Misha Malyshev : From plasma physicist to Citadel's nemesis

Misha Malyshev, who grew up in central Russia in a home with a wood stove and no running water, has earned enough in his hedge-fund career to afford almost any luxury.

He may need that thick wallet to defend himself against recent charges that he stole former employer Citadel Investment Group's "secret sauce," the computer code that controls its trading decisions. The lawsuit stands in the way of Mr. Malyshev's plans to start his own trading firm, Teza Technologies LLC, after earning tens of millions of dollars at Chicago-based Citadel.

The case underscores how dependent big hedge fund managers are on individual minds like Mr. Malyshev, whose computer programs helped generate billions of dollars in profits for Citadel. Known as high-frequency trading, the programs find tiny price mismatches across different markets and send off rapid-fire buy and sell orders to snag profits.

Under Mr. Malyshev, who declines to be interviewed, Citadel's high-frequency trading fund gained 40% last year, even as Citadel's main funds dropped 55%.

Though the strategy relies heavily on computer technology, people are more important, says Robert Iati, a partner at Tabb Group, a financial industry consulting firm.

"The idea that somebody stole code so they are going to bring everyone to their knees, that's garbage," Mr. Iati says. Trading companies are profitable because "they have smarter people."

Smart is one way to describe Mr. Malyshev, 40, who has a doctorate in plasma physics. The son of a truck-driver father and an elementary-school-teacher mother, Mr. Malyshev took a correspondence course as a teenager and landed a coveted spot at the Moscow Institute of Physics and Technology, sometimes called Russia's MIT.

He arrived in the U.S. with his wife, a graduate of the same school, in 1993, getting his doctorate from Princeton University six years later. Vincent Donnelly, a professor at the University of Houston who oversaw Mr. Malyshev's dissertation research at Bell Labs in Murray Hill, N.J., recalls giving him an assignment to build a component for a machine used in the production of silicon chips. Mr. Donnelly expected the job would take several months. Mr. Malyshev got it done in a week.

After a short stint at Bell Labs and a few years at consulting firm McKinsey & Co. in New York, Mr. Malyshev took a job at Citadel in 2003.

He quit Citadel last February. His contract barred him from competing with his former employer for nine months, during which time the hedge fund company was to pay him $30,000 a month and as much as $100 million in deferred compensation.

His plans to launch his own firm hit a roadblock on July 3, when the FBI arrested a former Goldman Sachs Group Inc. programmer named Sergey Aleynikov, alleging that he stole the computer code for Goldman's high-speed trading strategy. Mr. Aleynikov had just started working for Teza, which promptly suspended him and said it would cooperate with authorities.

Mr. Aleynikov, who says he's not guilty, is due in court Monday.

High-frequency trading lately has come under scrutiny after Sen. Charles Schumer, D-N.Y., called on the Securities and Exchange Commission to ban a practice in which some stock exchanges allow high-speed traders a split-second look at investors' orders before they're made available to the broader market. Citadel uses so-called flash orders at the stock market it co-founded, Direct Edge; it's unclear whether Mr. Malyshev plans to.

Six days after the FBI arrest, Citadel filed its lawsuit, saying Mr. Malyshev and another programmer had violated their agreements not to compete and stole trade secrets. As developers, "they had the whole picture," says Michael Foradas, a Kirkland & Ellis lawyer representing Citadel. "The key part of the business is the development of the trading tools."

Mr. Malyshev has filed a motion to dismiss the complaint.

"This isn't a case about trade secrets at all," says Chris Gair, a Chicago-based lawyer at Jenner & Block LLP who is representing Mr. Malyshev. "It's a case about human talent."

Update April 2014 

Misha Malyshev resides in Wilmette, Illinois.

Teza is a science and technology driven global quantitative trading business headquartered in Chicago with offices in New York and London. Misha Malyshevhas led Teza as its CEO since he founded the company in 2009. Malyshev earned his Ph.D. in astrophysics from Princeton University, as well as an M.S. in theoretical physics and a B.S. in physics and mathematics from Moscow Institute of Physics and Technology. For more information, visit www.teza.com.