02 July 2013

FN: HFTs are no longer just about the need for speed

While the polarised debate surrounding high-frequency trading continues apace, the world's HFTs are getting on with their daily business and are quietly being forced to adapt and evolve.

Speed or latency continues to improve, but few HFTs are choosing to base their business models exclusively on the need for speed alone. With increased regulatory scrutiny on the matter, most recognise that is an unwinnable and inefficient way to allocate their hard-earned investment dollars.

This technological arms race is seemingly coming to an end. Speed will continue to be important, but alpha is more important for longevity. Instead, driven by falling volumes in 2012, HFT firms are searching out new growth opportunities.

Smaller trading outfits are leading a charge into new territories, in some part out of necessity. Overcrowding in traditional markets means that volumes tend to be held by the biggest players. The more established HFT players have increased their capital base over time, which enables them to support higher volumes of risk-taking and trading. These firms also enjoy the advantage of having algorithms and execution methods that have been tested throughout a longer market cycle, across a much larger range of market events and conditions, than their younger peers. Given this poses them with such a competitive threat in their traditional hunting grounds, many smaller firms are looking beyond Chicago, London and other traditional venues. They are heading to emerging market venues in Latin America, emerging Europe and beyond.

They are able to make this migration for a number of reasons. Large exchanges are increasingly acquiring rivals in markets further afield, while local exchanges in emerging markets are embracing and acquiring both known and established infrastructure and technology that already facilitates HFT-type activity. This consolidation and uniformity of infrastructure is enabling nimble HFT firms to take their methods used in traditional but now crowded venues to other jurisdictions.

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