High-frequency traders slowed by headwinds

This graph appeared alongside the in 2009 and makes up much futures trading as well as a smaller proportion of the options market.

The cost of launching a high-frequency strategy has fallen from more than $1m to $200,000 or less, says Jayesh Punater, chief executive of Gravitas, a trading services firm for start-up funds. Cloud computing has cut the costs of storage and linkage. NYSE Euronext has started offering virtual co-location services."Once only certain people could afford a Ferrari. Now it’s available to everybody," Mr Punater says.

But, as trading has become faster, opportunities to make money using speed alone are drying up. Making a profit from the difference in speeds between trading systems is now very difficult with many funds making the same trades and exchanges upgrading their technology.

Rajesh Nagella, head of algorithmic products for Europe at Citi, says: "There is already overcapacity in the speed game." At the same time, trading by small retail investors, the most profitable to trade against since these quotes can be quite far from expected prices, has been light. There has been a net outflow of $16bn from US equity mutual funds this year to the end of June, according to the Investment Company Institute.

The retail business that remains is also increasingly captured by institutional market makers such as Knight Capital, or by big banks such as Citigroup.

"HFT is cannibalising itself, since it is driving out of the market the very traders it needs to feed off," says Karim Taleb, of Robust Methods, a New York trading firm. In response, most traders are already turning to other strategies less dependent on speed.

Increasingly, they are investing in technology that enables them to try to predict where markets will move. Cameron Smith, general counsel at Quantlab, a proprietary trading firm, says: "The reality is you need to have some sort of model that sees something that others don’t."

Many Chicago trading firms, which specialised in futures, are looking to extend into options and equities, where they can use their expertise in asymmetric trading, where dealers respond to news events such as Federal Reserve interest rate decisions.

Traders have also moved further into agricultural commodities and metals futures markets.

Some firms have indeed become more like ‘quant’ funds, leaving their computers to find patterns in trading, while investing more in human research – the judgment and experience of strategists – to obtain an edge. Ultimately, that could mean trading times slowing in mature markets over the coming years: from microseconds, to minutes, hours, and even days.

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