Will High Frequency Trading soon just be a thing of the past?

24 November 2014

Before I start it probably makes sense to define what I mean by high frequency trading. It’s standard for computers to be used for trading (they process more information than humans, and don’t have emotions or sick days) but HFT is a particular subset of algorithmic trading. The definition I normally use is short (tick by tick) horizon, high volume trading characterised by innovations in engineering, technology or market microstructure knowledge rather than any mathematical sophistication or fundamental insight. It isn’t a perfect definition, and it won’t work for a lot of people, but for now this works.

When we started recruiting within quantitative trading nearly everyone we spoke to was knee deep in HFT, or trying to be. Every PM and his dog had a high-frequency trade that they were marketing, domain technologists were being paid obscene premiums (more a factor in the USA than elsewhere), and Michael Lewis was still better known for his take on baseball.

During the time I’ve been observing this industry there has been one trend that stands out above all others – a massive decrease in the amount of people interested in HFT strategies, almost mirroring the same time that the practice became more well known to the mainstream press and public.

The list of firms still overtly high frequency traders is not long (though maybe best not to name them here!), and there hasn’t been a proper run at setting up a new HFT focused firm since Eladian imploded. Market conditions and competition (between AND within firms) has trimmed the number of profitable trading units in existing firms down to a small number.  If you’re one of the special few that can churn out good signals on a regular basis their shelf life is getting shorter and shorter. Raising a fund for these strategies is uneconomical (as your trading, staff and technology costs are so high), and if there’s any seeding firms out there still backing HFT prop businesses I don’t know them.

Even if, after all those problems, you have a strong enough team and trading methods to justify going it alone, your time to market could be a killer. 

But these are all pretty pointless observation while there are still big players in HFT, right?

Not completely. While there are no new firms starting, the ones that already exist seem to be starting a re-branding process away from calling themselves high frequency traders. One of better known companies has asked that we describe them as an intraday trading firm (technically accurate), and some larger multi-strat businesses have re-named their HFT teams internal execution (true in a few cases). Banks are managing to keep within the legal bounds of “market marking” while twisting the dictionary meaning of those words to breaking point, while the one genuine HF market maker has been turned into a glorified brokerage. It seems that even where the practices of HFT continue, the phrase is being whitewashed from an industry. This all leads me to think we’re at the end of a long HFT boom cycle. It’s been a fun few years, but the term will be considered old-school pretty soon. Quaint even.

Which I’m actually fine with – trying to figure out what different people meant when using the same words for different meanings got boring a long time ago. It just a pity that mid-frequency trading is going to create the exact same problem!!

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The aim of these blogs is to communicate with our candidates, clients and industries in new and better ways. Agency recruiters are in a weird position where we sit between quite a few firms and manage to accumulate a decent macro view, but very rarely the intimate details of how a firm operates. We’ll be trying to share any thoughts or insights we pick up which should be interesting and helpful to people reading, but I’m also bound to have some clangers along the way so please point them out when they happen!!

I’ll be asking people what your views are on different topics, as well as what you would like covered, so this may spawn a few interesting conversations. I’m based in London so in all likelihood my main focus will be here, but we cover a lot of ground in the US and are experimenting with Asia so I’ll probably take a stab at all of them over time.

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