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High-Speed Trading Slows Down

Profits are drastically down at high-frequency trading firms, according to new data. There are a number of reasons why.

High-frequency trading has put the brakes on. Profits from high-speed trading are expected to hit $1.25 billion this year, down 35 percent from 2011 and 74 percent lower than the peak in 2009 of around $4.9 billion, according to new data from Rosenblatt Securities.

To put things into perspective, the New York Times notes that by comparison, Wells Fargo and JPMorgan Chase each earned more in the last quarter than the high-speed trading industry will earn during the entire year.

As a results, high-speed trading shops have been laying off staff or shutting down, the NYT reports.

The single biggest challenge these firms have been facing is a global drop in trading volume on stock markets for the last four years. As such, high-speed traders who make a profit from buying and selling shares offered by traditional trading firms, have seen their profits start to dry up. The huge cost of the technology needed to run their trading operations has also caused a dent in their profits.

Meanwhile, the Times points out that traditional investors like mutual funds have adoed automated strategies and moved some business away from the exchanges that are typically popular with high-speed traders.

From the Times:

The firms also are accounting for a declining percentage of a shrinking pool of stock trading, from 61 percent three years ago to 51 percent now, according to the Tabb Group, a data firm.

It is a swift reversal for trading firms that have often looked to other investors like profit machines, thanks to high-powered software and superfast data connections that can take advantage of small changes in the price of a stock.

High-speed trading is far from disappearing from the market, but the struggles facing these firms have been greeted with enthusiasm by some traditional traders and investors who have viewed the firms as formidable adversaries, or worse, market manipulators that create sudden spikes and drops in share prices. Peter Costa, a longtime trader on the floor of the New York Stock Exchange, said the fading presence of the firms could “restore some order to stock markets.”

The years ahead could be even tougher for high-speed trading shops if regulators swing into action. Along with a host of high-profile technology glitches that have hit electronic players and high-speed trading firms such as Knight Capital, regulators have stepped up their scrutiny of these firms.

Earlier this month, the SEC hosted a roundtable on market technology where it discussed how market participants such as high-frequency trading firms can avoid technical problems that can cause mayhem to the markets.

This is still far from spelling the demise of high-frequency trading though. To date, there has been much talk and little action so far on the part of regulators.

And as one NYT reader comments, “But does Nathaniel Popper's insightful article suggest that if markets return to a volatile condition, then high-frequency trading will again rise to those profits seen in 2008?”

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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