The new order in trading

So who is the most important liquidity provider operating in today's markets? The "high-frequency trading community," according to the Aite Group, which takes an eye-opening look at this growing segment of the market in a new report. These firms boasted a banner year and now account for more than 60 percent of all trading volume. While most broker-dealers have suffered mightily, these firms have turned themselves into a prime force in the markets. They laugh at the notion that quants are dead. 

So who are they? 

The group isn't just comprised of technology-driven proprietary trading firms. It also includes regulated market makers who have embraced the quantitative approach and brokers, such as Lime Brokerage, which accounts for massive amounts of volume on behalf of clients. Here's a video. Even small clearing firms are in on the act, marketing their low costs and ability to handle huge volumes. 

"While small in number (estimated to be 10 to 15 firms at most, with significant trading operations), these firms have energized the overall trading market, pushing for greater technology innovation, testing the limits of speed and, most importantly, providing liquidity to the various execution venues," the report notes.   

They tend to be a brash bunch, reveling in the fact that they are far from Manhattan, but setting the tone with their low-cost, tech-centric approach. Kansas-based Prop firm TradeBot offers this: "We have approximately 50 associates, about half of which are traders. Software and infrastructure teams constantly work to improve our technology. We are entrepreneurial and nimble. We hate bureaucracy and lengthy meetings." 

The impact on the market has been palpable. These firms are boosting volume, driving spreads even tighter, reducing average trade sizes, lowering costs in general, boosting electronic trading, forcing execution venues to court their liquidity and fueling a technology arms race--the nukes being the science and math PhDs they employ. 

Their influence is poised to spread as they move into other markets. - Jim