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Riding the Wave: Speed, Algos and Consolidation
Traders Magazine Online News, July 11, 2017
A wave of consolidation has hit high-speed trading firms and brokers in the past few months, and many are blaming low volatility and weak trading volumes in the face of rising compliance and market data costs.
Starting with electronic market-maker Virtu’s acquisition of rival KCG in April, Two Sigma Securities buying options market-marker Timber Hill in May, and Cowen gobbling up Convergex a few weeks ago, trading firms are reassessing their business models, including the need for speed.
“While speed is still important, and is the way to capture liquidity, high-frequency trading firms are moving away from speed and diversifying into longer duration strategies,” said Rob Shapiro, former Chief of Staff at Bloomberg Tradebook, speaking at the Intelligent Trading Summit held on June 8. The two culprits are regulatory compliance and the increase in market data fees, he said.
“The HFT firms have long trafficked in their doing their own thing. Because their models are no longer working, they have become service providers because they need to subsidize their tremendous infrastructure,” commented Shapiro. Now high-speed trading firms are going after the buy side and the sell side as service providers of electronic trading for high performance tools, said Shapiro.
However, not everyone agrees that consolidation is a bad thing.
“The mergers and acquisitions that we’re seeing now are not a sign of weakness,” said Bill Harts, CEO of Modern Markets Initiative, who pointed to a misunderstanding in the press around the role of electronic market makers.
“It’s not that the algos weren’t working. It’s that the smarter operators want to extend those algos, extend their capital to more customers, more asset classes,” said Harts.
“Certainly times are hard and a lot of that has to do with costs, simply, exchange costs,” noted Harts. “Overall, whether you are a bank, a high-frequency proprietary trader, or an exchange, all the people in the trading ecosystem are constantly thinking about costs,” said Harts. “It’s the trade-off: is one microsecond extra worth it, especially in the context of exchange costs? “Every dollar that is spent on exchange fees or connecting to exchanges at high-speed is one dollar less that can be available to go into exchange’s pockets,” he said.
Cost pressures are leading banks to consolidate trading desks across multiple asset classes, said technology executives on the panel, Managing Change and Disruption: Trading in the New Normal Environment.
The pool of U.S. equity commissions earned by brokers contracted last year by more than 11% to $8.4 billion in the first quarter of 2017, from $9.7 billion in Q1 2016, according to a report by Greenwich Associates.
To Reduce Costs, Banks Leverage Algos Across Asset Classes
“What I am experiencing is consolidation across the business lines. No single business line can go off and build a massive low-latency infrastructure and support that with revenues. They have to collaborate with the other businesses,” said David Winig, Global Head of Market Data Services and Electronic Trading Infrastructure at JPMorgan Chase & Co.
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