Financial Times: How Traders Try to Survive the HFT Trading Decline
The Financial Times has traced the history of the development of high-frequency trading from the era of its heyday to the present day, when things HFT-traders do not always go well. Below is a story about how they adapt to market changes and regulatory pressure.
A bit of history: how high-frequency trading peaked
The exchange, in its classical sense, where brokers and traders meet “face to face” ceased to exist many years ago, today trading is conducted online. For example, the real deal of the New York Stock Exchange, for the most part, is made in the city of Mahwah, in the data center, surrounded by telecommunication towers. Most transactions in stocks and futures have become computerized — automatically and quickly. Because of this, huge amounts of money are invested in wireless networks, network switches and programming skills.
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Some traders calculated in advance the vector of market development and began to develop technologies that helped them to get ahead. They founded their trading firms and, with the help of computers, were able to bid, fixing even the rapid price spikes in the market. Since, due to the crisis, Wall Street banks had to close their trading floors, small firms began to appear that tried to occupy this place.
Many of their creators succeeded. For example, the former gasoline dealer Vincent Viola founded the largest HFT company Virtu Financial and became a billionaire.
Data transfer speed, at the moment, is one of the decisive success factors. Traders pay the exchange for the possibility of placing equipment in the same data center, where the trading system of the exchange. Thus, they earlier get access to information and are ahead of competitors.
Banks began to attract HFT firms to carry out certain transactions, instead of spending money on upgrading their own systems. French bank BNP Paribas recently joined Global Trading Systems in New York to trade bonds of the US Treasury.
This time was the heyday of HFT trading, but later the situation began to change.
High Frequency Challenge Issues
Exchange trading has recently become increasingly automated. Probably, soon any private investor who decided to play on the stock exchange will make deals not with other investors, but with trading robots that are set to search for the slightest market inefficiencies and extract profits from them. And it's one thing when they compete with real people, many of whom are inexperienced, and quite another when they have to deal with algorithms created by experienced traders and large companies with many analysts.
As a result, if large HFT firms can still make a profit due to a large volume of operations, then small players already now have to look for alternative ways of earning, among which, for example, entering cryptocurrency markets.
In addition to the natural development of the situation, HFT has other problems. So Michael Lewis (Michael Lewis) in his book "Flash Boys" accused high-frequency traders in manipulating the market. This book became a bestseller, was widely discussed, and the facts stated in it were studied even in the US Congress.
The release of the Lewis book took place shortly before the planned IPO company Virtu Financial - the hype and negative background around HFT trading forced the management to abandon these plans.
A decrease in trading volumes reduces traders ’room for maneuver, and low volatility leads to a reduction in the potential profit of each transaction.
“In order for a business to earn money, it needs raw materials for production, on Wall Street such raw materials are trading volume and volatility,” says investment banker from Rosenblatt Securities Vikas Shah.
Traders are also facing increased costs. Exchanges need players who generate a significant amount of trading - this allows you to keep liquidity at a high level. Therefore, the sites offer discounts on fees to HFT-firms that are active throughout the entire trading day.
The exchanges complicated access to market data, including making it more expensive. According to the Tabb Group, the total revenues of HFT companies in 2017 for the first time have fallen below $ 1 billion since the 2009 crisis.
Exchanges are commercial companies that seek to make money in any situation. In the conditions of decreasing trading volumes, the sale of auction data becomes a new source of income for them. This, in turn, further worsens the situation for HFT companies. Wolverine Trading, a private firm, complained to the Treasury Department that, in its case, the cost of purchasing the necessary data increased by more than 700% over eight years. Direct connection to exchanges such as the NYSE and Nasdaq costs $ 10,000 - $ 22,000.
The threat of HFT comes from the financial market players. So Renaissance Technologies - one of the world's largest hedge funds - has applied for a patent technology that allows you to carry out related transactions on multiple stock exchanges simultaneously. Thus, trading robots that are engaged in arbitration will not be able to make a profit. In addition, Alpha Trading Labs provides private traders with access to their software and infrastructure in exchange for a share of profits, explaining that they want to make HFT trading more democratic - the company earns new traders, but it also increases competition in the HFT market.
Traders reaction
Changing conditions lead to reactions from high-frequency traders. Instead of competing in the search and creation of the fastest data transmission channels to the Tokyo Stock Exchange, large companies formed a consortium, whose members share the cost of creating the single and most powerful communication channel for sharing.
The project was named Go West and should be launched in early 2018. It involves building microwave towers, laying fiber optic lines and submarine cables that connect Chicago, the Pacific Coast and Tokyo. In the end, data transfer between the world's largest exchanges will not exceed 8 milliseconds, which will give traders an advantage in trading.
The creators of the project are planning for money to provide the right to use their technical capabilities to any trader.
Conclusion
Some traders hope that volatility and trading volumes will increase, including through state participation. However, there are those who are preparing for life in new conditions.
“Perhaps now the era is just ending when we automated what was easiest to automate,” said Matt Haraburda, president of Chicago-based XR Trading, speaking to FT. “Now the real fun begins.”
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Source: https://habr.com/ru/post/346448/
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