual investors stupid? Why do individual investors deviate from what standard portfolio theory prescribes?

First of all it is important to us that individual investors trade individual stocks. However we believe that you can only build a long term business on  providing value to your customer and not by benefiting from the fact that there are stupid people in this world.  Therefore, given that we agree that the standard portfolio theory has merit, it is important that those investors who do invest in individual stocks are not stupid.

Some famous professional investors state that the individual investor can be successful in the market: Peter Lynch said “The amateur investor has numerous build-in advantages that if exploited should lead to a better performance than the markets.” Warren Buffet said “The average investor with only average intelligence can consistently outperform the market”. Hopefully these two gentlemen did not say that to sell more of their books.

An interesting article by Korniotis/Kumar analyzes the cognitive abilities of individual investors that invest in individual stock. Economic literature so far indicated that investors do not build a diversified portfolio either because of informational advantages or due to psychological biases (familiarity of the stock suggesting information advantage, over-confidence, wrong risk assessment).  In other words, they either know something or they are victim to misjudgments. In their article the authors group the investors by cognitive abilities and show that the group that is smarter is consistently outperforming the other group. This is quite intuitive: There are smart investors and dumb investors. The first group is able to generate market or above market returns, the other group consistently under performs.

The important take away for us is: Not every investor that buys individual stocks is stupid (intuitive, no?). In fact there are smart investors, that know how they should invest (broad portfolio allocation, value investing, long-term systematic). The only problem is, that they have no way to implement what they know they should do. They cannot manually analyze a broad portfolio because they do not have the time, mutual funds are not the solution (expensive and under performing the markets on average) and index certificates are no sure thing in side way moving markets (which we believe is what we will see over the next decade).

This is where Strateer offers help: We will provide the tools that allow investors to build the right system for them. Such systems might be broadly diversified or just based on a hand full of stocks. The system might be value orientated, momentum orientated or a combination of both. The system might have a short term horizon and trade actively or it might just trade a couple of times a year. But they will be a better alternative to manual and time consuming excel spread sheets, expensive and underperforming mutual funds and buy-and-hold index certificate investments.

It has become a bit quiet on this blog during the last month. Reading our last blog entry one could have thought that the meltdown took us down as well.

Quite the opposite. We are working on multiple fronts at the same time. We are preparing the public launch of our first product, Alerts4all. At the same time we are continuously in the process of raising money and working on our next product to be launched next year. Working quietly, making progress and keep trucking is the best way for us especially when the world seems to be coming to an end around us. I am not talking so much about the stock market where people have been calling out ‘bottoms’ during the last 3 weeks, but more about the credit freeze hitting the consumer and corporations - the real economy. The markets acted surprised on the latest earning disappointments. The effects on the real economy is very difficult to foresee but we brace for more ’surprises’.

Luckily our burn is minimal, potential competitors are distracted by survival mode and therefore our field is left open for innovation. Of course it would have been even better if all our cash requirements had been fulfilled by now, but you cannot have everything.

We faced a lot of negative sentiment in the last few weeks and it would be crazy not be concerned. But we feel that we are in a good position to either hibernate and build quietly our service or in case we get the funding at terms that make sense to us, use the current recession to invest into employees at reasonable prices.

I guess given the current implosions on Wall Street there is no way we cannot comment and try to make sense of what is happening and what it means to us.

Strateer is committed to democratize institution grade trading technology and bring automatic trading tools to the individual investor.  Now as the financial institutions are struggling to survive in this market, what does this mean for us? What does it mean for the service that we are planning to offer?

1. Better tools help especially in difficult markets
We believe that many individual investors were not following good risk management strategies over the last months and lost a lot of their portfolio value. Honoring a simple stop at the right time would have allowed them to watch the storm unfold from the side line. But more so, looking forward the markets might stay in bear territory for some time and then markets might go sideways for a while. Buy and hold might not be the best strategy for the years to come. Some people will be able to follow trading systems that find the right stock in this market at the right time. Strateer will be the tool to automate these systems and leverage them so other investors can profit from them, too. All in all we believe a difficult market environment is good for our product.

2. Talent exodus on Wall Street
We are right now expanding our team and it seems that now is the perfect time to find financial market engineering talent. Joining a startup does not seem to be so risky anymore, given the safe job at the large investment banks is not that safe after all. With no bonuses expected at the end of the year there is no lock-in that we faced until now when talking to people in the industry. Paired with all the upside of a startup (less specialized work areas - more end-to-end technology responsibility and an equity interest), the current market situation is good for us on the hiring side.

3. The change of the Broker/Dealer industry
Now that is a big one: Technology has been disrupting the broker/dealer space for many years, minimizing the margins of their core business and leaving them in need to push the envelope in those instruments that have been melting down (see as well this post) We believe that our technology paradigm is very disruptive leveling the playing field for large and small institutions as well as individual investors. Providing an algorithmic trading platform as a service, hosted in the cloud, diminishes economies of scale that larger hedge funds and investment banks used to have on the IT side. So the current market situation might be influenced by an ongoing technology trend that lies at the core of what we are doing.

4. Distraction of Angel investors
Well, not everything is good for us. Having a financial crisis and an economy in recession does not have an impact on our current business as it is non-existent. But as we finance our business by raising money from business angels that have an interest in financial markets makes these times challenging. It seems that people are quite busy with what is going on the markets. No dire need to close that deal with that financial services startup. Do I want to increase my exposure to anything that is related to financial markets? So that is not so good for us right now.