In 100 years, financial historians and economists will look back on the current era on Wall Street with great interest (and not just because of the sweeping regulatory changes). Call it The Age of High-Frequency Trading or The Rise of the Machines, but the electronic revolution in securities trading is nearly complete. As one industry participant sees it, "We are all electronic traders now."
"The guys I sell to, it's all programmatic trading. They don't consider themselves high-frequency guys -- they consider themselves traders," says Richard Chmiel, VP of OneMarketData, maker of OneTick, a storage and analytics tool for market data. "The people on the outside call it 'HFT,' but on the inside it's just 'trading.' "
This steady, if not quiet, march toward machine-generated orders started with the exchanges, which went electronic a decade ago, and the spread of new electronic trading venues five years ago. While equities led the charge in high-speed trading -- there are more than 8,000 listed issues on the New York Stock Exchange alone, after all -- options and futures soon followed. Then foreign exchange and swaps signed on for faster speeds, leaving only fixed income behind.
What spurred this high-frequency adoption? Along with the launch of electronic exchanges and new, faster trading venues, the products themselves became more homogenized. "The homogeneity of instruments is a key driver and virtually any type of trading is then possible," says Ian Domowitz, managing director of ITG.
According to insiders, the only reason why the bond market is lagging in the adoption of high-frequency trading is that speed isn't of the essence for trading fixed-income products. One industry observer tells Advanced Trading that bond market traders still make deals much like their predecessors did in the 1970s and '80s: over the phone.
A Chance to Hedge Their Bets
The rise of high-frequency trading beyond equities brings many benefits for traders, including the ability to hedge their bets -- they trade other asset classes in case their bets on cash equities crash and burn.
"If you're trading cash equities, how are you going to hedge?" poses OneMarketData's Chmiel. "You do it in the futures or options market." He points to the May 6 Flash Crash, when firms hedged their trades in other asset classes that were synchronized to their cash trades.
"Waddell & Reed came in with this huge sell order on e-minis. Who provided all the liquidity on that day? It was the HFT guys. They get the bad rap, but they were buying the Waddell & Reed sell orders. They were buying those futures, and they were turning around and selling cash equities to offset their long futures position.
"This is why you need high-frequency trading beyond equities," Chmiel says. "You can't trade cash equities or futures and not offset your risk as quickly as you took on the risk."
Marty Leamy, president of the Americas for Orc Software, says HFT allows firms to get in and out of positions with ease. The trading solutions provider has Canadian clients that trade in both the U.S. and Canada. "They're dual listed in the Toronto Stock Exchange and the U.S. exchanges, and they look at the price differences between those two listings. They want to be able to get in and out for some of these instruments, and being able to do that profitably requires high performance," he says.