New TABB Group Research on US Equity High-Frequency Trading Examines Strategies, Sizing and Market Structure
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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 https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to email@example.com. 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 www.tabbgroup.com. martinrabkinink Martin Rabkin, 914-420-5739 firstname.lastname@example.org Copyright Business Wire 2009