High-Frequency Trading Is Growth Industry
Traders Magazine Online News, October 14, 2009
High-frequency trading, which already accounts for about two-thirds of U.S. equities volume, is a growth industry. That, at least, is the consensus of a half-dozen executives in the high-frequency trading arena.
John Netto, president of M3 Capital, a proprietary trading firm that operates mainly in the futures markets, said at a recent panel discussion that capital efficiency and operational efficiency make high-frequency trading strategies in a range of asset classes attractive to many firms. These strategies typically don't require large outlays of capital, he said, because positions are held for short durations and "overnight risk is really frowned upon."
Advances in computing power have boosted the ability of firms to take advantage of pricing inefficiencies in various markets, Netto said. And changes in who provides liquidity to the markets, he suggested, have opened the doors to high-frequency firms.
The M3 executive, along with five other trading industry pros, spoke last Wednesday at a Thomson Reuters panel about high-frequency trading. The panel was moderated by Rich Brown, global business manager for machine-readable news at Thomson Reuters.
Brian Tahan, a vice president in the Advanced Execution Services group of Credit Suisse, stressed that high-frequency trading has been around for a while. Its current incarnation, he said, came about as a result of enhancements in technology and, on the regulatory front, decimalization and Regulation NMS.
Changes that took place in the mid-to-late 1990s, he said, have "come to a head right now," with the prevalence of high-frequency trading strategies. He added that there is now "increased demand for talent in this space," especially programmers and those with a track record developing models for automated trading.
Dhiru Patel, chief quantitative strategist at Thomas Weisel Partners, agreed. Changes in the regulatory environment, advances in technology on both the sellside and at exchanges, and decimalization have "generated an arms race" to build high-frequency trading strategies, he said.
Emmanuel Doe, global business manager for the tick history archive at Thomson Reuters, added that more high-frequency trading funds are now launching, along with high-frequency trading groups within larger funds. "Assets are starting to migrate" to these strategies, he said, in part because some of these funds have a lower tolerance for risk than they previously had.
All of the panelists hailed the liquidity added to the marketplace by high-frequency trading firms. They noted that this has made the markets more efficient. There are "enough diversified market participants to pounce" on any inefficiencies in the market now, Thomas Weisel's Patel said. He also suggested that high-frequency trading "may be considered a traditional way of trading" five years from now. It could be "like algos a few years ago," he said. Algos are now a common way to trade stock in the current fragmented marketplace.
The panel's audience, however, was less sanguine about the benefits of high-frequency trading. Asked if the growth of high-frequency trading might produce new risks and execution problems for fund managers implementing algorithmic strategies, most audience members said yes. Forty percent said it could be a problem. Another 30 percent said it could be a huge problem that might prompt the "exodus" of buyside trading to other venues--presumably to dark pools and upstairs desks.
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