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The End of an Era?

Traders Magazine Online News, September 25, 2017

John D'Antona Jr.

Has the day of the high-frequency trader and his hyper fast strategies seen its last days?

Is it time to queue up “This is the End” by the 1960s band The Doors? Or is more akin to February 3, 1959, when rock and roll musicians Buddy Holly, Ritchie Valens, and J. P. "The Big Bopper" Richardson were killed in a plane crash near Clear Lake, Iowa, becoming colloquially in then zeitgeist "The Day the Music Died?"

Well the “music’ didn’t exactly die, as Don MacLean sang but it did change. And likewise, HFT trading hasn’t necessarily died either despite some prognostications and hopes. Rather, it has evolved to survive in a slightly different iteration. Market forces, such as low volatility, thinner profit margins and an industry that has caught up technologically have all contributed to the morphing of HFT.

Richard Repetto, SON

It has been no secret that for years high-frequency traders and strategies were making billions via their myriad hyper-fast low-size executions. But now that volatility has gone to the sub 10 level as measured by the VIX, the cost of technology itself has cheapened and the brokers have caught up in terms of technology spend, the playing field has leveled off. 

The Day the Trade Died

Market volatility as measured by the VIX, has skidded two months in a row (as of this writing) to hit an all-time low. It was reported that in July 2017 the VIX average close was 10.3, decreasing even further from the all-time low in June 2017 of 10.5.

So VIX wore a black cloak and with it brought death – of sorts.

To illustrate, Tabb Group, an industry consultancy, said that total revenues brought in by HFTs from equity trading have dropped over 85% from $7.2 billion in 2009 to $1.1 billion in 2016. Furthermore, Tabb Group said HFT revenue I projected to slide to $900 million in 2017.

Ouch.

“We’ve known for a while that HFT results were exponentially tied to volatility,” began Richard H. Repetto, Principal at Sandler O'Neill + Partners, L.P. “With the extreme low implied and actual volatility, this has presented significant headwinds to HFT and their profitability/spreads.”

And what about changes in market structure?

“I don’t believe market structure changed significantly to cause the decline in HFT,” he continued. “Perhaps the move to passive (index & ETFs) has had some impact on volatility but generally certain HFT benefit from trading these instruments and the underlying securities.”

Sandler O'Neill + Partners’ Repetto continued that if volatility remains low, he thinks there will be continued consolidation. There have been closures, acquisitions and the like already – Virtu acquiring KCG, DRW Holdings agreed more recently to purchase high-frequency trading firm RGM Advisors and DRW also in 2015 agreed to buy the assets of Chopper Trading LLC, joining two of the most prominent Chicago-based computerized trading firms.

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