High Frequency Trading started in a modest way in a garage and saw its turnover rising from 9 percent of U.S. volume in 2006, garnering 60 percent market share in 2010 before its turnover dwindling to 6 million shares per day recently.

High Frequency Trading

Matthew Philips in his article published in Businessweek, chronicled the rise and fall of high frequency trading.

High frequency trading is the use of automated strategies to churn through large volumes of orders in fractions of seconds.

Steve Swanson, a 21-year-old computer nerd, enthused by his statistics professor Jim Hawkes, turned David Whitcomb’s idea into reality. He tapped market data beamed through a satellite dish so that his system could predict stock prices 30 to 60 seconds into the future. Swanson’s Automated Trading Desk executed trades within a second.

By 2006, Swanson’s firm traded between 700 million and 800 million shares a day and high-frequency became more pervasive. During 2007, Citigroup purchased the Automated Trading Desk for $680 million and named Swanson as head of Citi’s entire electronic stock trading operations.

By 2010, high-frequency trading garnered over 60 percent of all U.S. equity volume. Swanson left Citi to start his own trading shop called Eladian Partners.

However soon high-frequency trading started its retreat. According to an estimate from Rosenblatt Securities, as much as two-thirds of all stock trades in the U.S. from 2008 to 2011 were executed by high-frequency firms. However, today it is about half.  High frequency trades moved 3.25 billion shares a day in 2009, reduced to 1.6 billion in 2012.

According to Rosenblatt, in 2009 the entire HFT industry made around $5 billion trading stocks, and was reduced to $1 billion last year.

Dwindling margins put many firms into a financial trough, where they were not even paying their bills, and a number of high-frequency shops were closed last year.

Currently HFT lacks two important things for its revival, primarily trading volume and price volatility.

Trading volume in the U.S. now remains around 6 billion shares per day, the same as recorded in 2006. Volatility also diminished as arbitrage trading has become less profitable. The drop in volume has also been accentuated by the Flash Crash of May 6, 2010.

Speed has also been commoditized as firms started spending millions to maintain millisecond advantages by constantly updating their computers, besides opting for co-location facilities offered by the stock exchanges.

Since 2009, the Securities and Exchange Commission started strengthening its surveillance mechanism to get more information on high-frequency trading. The SEC implemented Market Information Data Analytics System (Midas) to scour market data from across all 13 public exchanges.

High Frequency Trading Firms Resorted To Momentum Trading

Europe has already started clamping down on speed trades, and France and Italy imposed a trading tax. The European Commission is also debating a Eurozone-wide transaction fee.

With dwindling profits, more high-frequency trading firms have resorted to something called momentum trading, while others have started using sophisticated programs to analyze news wires, headlines and Twitter feeds to get their returns.