High Frequency Trading (HFT) is the natural evolution of screen based trading which was the natural evolution of open outcry. After completely decimating market makers on the floors of the exchanges, they turned their sights onto price disparities between exchanges. They have been so successful, that the arb no longer exists. Besides, you can only make so much more money once you have to use balloons to create a transatlantic wireless trading line using microwave signals.
In 2009 the entire HFT industry made around $5 billion trading stocks. Last year it made closer to $1 billion. The “profits have collapsed,” says Mark Gorton, the founder of Tower Research Capital, one of the largest and fastest high-frequency trading firms. “The easy money’s gone. We’re doing more things better than ever before and making less money doing it.”
So what’s next for the bots?
Due to a crowding effect in HFT domain and a continuous decrease in profitability a lot of those firms are now moving to momentum, swing and trend-following domains in an effort to recoup their initial investment. Thus, retail traders and fund managers should expect more competition from highly competent and well-capitalized firms with excellent infrastructure and talent. Competition is about to rise significantly.
And this is not a “macro” thing that is not going to affect Indian markets. Algo trading makes up roughly 30% of all trades through NSE. Getco, one of the world’s largest automated traders, received regulatory approval to start operations in India back in March this year.
Expect more competition in traditional timeframes soon but from high-tech participants. The days of the chart trader and the golden cross fund manager are over.