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Bloomberg Business Week has a story this week on the High Frequency Trading aka HFT shops. [1] The facts are clear that they are on the downswing. A few excerpts:

For the first time since its inception, high-frequency trading, the bogey machine of the markets, is in retreat. According to estimates from Rosenblatt Securities, as much as two-thirds of all stock trades in the U.S. from 2008 to 2011 were executed by high-frequency firms; today it’s about half. In 2009, high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion a day. Speed traders aren’t just trading fewer shares, they’re making less money on each trade. Average profits have fallen from about a tenth of a penny per share to a twentieth of a penny.

According to Rosenblatt, in 2009 the entire HFT industry made around $5 billion trading stocks. Last year it made closer to $1 billion.
By comparison, JPMorgan Chase (JPM) earned more than six times that in the first quarter of this year. The “profits have collapsed,” says Mark Gorton, the founder of Tower Research Capital, one of the largest and fastest high-frequency trading firms. “The easy money’s gone. We’re doing more things better than ever before and making less money doing it.”

“The margins on trades have gotten to the point where it’s not even paying the bills for a lot of firms,” says Raj Fernando, chief executive officer and founder of Chopper Trading, a large firm in Chicago that uses high-frequency strategies. “No one’s laughing while running to the bank now, that’s for sure.” A number of high-frequency shops have shut down in the past year. According to Fernando, many asked Chopper to buy them before going out of business. He declined in every instance.

. . .

On April 15, Getco revealed that its profits had plunged 90 percent last year. With 409 employees, it made just $16 million in 2012, compared with $163 million in 2011 and $430 million in 2008. Getco and Knight declined to comment for this story.

The story explains the three main reasons that HFT is less profitable: lower volumes, lower volatility and more competition. Yoda finds it ironic that after all of the infrastructure costs to build fiber optic links and massive co-located servers, profits head south. HFT has become a commodity, just like pork bellies and orange juice. As in other commodity businesses, several competitors might have to leave the market in order for prices to stabilize. It is possible that spreads widen a little as the number of HFT players falls.

The article will be interesting if you care about the details of HFT, otherwise it I have hopefully conveyed the essential points.



[1] Business Week :How the Robots Lost: High-Frequency Trading's Rise and Fall
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