There's been a lot of talk about what high frequency trading firms do to the market. But this weekend, the New York Times took a rare step into how HFT firms are doing for themselves.
The verdict? The HFT business is not what it used to be.
Profits from high-speed trading in American stocks are on track to be, at most, $1.25 billion this year, down 35 percent from last year and 74 percent lower than the peak of about $4.9 billion in 2009, according to estimates from the brokerage firm Rosenblatt Securities. By comparison, Wells Fargo and JPMorgan Chase each earned more in the last quarter than the high-speed trading industry will earn this year...The firms also are accounting for a declining percentage of a shrinking pool of stock trading, from 61 percent three years ago to 51 percent now, according to the Tabb Group, a data firm.
Here are the challenges firms face — regulators clamping down on HFT abroad (Germany and Australia for example) and renewed attention to how they could potentially harm markets here in the U.S, for one.
Then there's also the biggest loss in trading volume in the last four years, the move by big institutional investors into dark pools (places where they can trade outside of traditional exchanges), and the high costs of maintaining ever-evolving high speed trading technology.
And then there's the lack of market volatility (from the NYT):
....Timber Hill, which is one of the few high-speed firms that releases its financial results publicly, provides a unique window into the trends.
The firm’s founder, Thomas Peterffy, said that firms like his “had a field day” in 2008 and 2009. Share prices were plummeting, and the volatile conditions were ideal for high-speed firms. In addition to the high volume of trades in those years, share prices were moving around wildly, allowing computer programs to take advantage of dislocations in prices. Timber Hill, which trades stocks but specializes in options, made a $328 million profit, before taxes, in 2009.
Since then, though, the amount of stock trading done by Timber Hill fell 27 percent between 2009 and 2010 and 38 percent between 2010 and 2011.
To cope with this change, HFT firms are doing what other firms have been doing all over Wall Street since the financial crisis — cutting jobs.
Here's the thing, though, as technology evolves, humans are less and less necessary in this process anyway. So layoffs aren't going to mean the end of HFT firms by any means.
Not only that, but there's the issue of cost. The NYT points out that a data package that firms once bought from the Nasdaq for $1,000, now costs $25,000. That's a killer for the small guys, but for the big boys that can be a manageable expense.
Looks like a survival of the fittest situation, and the firms that get through it are going to be leaner, meaner, and more dominant over the industry.
