When everyone was throwing computing power at the 'momentum igniting', "can't lose", HFT-driven algo-trading world, it is perhaps little wonder that the opportunity to expropriate profits from an ever-decreasing pool of real money traders dwindles like a convertible arbitrage hedge fund in the 90s. Perhaps it was the writing on the wall we noted in February when GETCO's money-printing machine was reduced to pennies [4], but it seems the world of high-freaks is tearing itself apart. As the WSJ reports [5], two of the largest independent US high-frequency-trading firms are in early merger discussions - as a downturn in trading opportunities has spurred cutbacks. Of course, the firms claim this is a positive, "we're in accelerated growth mode, both organically and inorganically," but as one HFT analyst notes, "HFT is a volume business... If trading volumes are going down, that means it's tougher for prop shops to make money." The slowdown has forced some high-speed specialists to leave the business and with RGM and Allston (the two firms) having 280 staff, we suspect this week's initial claims may be bloated with PhDs.
Via The WSJ, [5]
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RGM Advisors LLC and Allston Trading LLC have discussed a deal that would combine their respective strengths in automated stock trading and futures markets, according to people close to the talks.
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While fast trading benefited from the opportunities churned up by the market volatility of 2008 and 2009, a downturn in volumes on both sides of the Atlantic since then has squeezed profits, spurred cutbacks and set the stage for industry consolidation. Meanwhile, regulators are drawing up tighter restrictions on automated-trading practices, and some trading venues are clamping down on high-speed dealing.
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"The dialogues have picked up post-Knight," said Chris Malo, chief financial officer of Sun. "We're in accelerated growth mode, both organically and inorganically."
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U.S. stock-trading volumes have declined in each of the past three years and this year are running 35% below the industry's peak in 2009, when an average 9.8 billion shares changed hands a day, according to Sandler O'Neill + Partners.
"High-frequency trading in general is a volume business," said Robert Stowsky, a senior analyst with Aite Group, a Boston-based firm that researches electronic trading. "If trading volumes are going down, that means it's tougher for prop shops to make money."
The slowdown has forced some high-speed specialists to leave the business.
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[RGM] employs about 130 staff in Austin and London and is seen complementing Allston's specialty in providing liquidity to futures markets. Allston, which was founded in 2003, has about 150 employees in Chicago and London.
Both firms have hired staff in recent months, and Mr. Mahajan said Allston is pursuing a strategy to double the firm's net trading revenue.