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The future of HFT? More risk and fewer easy pickings

First Published 12th February 2013

It hasn't taken long for the HFT industry to get nostalgic about the good old days. Adam Cox reports on the views from one panel discussion.

London - The easy pickings don't look so easy these days.

High frequency trading firms may still be making money, but it's getting tougher all the time and that's a trend that is unlikely to reverse, industry watchers say.

"The low hanging fruit has been plucked," said Donald MacKenzie, a professor of sociology at the University of Edinburgh who has been studying the HFT industry.

MacKenzie, speaking during a panel session at this week's High Frequency Trading World conference in London, cited estimates from Rosenblatt Securities which concluded that high frequency profits probably fell to about $1.25 billion in 2012. That was down from nearly $5 billion at a peak in 2009.

"Whenever an industry has grown quite quickly, people just presume that it always will, and that's not a reasonable assumption," said fellow panel member Patrick Boyle, a founding partner at Palomar Fund Management.

For a short period of time, people certainly were cleaning up, Boyle added. "Essentially they took a trade which used to be done manually, they automated the decision making and the speed of execution and, you know, the manual guys were horrified - they couldn't get a fill, they didn't know what was happening."

But that inevitably had to change.

Boyle offered some historical perspective. Initially, he said, financial firms would create high-frequency trading teams with, say, 30 people. But perhaps half of them would take signing bonuses and go off and start teams elsewhere.

"Suddenly every firm on the street has a team of guys that's promised them risk-free return, and they're all running the identical strategy and that can't possibly work," he said.

At the same time, firms were throwing money at technology and did not necessarily allocate costs correctly. So they might have a large team that was making 20 million a year but not factor in that they were spending 15 million of that on technology.

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