Last month, Chicago-based DRW bought Austins RGM. Its a merger of fast giants – or ones who thought they might be giants (opaque musical reference) and once were, and might be again.
You see a lot of acronyms in the high-speed proprietary trading business. Getco became KCG, now Virtu. HRT remains one of the biggest firms trading supersonically – Hudson River Trading. TRC Markets is Tower Research. Theres GTS. IMC. EWT is gone, absorbed by high-speed firm Virtu.
Vanished also is ATD, the pioneering electronic platform created by the founder of Interactive Brokers bought first by Citi and then by Citadel, another high-speed firm. Mantara bought UNX.
If I missed any vital acronyms, apologies.
RGM embodied HFT – high frequency trading, another acronym. Robbie Robinette studied physics at the University of Texas. Richard Gorelick is a lawyer, and in todays markets one of the letters of your trading acronym should be backed by jurisprudence. Its all about rules. Mark Melton wrote artificial intelligence software.
They were RGM. They built trading systems to react to real-time events. We estimate the peak was 2010. They were crushing it, perhaps making hundreds of millions. By 2012 in the data we track theyd been passed by Quantlabs, HRT and other firms.
Donald R. Wilson in 1992 was a kid trading options in Chicago when he founded DRW. Today its a high-speed trader in futures across 40 global markets with 750 employees, real estate ventures, and a major lawsuit with the Commodities Futures Trading Commission that seeks to bar Wilson from the industry. Oral arguments were heard in December and the parties await word. DRW confidence must be high. Theyre a buyer.
What does it mean traders, investors and public companies? History teaches and so we return to it.
From the early 1990s when both Don Wilson and I were youngsters out of college (were the same age so what am I doing with my life?) until roughly 2005, software companies called Electronic Communications Networks pounded stock exchanges, taking perhaps half the trading business.
The exchanges cried foul, sued – and then bought and became the ECNs. Todays stock market structure in large part reflects the pursuit of speed and price, which began then. The entire structure has become high speed, diminishing returns for the acronyms.
Exchange are still paying close to $3 billion in annual trading rebates, incentives to bring orders to markets. Yet the amount earned by high-speed firms has imploded from over $7 billion by estimates in 2009 to less than $1 billion today.
Where are dollars going? Opportunity has shrunk as everyone has gotten faster. Exchanges and brokers that are still the heart of the market ecosystem have again adapted as they did before, becoming the acronyms that are disappearing. They are Speed.
Exchanges are selling speed via colocation services, and the data that speed needs. And big brokers with customers have learned to apply high-speed trading methods – lets call them acronym techniques – to offload risk and exposure when theyre principals for customer orders.
Theres nothing illegal about it. Brokers are free to transfer risk while working orders. But now they can make money not via commissions but in offsetting risk with speed.
And speed is the opposite of the way great things are created. Your companys success is no short-term event. The Neuschwanstein Castle in Bavaria (which we will visit on our cycling trip in the Bavarian Alps later this month) took 23 years to complete.
Your house. Your career. Your investment portfolio. Your reputation. Your relationships. Your expertise. Your craft. What of these happened in fractions of seconds? Technology should improve outcomes but more speed isnt always better.
Acronyms of high-speed trading have slipped yes, but remain mighty – 39% of US stock market volume the past five days. Fifteen are still pounding pulp out of prices.
But increasingly investors are adopting speed strategies driven by quick directional shifts. We are exchanging patience and time for instant gratification.
With that comes risk. As the acronyms wane in ranks the chance of a sudden shock to equity prices increases, because prices in the market depend on short horizons.
And stocks are acronyms.
Tim Quast is founder and President of Denver-based ModernIR, the leading provider of equity market-structure analytics to US-listed companies. Follow him on Twitter: @_TimQuast
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine or its staff. Traders Magazine welcomes reader feedback on thiscolumn and on all issues relevant to the institutional trading community. Please send your comments to firstname.lastname@example.org