The following clip from Tabb Group (and accompanying report which we hope to post shortly), provides some much needed color on what has been the source of some serious head-scratching lately: completely irreconcilable action between spot and futures trading, especially in some core market ETF and corresponding futures (see PragCap's recent post on this). As Tabb's Adam Sussman points out "Automation is not just a way to capture alpha anymore, but in some cases is a source of alpha itself." In other words, if you can't join in, and you really cant, the best you can hope for is to ride the occasional beta wave here and there. Just make sure you fall off the board first when the wave is about to crash.
Most notable: HFT shops' volume on the CME has increased by 30% in one quarter: from 31% in Q2 to 40% in Q3! And somehow the SEC is still contemplating the "benefits" of HFT, when it is more than obvious that HFT is now a way, by those who can, to game the market on a daily basis.
As we will demonstrate in a post later, pronounced momentum chasing strategies and predatory algorithms operating on the non-futures market is one thing, which in fact has increased trading costs, not decreased, but when HFT is essentially the dominant strategy in futures markets as well, then there is no question that fundamental alpha extraction is now practically impossible. Any fundamental equity hedge funds can just as well shut down now, as they are the whipping boys for those who really control the market in this increasingly low-volume market. Curiously, we have been hearing numerous rumbling about these same HFT operators demanding access to a CDS HFT strategy once CDS become exchange traded and cleared. Sky Net is truly becoming sentient.