High-frequency trading could soon become as powerful a force in other asset classes as it already is in US equities, according to new research from consultancy TABB Group.
In the report, ‘US equity high-frequency trading: strategies, sizing and market structure’, TABB revises down its estimate of the proportion of high frequency trading in US equities to 70% from the 73% it reported in July.
The report said a number of drivers are creating the pre-conditions for high-frequency trading in new asset classes, including increasing numbers of participants, low commission rates, smaller contract sizes, automated matching, open access to neutral execution venues, advances in the price/performance ratio of technology and inexpensive, high speed networking and connectivity.
These combined factors support the ability of high-frequency traders to gain direct market access and employ high-turnover trading strategies with a small amount of capital in an attempt to reap significant rewards, according to TABB.
“In the more liquid contracts and instruments, such as equity options, futures, foreign exchange and credit, high-frequency trading is already present,” said Robert Iati, global head of consulting at TABB and co-author of the report. “Barring a sharp change in regulatory or legislative attitudes, high-frequency trading will become as dominant in global markets as it has become in US equities.”
He adds, “While the Luddites of liquidity may bemoan this virtual inevitability, high-frequency traders are scanning the markets for inefficiencies that traditional traders could never spot or capitalise on. Unfortunately for these traders, humans just cannot analyse data as fast as computers, and the gap will only become larger.”