High-speed trading, the hottest, new thing on Wall Street, is undergoing a slump in profits, impacting both large and small firms, causing some to shut down while others trim headcount. That is the picture painted by today’s New York Times in a front-page Business Day article showing bar graphs of volume and profits that are definitely shrinking.
Profits of high frequency trading firms, which rely on rapid-fire computerized trading in U.S. stocks, are expected to be no more than $1.25 billion in profits this year, down 35 percent from last year and 64 percent beneath a peak of about $4.9 billion in 2009, according to estimates from Rosenblatt Securities, the paper reports. While no one seems to know how many employees work at high frequency trading firms, since no official data is kept, the Times said that based on interviews with more than a dozen industry participants, there is evidence that firms have been cutting staff and in some cases, closing down. As for the source of their struggles, high speed firms are accounting for declining percentage of the “shrinking pool” of average daily share volume in U.S. stocks, falling from 61 percent of volume three years ago to 51 percent currently, according data from the Tabb Group, cited in the Times article.
It is a swift reversal for trading firms that have often looked to other investors like profit machines, thanks to high-powered software and superfast data connections that can take advantage of small changes in the price of a stock.
High-speed trading is far from disappearing from the market, but the struggles facing these firms have been greeted with enthusiasm by some traditional traders and investors who have viewed the firms as formidable adversaries, or worse, market manipulators that create sudden spikes and drops in share prices. Peter Costa, a longtime trader on the floor of the New York Stock Exchange, said the fading presence of the firms could “restore some order to stock markets.”
The main challenge impacting HFT firms appears to be the decrease in trading volume in world markets over the past four years, notes the article. Such firms rely on speed to buy and sell shares from slower investors, capturing tiny price discrepancies, but lower volumes are sapping their profits. In addition, some of the traditional mutual funds are adapting the automated strategies and moving their flow away from public markets where the HFT firms play, into dark pools.
Since the firms must pay for expensive software and market data feeds as well as colocate their computers closer to exchange matching engines, in pricey data centers, all of this is putting a dent in their profits.
In terms of firms that are cited as scaling back, the NYT reports that the Chicago Trading Company is cited as reducing staff in its New York office, according to unnamed sources in the article who are familiar with the firm. The firm’s CEO Eric Chern, however, said that some people had been transferred to Chicago and ten had left the firm.
Despite the impression that HFT firms can hire a bunch of PhDs, turn on their computers and instantly mint money, it’s not the case, Virtu Financial’s president Douglas Cifu told the Times.
But HFT firms need the fastest data feeds to stay in the game. Thomas Peterffy, founder of Timber Hill, an automated trading firm, told the Times that his firm paid $1,000 for a data package per month from Nasdaq that showed all the bids and offers in U.S. stocks. Recently, Nasdaq came out with a more comprehensive package that costs $25,000 a month. Due to the arms race, Timber Hill among others, will sign up for the service to stay competitive, even as they adjust to lower profits.