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CITADEL’S SENTINEL

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CIO Tom Miglis uses technology to redefine the business.

The Waters Profile

think he is extraordinary—in fact, he insists he isn’t. Miglis’ hobbies are exactly two: work and family. In a time when C-levels in !nance are known for their eccentricities, Miglis’ lack of pretense is endearing. At a recent meeting in a Manhattan breakfast spot owned by celebrity chef Gordon Ramsay and reportedly visited by the Beckhams the day prior, the CIO at Citadel ordered something slightly unexpected.

“Do you have any Cheerios?” he asked the server.

That moment looks like many others Miglis spends by the "oor-to-ceiling whiteboards that blanket Citadel’s head o#ce in Chicago. His expectations as CIO can sometimes be stunningly simple—foundational even—yet often they aren’t on a traditional buy side’s menu of options. That is the point.

Running technology at Ken Gri#n’s $13 bil-lion hedge fund since 2001, Miglis works without fear of failure, engendering a mix of collaboration, engineering wherewithal, and grit at the nimble !rm. With a series of successes during that time, Citadel has not only weathered a period when other funds have faltered, but has dramatically altered the possibilities of what technology can do.

Powerful PersonalitiesMiglis counts his luck, breaking into !nance in the early 1980s with Salomon Brothers, a shop known for its forward approach to capital mar-kets technology and one that, after restructuring

Tom Miglis doesn’t

Commitment to investors is the thesis at Ken Griffin’s Citadel, but how the firm achieves returns—through technology—is unique for a hedge fund. Steering strategy and growing the firm’s vaunted development capacity, CIO Tom Miglis is trusted with leading the way. And when you combine daring with talent, you can redefine what is possible. By Tim Bourgaize Murray with photos by Paul Elledge

“In the early days, Ken would ask how we would use technology at Salomon, because of its reputation as the leader in applying advanced technology to trading. At Citadel, we use technology to change the nature of our people’s jobs. For example, we recognize that our portfolio managers’ and traders’ most important role isn’t the actual execution; it’s gathering information, discovering opportunities others aren’t seeing. You use technology to flip the equation around, and for Ken, that is key.” Tom Miglis, Citadel

ImpossibleDo the

December 2012 waterstechnology.com

The Waters Profile

Tom Miglis, Citadel

waterstechnology.com December 2012

The Waters Profile

form,” Miglis says, explaining why the !rm, unlike publicly traded investment banks, always has to seek new oppor-tunities, whether novel or just a subtly better way to trade in equities markets that are 100 years old.

The few stories separating the !rm’s blade stacks from its traders, however, is where the separation between asset managers and technologists—both physical and cultural—ends.  

“Citadel has a fantastic culture of collaboration between our business leaders and technologists.  Our sys-tems ful!ll the needs of our portfolio managers’ vision, increasing our ability to capitalize on opportunities in the global markets,” Gri#n tells Waters. Indeed, on the trading "oors they are literally side by side, the technologists sitting with the businesses, or as Miglis proudly puts it, “the businesses sitting with the technologists.”

Little AcornsConvertible bonds arbitrage, a historical strength on the !rm’s asset management side, o%ers one illustration.

“To know how e%ective your model is in converts, the type of research you need to do requires almost industrial scale testing and calibration. We have some of the best quants in the world, but there is a two-way "ow—we understand the world better because technology enables us to see the results over time and across parameterizations. We’re running our modeling approach back in time, and it’s going to take 10,000 cores about a week to do a study to help parameterize a new innovation, and we’re pushing limits on that con-stantly. The internal cloud architecture gives our head of quantitative research (QR) much higher throughput and lower turnaround time,” says David Grossman, a managing director.

Building those tools o%ers a profound opportunity for the !rm’s technology sta%, who are asked to make a di%erence right away. For example, the fund’s primary electronic QR environment for converts began as

with the Citi merger, has produced a number of buy-side head technologists.

A colleague at Salomon and longtime friend, Tom Sanzone, who is now a senior vice president with Booz Allen Hamilton, says Miglis’ steady hand sets him apart. “Tom knows how to deal with con"icts and build the relationships necessary to deliver those high-risk, high-reward challenges he takes on,” Sanzone says. “They are often multi-dimensional, with both building the platform and managing the powerful personalities involved.”

In an industry that is known for them, Gri#n is among hedge funds’ more powerful personalities. Famously founded in a Harvard dor-mitory room in 1991, Citadel is now a large hedge fund with a sta% of 1,100. But when Gri#n brought Miglis on, he had greater ambitions, and a set of much larger competitors, in mind.

“In the early days, Ken would ask how we would use technology at Salomon, because of its reputation as the leader in applying advanced technology to trading,” Miglis says. “At Citadel, we use technology to change the nature of our people’s

jobs. For example, we recognize that our portfolio managers’ and traders’ most important role isn’t the actual execution; it’s gathering information, and discovering opportunities others aren’t seeing. You use technology to "ip the equation around, and for Ken, that is key.”

That means leveraging technology to do things other funds can’t. The !rm operates on a single security master, transaction, and position database with real-time reconciliation. “Critical in our success in the last !ve years is knowing everything that a counterparty knows about us better than they do,” says Steve Belluardo, the !rm’s technology co-head for front-o#ce technology.

Citadel also actively enhances the reliability of its hardware, much of which is managed in-house and, if not co-located, is connected by an all-!ber network on a dedicated "oor in the !rm’s eponymous Citadel Center on South Dearborn Street in Chicago.

“Investors entrust us with their capital, and for us there is no greater responsibility. The faith they place in us drives us to constantly improve and innovate to generate the strong returns they expect. We must constantly per-

December 2012 waterstechnology.com

The Waters Profile

a plot tool, created as part of a project for a developer in the !rm’s year-long, modular Financial Technology Associate Program (FTAP) training scheme. “Someone a year out of school plants a little idea—an acorn, really—and frequently those blossom into major technology investments,” says Ryan Garino who, with Grossman, co-heads Citadel’s credit desk. Both are going on a decade with the !rm.

The Long WayThat opportunity re"ects Miglis’ own background. An accountant by train-ing and a graduate of City University of New York’s Baruch College, Miglis made it to Citadel via the long way around, and as an auditor, hard work was taught early. “When you’re audit-ing, you step into a !rm and know nothing about it. You have a handful of weeks to !gure out whether their books are accurate. No one is especially interested in talking to you, but you need to extract information from them to do the job.”

As a result, Miglis has an a#nity for names a politician would envy.

“I had the good fortune of work-ing in their mortgage business from the ground up. Here I was in their !nancial division, involved in writing collateralized mortgage obligation (CMO) indentures and bond admin-istration for early deals, because it had to be done. It was about crossing boundaries,” he says.

Pushing them, too. Miglis recalls Lewie Ranieri, known as the inventor of mortgage-backed securities (MBSs), once calling up, asking him to execute a novel MBS product with deals already in place: “I told him, ‘Well, that’s impos-sible,’ and he shot right back, ‘I know, go do it!’ and hung up the phone.”

Doing the impossible as a technolo-gist starts with a deep understanding of the business. “I was in a meeting at Salomon Brothers, next to the tech-nologist for the funding desk, and John McFarlane [then head of the !rm’s !nance desk and previously COO for

Tudor Investment] was explaining something,” Miglis recalls. “I asked him, ‘Do you understand what he said?’ and told him to !gure it out in a week. It just isn’t possible to build a system if you don’t know the business. It sounds counterintuitive, but technology people have to understand the trading better than the traders, even if they aren’t transacting.”

“It’s amazing how quickly a young college student is at the head of the table, running the group,” says Belluardo, describing Citadel as a “well-funded incubator” for technology talent.

“We embrace hardcore tech-nologists because we’ve got hardcore problems,” Miglis adds. “We need developers who understand networking at the packet level, operating systems !ne tuning, assembler code, electrical engineers, device driver writers, kernel hackers.” He also knows to !nd them before they head to Silicon Valley.

Gri#n says, “Citadel’s long track record of success is what attracts and retains the most gifted system engi-neers and developers in the industry,” and nowhere is that record more evi-dent than in the !rm’s execution arm, Citadel Execution Services (CES), initially developed in 2004 with the !rm’s options market-making business.

Eight years later, CES executes 21 percent of US listed options, 13 percent of consolidated equities volume, and is the country’s largest retail execution venue. Chinese walls separate CES, based in New York, from the asset manage-

ment side, CES head Jamil Nazarali explains, who himself is an example of Citadel’s ability to attract new, top-tier talent. But Miglis oversees technology across the entire !rm. “Tom was able to help build the CES team with hedge fund DNA,” Nazarali says, describing the !rm’s rapid rise in execution as “unprecedented.”

Much of that rise is down to com-mitment to investor protection, with technology serving not just as a catalyst for faster execution or better price improvement, but as an intuitive !re-wall. Nazarali, who joined CES from Knight Capital about a year ago, says a

proprietary “fusebox,” which sits outside the !rm’s

trading software, is just one safeguard Miglis implemented years before the industry became painfully aware of kill switches. “We !ne-tune it every

time we have a mis-take. It has limits

“Citadel has a fantastic culture of collaboration between our business leaders and technologists.  Our systems fulfill the needs of our portfolio managers’ vision, increasing our ability to capitalize on opportunities in the global markets.” Ken Griffin, Citadel

Ken Griffin, founder, Citadel

The Waters Profile

built in—whether exceeding average daily volume (ADV), or risk param-eters on a position in any single name, aggregate book or a market exposure gets too large. It’s gone o% a number of times, certainly. But that’s why we’re not in the news,” he says.

The Day After TomorrowWhen Nazarali attended the Securities and Exchange Commission’s (SEC’s) roundtable on technology in September, few at Citadel were surprised that it was Miglis “in the weeds,” combing though every detail of the !rm’s letter to the regulator. But details are what Gri#n and Miglis are about; indeed they are why Citadel, as a hedge fund, can enter markets that are formerly old boys’ clubs with technology, and thrive.

“We’re about not being satis!ed with where we are today. The person across the street is thinking about tomorrow; we need to be thinking about where we want to be the day after,” Miglis says.

This is re"ected in the !rm’s cur-rent technology projects, like internally sharing systemization strategies as it merges its converts, relative value, and index arbitrage trading into one credit group. “We’re not a special-situations shop running unique, undiversifable trades,” says Grossman. “We focus on gleaning as much information as possi-ble, within the broadest context. That’s why technology is the tool of choice, creating a framework that joins the creative process with a deep bench of capacity to see business vision realized in a more rapid way. Dedicated mathe-matization can formalize and add rigor to kernels of wisdom. But even then, it’s still just a number, and that’s where you need the application.”

Another project, which Miglis sees as providing mutual bene!t, is the !rm’s newly formed technology services arm, which, following the successful sale of its Omnium fund administration platform to Northern Trust in 2011, licenses software the !rm uses itself—mostly to institutions already invested in Citadel’s funds.

“It’s at a starting stage, but an impor-tant business for us, in that it represents a way for us to acquire new knowledge. Every time we talk to a third party, we learn something new, something we never would have learned unless we had that conversation,” Miglis says.

The !rm’s most ambitious project, however, is to in"uence the post-crisis swaps market structure with technol-ogy, bringing fairer competition to a space that, like electronic market-mak-ing in the past, could use maturation.

“We have a dedicated COO, Randall Costa, who only spends his time pushing Dodd–Frank, because there is a lot of complexity around marching this forward. The initial goal was clearing, and get-ting depth-of-book trading on top of that. As swaps execution becomes more transparent, with a more level playing !eld, a !rm like ours has opportunities to generate returns for our investors,” he says. “From Ken’s college days, the message here is that if you work harder and smarter, you can take advantage. If you don’t, someone else will.”

As Sanzone points out, Miglis has always had that in him. “There is no conservative mindset about him. When someone is successful in multiple places, it speaks to the person,” he says. “You have to reinvent yourself. Reputation might help, but every time you change a job, you have to rede!ne yourself and that takes a certain skillset. We both came from a blue collar background, humble beginnings, and in that sense he’s never lost where he’s came from. The success hasn’t changed him.”

Rede!nition. A stunningly simple idea for a CIO who has already shown how technology, whether through market-making or software develop-ment, can transform what a hedge fund can be. With Miglis to his left, Belluardo wonders in a moment of re"ection, “Just what are we?”

Some would say a target. Others would say the future. Having it no other way, Miglis just smiles. W

Jamil Nazarali

Ryan Garino

Steve Belluardo

David Grossman

©2012 Incisive Media Investments. All rights reserved. Used by permission. First published in Waters, December 2012.December 2012 waterstechnology.com