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STEP SEVEN: Use Machines To Make Extreme Profits From Extreme Frequency
July 6, 2009
High frequency trading firms now account for more than 60% of all US equity trades, according to research from Boston advisory firm Aite Group.
They go by names such as Citadel, Getco and Tradebot. And now their activity has led to a "burgeoning third-party technology market'' that will try to execute ever more trades in ever smaller fractions of a second.
"High frequency trading technology was very much in evidence" at the Securities Industry and Financial Markets Association Technology Conference this year, said Aite Group co-founder Sang Lee.
There were ultra-high-speed messaging firms, ticker plant providers, latency testing outfits, specialized execution platforms and co-location services in attendance. "High frequency" was the term found with unusually high frequency in sales pitches, booth-side chats and marketing literature.
There were high performance messaging vendors such as 29West, Solace, Tervela and Tibco; low latency market data providers such as Activ Financial, Spryware, SR Labs and Redline Trading Solutions; complex event processing vendors such as Aleri, Progress Apama and StreamBase; and outsourced high frequency infrastructure providers such as Fixnetix, FTEN and LiquidPoint.
All of them were arms suppliers aimed at helping the high-frequency traders move in and out of markets in thousandths or even millionths of a second. Their tools help execute complex strategies that profit from miniscule price movements in equity markets or between equities and other asset classes.
FTEN, a New York and Colorado firm which says its technology processes about 20% of daily U.S. equity volume, defines high frequency traders as those who execute at least 1,000 trades per second. But when multiple strategies are running simultaneously, the number of trades in a second can reach 3,000 - and sometimes as high as 8,000.
This contrasts with direct market access (DMA) and execution management (EMS) firms where the frequency is more likely to be a couple hundred trades per second, at most.
Not all market participants are particularly enthusiastic about the growing presence and market influence of high frequency traders. But the profit in increasing the number of trades that can be executed by one entity in one second is not denied.
Joe Saluzzi, a co-founder of Themis Trading, a Chatham, NJ-based agency brokerage, wrote in a June 17th posting to his company blog that: "The high frequency trading business is extremely profitable....But the problem here is unlike a traditional market maker, they have no requirements. No minimum size to display, no minimum time to display and quote and no capital commitment to a client...Our equity market is being controlled by machines that are nothing more than two-bit, (small order execution system) bandits. They cloak themselves under the mantra of liquidity providers but they are really just locusts and are feeding off the equity market until it doesn't suit them anymore."
The number of high-frequency traders actually in operation is "very hard to nail down," Lee said. He points out that they don't have to register but estimates that currently, there are a "couple of thousand" high frequency trading firms on a global basis and Lee expects that they will only continue to grow in number.
FTEN Inc., which provides execution and pre-risk management systems for prime brokers and high frequency traders, even went so far as to display a 7- foot dinosaur at the Sifma show, next to a pot of what appeared to be bubbling, primordial goo.
