The struggles of high-frequency trading firms were underscored today by the closure of Eladian Partners , a computerized trading firm, which succumbed to the slowdown in equity markets.
The closure is further evidence that the downturn in stock trading volumes is eroding the profits of high-frequency trading firms , which rely on rapid buying, selling, and rebates to generate revenues.
But this closure is also significant since the firm's founders are Steve Swanson and Peter Kent, the creators of Automated Trading Desk LLC, a pioneer in sophisticated computerized trading and electronic market making. ATD was sold to Citigroup for $680 million in 2007, to expand the bank's use of its technology to algorithms for equity trading on exchanges and dark pools. Swanson was chief executive of ATD, while Kent was chief financial officer.
After the acquisition, Swanson and Kent stayed on at Citi until 2010 to help the firm integrate the companies' technologies. But they eventually left the financial services behemoth to start their own electronic trading venture. In May 2011, Swanson told me that Eladian Partners would focus on executing multiple asset classes.
At that time, Swanson was keeping an eye on regulatory changes and mentioned that authorities would require trades across a range of asset classes be centrally cleared. He noted that the next logical step for such instruments would be for them to be traded electronically on exchanges.
The term Eladian in Latin means — "to transform with expertise." Shortly after the launch, Swanson spoke to Wall Street & Technology about the upstart firm's plans, and said they would go after retail and institutional customer flows across assets classes.
We're in the early stages; we're building the team right now," he reports, beaming with excitement over the next phase of his career. "We think we can transform those asset classes with expertise, having lived through it before.
The firm also attracted capital from private-equity firm Technology Crossover Ventures, which it planned to use to trade stocks and other securities, according to The Wall Street Journal.
Then why did Eladian pull the plug so soon?
Apparently, the firm, which grew to more than 50 employees and had offices in New York, London and South Carolina, underestimated the shrinkage in U.S. equity trading volumes, which has steadily declined for the past four years.
Today's Times story reports that Eladian was focused on buying and selling stocks and exchange traded funds.
As the industry faces a slow down, it's become more difficult for high speed trading firms to thrive on lower volumes, while paying for super fast data feeds, telecom lines and other infrastructure that's required.
On Monday, Rosenblatt Securities estimated that HFT firms would earn no more than $1.25 billion in profits this year, down 35 percent from last year and 64 percent beneath a peak of about $4.9 billion in 2009.
While it's not clear why Eladian decided to close up shop rather than continue to weather the storm, it's a bit ominous for other high-frequency trading firms that are facing similar headwinds and profit pressures.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio