HFT vs. retail in S&P 500 futures
If you're an avid reader of FierceFinanceIT, you know that I've often noted that the lifeblood of some high-frequency stock traders is the retail sector.
That's the order flow that is juiciest, where the big profits are to be had. This is not new. What is new is a study from the outgoing chief economist at the CFTC, Andrei Kirilenko, who will soon take a position at MIT.
As noted by the New York Times, "Using previously private data, Mr. Kirilenko's team found that from August 2010 to August 2012, high-frequency trading firms were able to reliably capture profits by buying and selling futures contracts from several types of traditional investors…The researchers found that more aggressive traders accounted for the largest share of trading volume and made the biggest profits. The most aggressive scored an average profit of $1.92 for every futures contract they traded with big institutional investors, and made an average $3.49 with a smaller, retail investor. Passive traders, on the other hand, saw a small loss on each contract traded with institutional investors, but they made a bigger profit against retail investors, of $5.05 a contract."
This phenomenon was underway in the stock market as well. But as retail liquidity dried up--and it's unclear if the HFT trading really pushed them out of the market--the high-frequency traders have been wounded. Many continue to ail amid the low retail volume and low volume in general. All this points to the need to re-think the current market structure, perhaps making peace with the two-tier system that has evolved.
- here's the article