Aggressive HFT Is Not Dead

Many firms are doing very well with high frequency trading can reap profits -- if they trade the right way.

Recently, some articles have declared high-frequency trading (HFT) dead. One industry observer even suggested that poor HFT firms should be pitied as their strategies have been wiped out by volatility and dog-eat-dog competition for faster, better, ever more expensive technology undermining all profits.

According to research from, nothing could be farther from truth. Aggressive HFTs quietly, but significantly, prosper, and more so in the presently volatile market conditions.

Just how profitable are the aggressive HFTs? Just a set of aggressive HFTs that hold positions for one minute on average can achieve a Sharpe ratio of 39 trading all 500 stocks in the S&P 500. An aggressive HFT that trades just 100 shares in each of the 500 stocks at a time and deploys $5 million in capital for the given strategy produces nearly 35 percent return per year without any additional leverage, generating almost no volatility in the performance, regardless of market conditions.

Figure 1 (Listed below) illustrates the performance of selected aggressive HFT algorithms detected by the Aggressive HFT Index. The index estimates the participation of aggressive HFT by volume in real time. The profitability of aggressive HFTs is computed as follows: Whenever the proportion of volume estimated to be initiated by aggressive HFT sellers exceeds the proportion of volume the index attributes to aggressive HFT buyers by at least 10 percent, a hypothetical sell order is generated. The position is held for the following minute, at which point the position is considered to be closed at the prevailing market price and the gain or loss of the trade is recorded. Similarly, whenever the aggressive HFT index reports the proportion of aggressive HFT buyers exceeding that of aggressive HFT sellers by 10 percent or more, a paper buy order is generated followed by an offsetting sell order 1 minute later.

The resulting trading strategy illustrates just how good aggressive HFTs are at their game. While highly sensitive to transaction costs, with a Sharpe of 39 one can afford to invest into a lot of super-fast super-computing power in order to reduce transaction costs and maximize the net gain. The strategy may also be used to optimize the execution of other strategies with large positions in individual securities: Deciding when and how to send in slices of large orders to exchanges. Intuitively, when the percentage of aggressive HFTs is higher than that of aggressive HFT sellers, and the price will imminently rise as a result, it is a good time to place buy orders as well.

Should we be surprised by such performance results? Not really; the performance is perfectly in line with HFT giants such as Virtu Financial, who have not experienced a single losing week in a few years. In other words, reports of premature death of HFT appear to be, well, premature.

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Steve Krawciw is CEO of Irene Aldridge is managing director of Able Alpha Trading, LTD., and and author of High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems.