High Frequency Traders Are More Profitable for Select Firms, Study Shows

by on May 13, 2014 7:09 am BST

According to ex-Commodity Futures Trading Commission (CFTC) chief economist Andrei Kirilenko, high frequency trading (HFT) firms are dominating the markets, but there are only a select number of firms that are consistently profitable.

These HFT firms account for nearly half of all trading volume in many markets, most notably the forex markets of late. Kirilenko led a study following the 2010 flash crash that was largely causes by rapid selling from computerized programs, commonly known as algorithm trading.

Kirilenko will tell lawmakers that safeguards and policies need to be brought up to speed in order to protect market integrity and other participants from another flash crash. “It is time to go at least this far, so when the next flash crash or technological malfunction happens, the regulators could go deeper into the market ecosystem to piece things together,” he said.

The study, co-authored by Jonathan Brogaard of the University of Washington and Matthew Baron of Princeton University, suggested that HFTs earn consistent profits but often at the expense of retail traders. Based on proprietary of transaction-level data from E-mini S&P 500 futures from August 2010 through August 2012, researchers indicate that a small number of firms benefit from the ability to rapidly fire of trades quicker than other traders.

Virtu Financial is a prominent HFT market maker in various exchanges and asset classes from equities to fixed-income, which recently delayed the initial public offering (IPO) due to recent scrutiny over high frequency trading. Virtu is the pinnacle of the HFT for not having more than two non-profitable days in the last five years, ever.