High-frequency trading war decimates many firms
Where will the technology arms race ultimately lead in the trading industry?
A Financial Times essay makes a provocative prediction, noting that "Unfortunately, no study has yet considered the long-term implications of the arms race: the fastest HFTs will eventually drive out their slower competitors and only a few high-frequency trading firms – perhaps just one or two – will survive. The high costs of acquiring the technologies needed to be fast enough to compete successfully will become an insurmountable barrier to new competitors. Indeed, these costs already prohibit all but the most wealthy and wildly optimistic potential competitors."
Just one or two? That's quite a prediction.
Will we end up with just Getco and one other? That may be overstating it, but the Getco acquisition of Knight Capital certainly makes one wonder. A shakeout just might be in the offing.
The article also notes, that, "Decreasing competition among HFTs will be a very troubling outcome of this winner-take-all arms race. When the competition among HFTs thins out, the HFTs will no longer have to quote aggressive prices to obtain order flow. Investors will have to pay high prices when they buy and they receive lower prices when they sell."
This suggests an era in which the benefits of HFT evaporate but the downsides remain. The FT suggests that regulators should slow down trading essentially by Fiat, and force firms to compete on other features, such as price.
I doubt that this will catch fire as an issue. The industry will fight hard, and it would be easy to paint a artificially imposed slowdown as anti-innovation. The arms race will continue for the foreseeable future.
- here's the essay