New TABB Group Research on US Equity High-Frequency Trading Examines Strategies, Sizing and Market Structure

Wed Sep 16, 2009 9:00am EDT

* Reuters is not responsible for the content in this press release.

Revises July 2009 Industry Estimate of US Equity Trading Volume to 70% Based on
Updated Volume and Trading Data
NEW YORK & LONDON--(Business Wire)--
Imagining US equity market structure without high-frequency trading is like
trying to remove the "c" in Albert Einstein`s Theory of Relativity, E=mc², says
TABB Group in new research published today. 

"US Equity High-Frequency Trading: Strategies, Sizing and Market Structure" is a
32-page report with 22 exhibits that explores the importance of high-frequency
trading (HFT), defines terms associated with high-frequency trading and explains
the relationships among the primary participants. 

Written by founder and CEO Larry Tabb, partner and global head of consulting
Robert Iati and head of research Adam Sussman, it gives explanations and
examples of HFT strategies, including virtual market making, rebate trading,
liquidity detection and various forms of arbitrage, as well as the number of HFT
prop trading firms in the US; percentage of HFT trading done by prop desks; "to
flash or not to flash;" front running; pros and cons of HFT; the SEC and HFT;
sponsored access; and innovative types of flash orders. 

The report also includes a detailed, 500-word methodology for the proportion of
equity volume and trades that involve high frequency strategies, as well as
drivers for future changes to those numbers. "TABB ordinarily doesn`t like to
reveal its methodology (since it could easily cause the research equivalent of
information leakage and market impact), but the issue is too important to simply
ignore," says Sussman. 

Based on updated volume and trading data shared in the report, TABB Group
revises its estimate of US equity trading volume to 70% from 73% as previously
announced in July 2009 in a TABB commentary written by Iati, "The Real Story
behind Trading Software Espionage," covered by financial and business media
around the world. 

"Throughout the report you`ll find results of an August 2009 poll of 62 market
participants on various components of current market structure," adds Sussman,
"including flash trading, redefining front running, the tradeoff between order
exposure and price improvement and the need for an SEC inquiry into market
structure and the ability to achieve good execution. 

Peeling back the layers of the process and examining tradeoffs market
participants face, from institutional investors and hedge funds, to retail
brokers, individuals and their representatives, TABB asks and provides fresh,
in-depth analysis on new data drawn from:

* How much daily trading activity can be classified as high frequency? 
* What comprises this classification? 
* What kind of firms include HFT as part of their strategy and how big of a role
does it play in the profitability of the industry? 
* Should we expect all participants to play on a level field or will
professional traders naturally gain greater ability from their experience,
intuitive knowledge and advanced technology tools? 
* What is the relationship between these terms?

While there are enough definitional ambiguities and a lack of empirical evidence
to debate the exact share of high frequency volume, Tabb, Iati and Sussman
explain that no one disputes its dominance or importance to the equity markets.
Barring a major overhaul in market structure or new regulatory action, this
dominance will become a de facto principle in other asset classes. While there
is no SEC (or CFTC, or regulator at all) to enact rulings that lay the
groundwork for a high frequency market structure, other drivers are leading to a
similar situation, e.g., increasing number of participants; low commission
rates; smaller contract sizes; automated matching; open access to neutral
execution venues; advances in the price performance of technology (Moore`s Law);
and inexpensive and blazing-fast networking / connectivity (Metcalfe's Law). 

These drivers, says Tabb, "allow high-frequency traders to gain direct market
access and employ high turnover trading strategies to efficiently leverage a
small amount of capital in the attempt to reap significant rewards. While all
HFT strategies are quantitative, not all quantitative strategies require HFT.
Some, such as traditional statistical arbitrage, have longer time horizons and
do not require the same degree of sophisticated execution technology, while
others with higher turnover rates require direct market access and depend on
virtual market making, i.e., co-location at the execution venue. In addition,
some strategies, such as rebate traders, are so venue-dependent they rely on
specific pricing arrangements that may never be successfully replicated in other
trading venues or asset classes." 

According to Iati, "In the more liquid contracts and instruments - such as
equity options, futures, FX and credit - HFT is already present. Again, barring
a sharp change in regulatory or legislative attitudes, HFT will become as
dominant in global markets as it has become in US equities. While the Luddites
of liquidity may bemoan this virtual inevitability, HFT traders are scanning the
markets for inefficiencies that traditional traders could never spot or
capitalize on. Unfortunately for these traders, humans just cannot analyze data
as fast as computers, and the gap will only become larger." 

The report is available for download by TABB Group Research Alliance clients at For an executive summary or to purchase
the report, visit or write to 

Media interested in interviewing one of the co-authors are asked to contact TABB
Group`s media relations firm. 

Other TABB research on HFT and related issues includes "The TABB Group Anthology
on High Frequency Trading Technology," a 67-page collection of recently
published content focused on business and technology issues facing US equity and
options trading. 

About TABB Group

TABB Group is the financial markets industry`s only research and strategic
advisory firm focused exclusively on capital markets. Founded in 2003 and based
on the proven interview-based research methodology of "first-person knowledge"
developed by founder Larry Tabb, TABB Group analyzes and quantifies the
investing value chain from the fiduciary, investment manager and broker, to
exchange and custodian, helping senior business leaders gain a truer
understanding of financial markets issues. For more information, visit 

Martin Rabkin, 914-420-5739

Copyright Business Wire 2009