Trading Technology

09:40 AM
Greg MacSweeney
Greg MacSweeney
Commentary
Connect Directly
LinkedIn
Twitter
Facebook
Google+
RSS
E-Mail
50%
50%

HFT Profits Shrinking? The Data Doesn't Lie

Whether high-frequency trading is good for investors or bad, one fact that no one disputes is the drastic drop in HFT profits.

When people argue, the best debaters usually have a good grasp of the data that can support their arguments. Whether it's about who's better (Mays or Mantle) or which phone is more popular (iPhone or Galaxy S III), people point to stats and data to support their arguments.


HFT Loses Its LusterThe April 2013 digital issue of Advanced Trading takes an in-depth look at how the fall in trading volume and volatility are forcing high-frequency trading firms to look for new markets and innovate. To read more, download our April 2013 digital issue now.

Willie Mays hit more home runs, but he played longer; Mickey Mantle, on the other hand, had many injuries, but he won more World Series titles. The iPhone is the best selling smartphone of all time. The Galaxy S III, however, is rapidly gaining market share.

When it comes to high-frequency trading, the debaters also point to stats and data to make their arguments, both for and against the controversial practice. Proponents claim that HFT players are the new market makers, providing liquidity to the marketplace, and that spreads have tightened since Regulation NMS -- both beneficial to investors. Opponents argue that spreads haven't actually decreased since Reg NMS and that the liquidity isn't genuine and can quickly evaporate in times of crisis, such as the 2010 flash crash.

So what is the truth? Everyone is using the same market data, yet each is reaching very different conclusions. Is the data lying, or is the interpretation of the data at fault? Both arguments are convincing, but which should we believe? Entire books have been written pillorying HFT based on data analysis and research. Other books, pulling from the same data, make HFT seem like the greatest thing since sliced bread.

A Shrinking Market

Whether high-frequency trading is good for investors or bad, one fact that no one disputes is the drastic drop in HFT profits. As market volatility has declined and volumes plummeted, the amount of money to be made from HFT strategies has fallen as well. For instance, overall U.S. equity trading volume is down more than 33% since 2009, according to TABB Group. This results in fewer opportunities for HFT strategies to capitalize on market movements.

[HFT Demise as the Precursor to Changes in the Markets Landscape ]

Just how much smaller are the profits? Well, for GETCO, the largest HFT player in the U.S. markets, profits from HFT shrank 82% last year, down $110.2 million from 2011. That's staggering.

Profits from all market participants using high-frequency trading strategies dropped to $1 billion last year, reportedly down from $5 billion just four years ago.

Does this mean HFT will disappear? No, certainly not. However, the game has shifted. No longer can anyone with a server, an algo and some capital enter the high-frequency trading space and expect to compete. It appears that the market will be dominated by larger organizations that have the ability to invest in technology and continually improve their strategy.

Despite one's views on the pros and cons of high-frequency trading, the data shows that profits from the practice are shrinking, and so is the number of competitors. And in this case, the data doesn't lie.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
DickeyFuller
50%
50%
DickeyFuller,
User Rank: Apprentice
3/18/2013 | 8:24:53 PM
re: HFT Profits Shrinking? The Data Doesn't Lie
Gosh, that's a shame. Couldn't happen to a nicer group of guys . . .

~
Jade
50%
50%
Jade,
User Rank: Apprentice
3/18/2013 | 8:24:53 PM
re: HFT Profits Shrinking? The Data Doesn't Lie
Gosh, that's a shame. Couldn't happen to a nicer group of guys . . .

~
Nico
50%
50%
Nico,
User Rank: Apprentice
3/18/2013 | 7:00:30 PM
re: HFT Profits Shrinking? The Data Doesn't Lie
i believe human traders have also started to learn(hopefully) that the intraday game is not working anymore and moving up to larger timeframes.

i believe humans will adapt to this HFT monster fuelled by greed.(it is a great hope)

its good to see their profits drop so much. makes it less worth the infrastructure costs.
More Commentary
Is Big Data a Problem or an Opportunity?
When it comes to data, financial services firms are, as a rule, quite circumspect. They fear cyberattacks, data theft, data loss, security breaches, data privacy, and human error.
Data Integrity: A Necessity, Not an Option
Financial institutions that have taken on the data integrity task in the past now have to spend more money on hardware, software, and people just to keep up with the demand.
What Colombia’s New IT Campaign Means for Latin American Tech Investment
Colombia’s campaign is the latest example of how Latin America is trying to edge into the global technology space.
Initial Margin: When Does More Turn Out to Be Less?
Changing margin regulations are set to affect the OTC derivative market, including initial margin risk models for non-cleared OTCs.
The Mainframe Innovation Drag
It may be time for a consortium of firms motivated around the objective of eliminating the mainframe. What if every self-clearing firm decided to participate in building a modern, back-office system as an open-source, cloud-based project?
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.