In the last few years, high-frequency trading (HFT) has become more and more widespread in the US equities markets, to the extent where by some estimates, it now accounts for more than 70% of total volume traded. However, it seems that the market is now becoming increasingly crowded and where once there were rich pickings for the trading firms run by quants and computer scientists, those opportunities for making profits based on pure speed are now decreasing rapidly.
Is high frequency trading finally becoming commoditized? Is the HFT landscape now so competitive that everyone is eating each others’ lunch and there are now only the bare bones to be picked? That would seem to be the situation, according to recent HFT interviews.
So where does high frequency trading go from here? The view from the street is that HFT will expand out both geographically, to emerging markets like Singapore (who recently announced a $250 investment in new technology), and laterally, to other asset classes such as currencies and fixed income.
The geographic expansion looks particularly interesting. At the moment, there are only four fibre optic lines running between New York and London, so space on those lines is at a premium. Traders who are able to send orders to and from London and New York faster than their competitors will certainly be able to take advantage of arbitrage opportunities.
Another market that is still relatively untapped, which may be a growth area on the buy-side, is high-frequency ETFs (Exchange-Traded Funds). Not many investment firms are making use of these yet, but as the market matures, one can expect to see a proliferation of funds that invest purely in high frequency trading strategies.
So despite the fact that the US equities market has become somewhat saturated with high frequency traders, there are still rich pickings for firms who have the necessary technology, expertise and communications to stay ahead of the market.
Related posts:
