World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading What Is It & Should I Be Worried? Presented by Larry Tabb (Founder & CEO)
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World Federation of Exchanges | Cambridge, MA | Nov, 2009
High Frequency Trading
What Is It & Should I Be Worried?
Presented by
Larry Tabb (Founder & CEO)
Agenda
What is high frequency trading
Who does it
Why has high frequency become an issue
How does this impact exchanges?
What is high frequency trading?
Wide definition Firms leveraging high speed market data and analytics to
look for temporal supply and demand trading opportunities. These firms typically are self capitalized and hold positions for very short periods of time (typically less than minutes)
Includes Equity market making Index arb Options market making ETF arb Stat arb/pairs trading
Narrow and more typically used definition Equity market making
Who does it?
Typically Equity market makers Proprietary trading shops And a few high frequency hedge funds Many located in Chicago
This is typically done by self-capitalized firms This is market-driven and not PM driven Significant investment in technology
infrastructure Not your standard investment strategy
Who trades?
US Equity Share Volume by Market Participant
IB Prop, 16%
Retail, 3%
Independent HFT, 29%
HFT Broker/ Market Makers,
28%
Long Only, 13%
HFT Hedge Funds, 4%
Hedge Funds, 7%
High Frequency Trading accounts for 61% of Share Volume
Source: TABB Group Estimate
US Equity Share Volume by Market Participant
High Frequency Trading accounts for 61% of Share Volume
Source: TABB Group Estimate
3% 7% 13% 16%
4% 28 % 29%
Investors
Liquidity Providers
RetailHedge Funds
Investment Bank PropLong Only
HFT Hedge FundsHFT Broker/ Market MakersIndependent HFT
Investors Liquidity Providers
The majority of trading is done by professional traders / liquidity providers
Goal of HFT - first to spot an opportunity & first to take advantage of it Co-location
Depending upon the firm, the HFT may need multiple locations May also want access to dark pools
Sponsored access
Flash trading
Market data Direct feed Messaging Low latency time series Back testing tools
High speed analytics CEP (mostly home grown) to locate trends Execution technology to trade
Why has HFT become an issue?
The floor is empty – most trading is done by machines
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03Jan-04 Jan-05Jan-06Jan-07Jan-08Jan-09
Avg
. S
ha
res
(m),
Avg
. T
rad
es(
k)
0
200
400
600
800
1,000
1,200
1,400
1,600
Avg
. S
ha
res
/ T
rad
e
Avg Shares Per Day (mm) Avg Trades Per Day Shares / Trade
Source: TABB Group and Exchange Data
Electronic Trading Has Caused Steep Decline in Average Trade Size
US Equity Share volume and trades
Shares by Execution Venue (volume weighted)
37%
12%
14%
22%
15%
44%
11%
9%
24%
11%
38%
11%
9%
31%
12%
Sales Desk
Program Desk
Direct ToExchange
Algorithms
CrossingNetwork
2007 2008 2009
1%
-5%
-22%
18%
-10%
2 Year CAGR’07-’09
Algos have broken up flow into much smaller executions
Source: TABB Group – Institutional Equity Trading in America ’09/’10 – Preliminary
Capital usage is down because of credit crisis and advanced trading technology
Directionality of Capital Usage
6%
31%
63%
Up
Same
Down
68%% Firms
67%
84%
100%
SmallMediumLarge
Percent of Firms Paying More For Capital
Percent of Firms Using Capital
Source: TABB Group – Institutional Equity Trading 2008
Sales trader flow is declining – back to on-trend levels
33%38%
44%
37%
47%
59%
69%
2010e200920082007200620052004
Percentage of Order Flow Firms Sent to Sales Trader
3 Year CAGR-19%
’07-’08+19%
2 Year CAGR-13%
Source: TABB Group – Institutional Equity Trading in America ’09/’10 – Preliminary
Should exchanges be worried?
In last 23months, exchanges have lost 20% market share to dark pools and ECNs
89%
87%88
%
86%
85%
85%
82%83
%
73%76
%77%
76%77
%
73%74
%
72%
72%
71%
70%
67%69
%69
%69
%
67%
66%
66%
62%
59%
58%
57%
53%
53%
53%
4% 5%3%
5% 6% 7% 8% 9%
15%
14%
14%
14%
13%14
%13
%15%
15%16
%18%19
%19
%19
%18
%21%22
%22
%24%25
%27%
27%30
%29
%28
%
2% 2% 3% 2% 2% 2% 3% 2%4% 3% 3% 3% 4% 5% 5% 4% 4% 4% 4% 4% 4% 5%
3% 3% 3% 3% 4%6% 5% 6% 6% 7% 8%
5%6%6%6%6%6%7%6%8%8%7%8%7%8%8%9%9%9%8%
10%8%7%
9%9%11%10%10%10%10%10%11%11%11%
0%
20%
40%
60%
80%
100%
Jan-0
7
Mar
-07
May
-07
Jul-0
7
Sep-0
7
Nov-07
Jan-0
8
Mar
-08
May
-08
Jul-0
8
Sep-0
8
Nov-08
Jan-0
9
Mar
-09
May
-09
Jul-0
9
Sep-0
9
NYSE, NASDAQ, & Arca
BATS / DirectEdge
Crossing /Dark Pools
RegionalExchanges
Source: TABB Group LiquidityMatrixTM
Matched US Equity Flow as a Percentage of Total US Equity Matched Flow
Market share of liquidity pools are beginning to converge around 13%
US Equity Market Share (includes Internalized)Consolidated NYSE/NASDAQ Listed Equities
Jul 2008 – Sept 2009
4% 4% 4% 4%3% 3% 3% 3% 3%
5% 5% 5% 5%6% 7%
30%29% 29%
30% 30%
27% 27%26%
23%
21%20% 20% 20%
19%19%
16%
14% 14%15%
16%15% 15% 15% 14% 14% 14% 13% 13%
14%
18.10%18.00%
19.90%20.10%19.90%
18.00%17.90%18.30%17.20%
16.40%16.00%15.10%14.60%14.00%
13.00%
10% 10% 11%11%
10%11%
11% 11%10% 10% 11% 11%
10%9%
5%6% 5% 5%
6%6% 7% 7%
9%10%
10% 10%
12%13%
12%
7%
9%
7% 7%9% 8%
9% 9% 9% 9% 9% 8%10% 9% 9%10% 9% 9%
8% 9%
11% 11% 12%
14%
16%17%
17%
15%16% 16%
15%
10%
-5.00%
5.00%
15.00%
25.00%
35.00%
Jul-08
Aug-0
8
Sep-
08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb-
09
Mar
-09
Apr-0
9
May
-09
Jun-0
9
Jul-09
Aug-0
9
Sep-
09
Regionals Nasdaq NYSE Arca BATS DirectEdge Dark Pools Internalized
Source: TABB Group LiquidityMatrixTM Exchanges, BATS
Is it worth it? Benefits
Greater automation Low fees – exchange competition Tighter spreads High certainty of execution
Challenges Finding the needle in the haystack Massive quantities of
Data, IT,& Bandwidth Greater obfuscation
All of this tilts market toward larger brokers Will benefits remain when only mega-brokers can play?
However Sponsored Access is changing this Market is becoming more open and accessible (for the
technologically advanced)
World Federation of Exchanges | Cambridge, MA | Nov, 2009
High Frequency Trading
What Is It & Should I Be Worried?
Presented by
Larry Tabb (Founder & CEO)
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