How high-frequency trading lost its mojo


A few years ago, the term high-frequency trading inspired all sorts of fear and awe. Few people understood it, which made it scary. But its impact on the market and the profits the top practitioners generated could not be denied. Fast forward to the present, and it's hard to believe how times have changed for the worse.

The top firms are hanging on, but the glory days are over, leading them to ponder new approaches and new markets.

In a lengthy excavation of the current state of the industry, Bloomberg writes that, "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."

The result is that revenues have fallen precipitously. According to Rosenblatt data, the entire HFT industry made around $5 billion trading stocks in 2009. In 2012, the comparable figure was down to $1 billion.

It's tempting to think about the industry as the ultimate SOES bandits, using technology to scrape off a tiny bit of the spread, vexing traditional sell-side trading desks, only to see it all wither away. The world has caught up, but somewhere, someone is coming up with the next great trading idea, and at some point it will take the world by storm. It will rise and then fall as they cycle continues.

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