High Frequency Trading Hits the Brakes

By Bristol Voss  OCT 17, 2012 1:25 PM

Profits from the controversial computer-driven trading method are down 35% this year, according to Rosenblatt.


MINYANVILLE ORIGINAL Profits from high-frequency trading ("HFT") are down 35% this year to $1.25 billion, according to data from Rosenblatt Securities. Challenged by a global drop in trading volumes in equities for the last four years, 2012 profits are off a whopping 74% from the peak of nearly $5 billion in 2009, according to an article by the New York Times posted on the institutional brokerage's website.

With expensive high-powered computers, complex software, and fast data connections (HFT computers are often located physically closer to the exchanges than other market players' computers), high-speed firms profit from small changes in the price of a stock and millisecond timing of trade executions. With the drop in trading volume on global stock markets shrinking from 61% three years ago to 51% today, according to the Tabb Group, HFT firms are operating in a smaller pool of stocks, futures, and options where they can use their automated trading strategies to buy and sell faster than human traders, or even traders using automated software but on slower computers or data connections.

Contributing to the volume drop are moves by the various traditional investors, like mutual funds, who have taken some business away from the exchanges popular with high-speed traders.

At the same time HFT firms' profits are down and their technology expenses are up as the exchanges themselves have rushed to cash in on the demand for colocation and the type of data that these companies use. According to the NYSE Euronext Exchange (NYSE:NYX) (NYX), "Colocation is...an essential requirement for firms seeking to gain micro-second latency advantage when trading in today's increasingly competitive electronic markets." The NYSE offers a variety of data packages, including its "SuperFeed" and "a host of specialized and flexible colocation connectivity solutions."

Over at NASDAQ OMX Group (NASDAQ:NDAQ) (NDAQ), which had been offering the same data package to all traders, including a feed of all orders to the exchange for roughly $1,000 a month, the exchange has introduced a new, more comprehensive data package at about $25,000 a month.

Yesterday Eladian Partners closed. The two-year-old firm was founded by two pioneers of high-speed trading who had also founded Automated Trading Desk, which was sold to Citigroup (NYSE:C) (C) in 2007. The firm shut, according to a spokeswoman, "due to market conditions."

No positions in stocks mentioned.