High-frequency boom time hits slowdown

By Jeremy Grant in London

Published: April 12 2011 18:51 | Last updated: April 12 2011 18:51

Low market volumes and stiff competition have led to a sharp fall in “high-frequency” trading as industry experts warn that the past two years of rapid growth may be coming to a halt.

Instead, high-frequency traders are flocking to emerging markets such as Russia, Brazil and Mexico where exchanges are beginning to revamp their systems to attract such players.

High-frequency traders use automated trading systems to dart in and out of markets at high speed with holding periods of a fraction of a second.

The practice has come under scrutiny by regulators in the US and Europe who want to know whether it provides liquidity to markets – as its proponents claim – and whether high-frequency trades increase or reduce volatility in markets.

However, growth in the practice has slowed significantly in the US and Europe, market experts said on Tuesday.

The Vix index, produced by the Chicago Board Options Exchange and also known as “Wall Street’s fear gauge”, has been steadily falling since the second quarter of last year, although it jumped temporarily during Japan’s earthquake.

Larry Tabb, chief executive of Tabb Group, a consultancy, said high-frequency trading now accounted for 54 per cent of overall US equity trading, down from an earlier Tabb estimate of 61 per cent in 2009. The level in Europe fell from 38 per cent last year to 35 per cent, although Tabb is expecting a small uptick towards the end of the year.

“That has a lot to do with the fact that volumes and volatility have made it much more difficult for these players to operate,” Mr Tabb said. at the annual TradeTech conference in London. “We haven’t been seeing any big names blow up but it’s more about people downsizing. And we’ve seen some people get out altogether.”

A technological arms race is also hurting profitability. Peter Nabicht, executive vice-president at Allston Trading, a Chicago-based proprietary trading firm, said: “It is getting harder. You’re seeing competition expand like crazy and we are taking a big hit on our margins because of the investment we make in our systems. I wouldn’t be surprised to see some HFT firms being bought.”

He added that the growth of “dark pools” and other private networks where prices are not displayed publicly had reduced trading opportunities. “We have less flow to interact with so the flow we interact with we have to handle better.”

Robert Hegarty, global head of market structures at Thomson Reuters, said that high post-trade costs in Europe relative to the US was “a significant inhibitor to growing this [HFT] business”.

Rutger ter Hoeven, marketing manager at Interxion, which runs data centres where high frequency traders can put their trading systems, said profits were down at many trading firms based in Amsterdam, the largest community of HFT firms in Europe outside London. “In Amsterdam we’ve seen some of the market-makers come under pressure,” he said.

One such firm, Alpha Bay, went out of business in recent months while one of the largest options trading firms, All Options, has left the floor of the Amsterdam Stock Exchange, where it based its electronic trading, and has cut staff.

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