The CEO of Liquidnet, a crossing platform for institutions, believes high-frequency trading, which is on the rise, is likely to broaden to many hundreds of stocks in the next couple of years.
Seth Merrin, Liquidnet’s chief executive, said he expects high-frequency trading, which is currently concentrated mainly in liquid, low-priced names, to "spread very quickly to the top 300 or 600 names." He also predicts that "the amount of money being tossed into high-frequency trading between this year and next could quintuple."
The result, in Merrin’s view, is that the marketplace could turn "from an investor’s market to a trader’s market" because of high-frequency trading. He spoke last week at the Security Traders Association annual conference, in Scottsdale, Ariz.
Technology and profit opportunities are driving this development. These strategies are "easy to deploy and virtually limitless in capacity," Merrin said. The strategies, he added, seek to take advantage of inefficiencies in the market as well as the "supply-demand imbalance." That imbalance, in Merrin’s view, comes mainly from institutions trading large orders in the market.
For every buyside algo working a stock, there are "thousands of computers on the other side sniffing it out," Merrin said. "That is the virtual unlimited capacity."
Liquidnet has argued for months that high-frequency trading hurts institutional investors by driving prices away from them, forcing them to pay more when they enter positions and earn less when they exit them. Merrin acknowledged, however, that he does not have empirical evidence backing up these observations. He told the audience that it’s still too early to see the effects of high-frequency trading on institutional trading costs.
Last year, high-frequency trading constituted about 30 percent of consolidated equities volume, while this year it has been 60 percent, Merrin said. He did not predict how much market share high-frequency strategies might represent next year.
"We haven’t even scratched the surface of where high-frequency trading is going," Merrin observed. He pointed out that private equity firms are "seeding these shops" and that even "long-onlys are taking a look at setting up high-frequency trading strategies." Firms that want to employ high-frequency trading, which include a range of strategies, can readily acquire the infrastructure and technology they need to set up shop and begin trading in no time. Merrin referred to this technology as "high-frequency trading out of a box."
Merrin said he did not have an opinion about whether high-frequency trading is good or bad for the markets. However, referring to institutions, he said: "You have to change your tactics when there’s a new adversary in the world that plays differently."
