High-speed traders have hit the wall.Virtu priced their IPO at $19 on April 15, 2015. $16.95, up a dime last.
Even as critics of high-frequency firms have argued their speed and technology give them an unfair advantage, the traders are facing diminishing returns. For one thing, there’s been relatively little turbulence in this bull market, a challenge for high-frequency traders and other market makers because it restrains volatility and trading volume, curbing their profits.
“It’s not going to come back,” said Richard Johnson, a market structure and technology analyst at Greenwich Associates LLC in Stamford, Connecticut. “For a few years after the crisis, people were in denial and kept their business running as it had been. It’s not going to get back to that level, people have to accept that.”
That’s created an identity crisis for the fastest traders, forcing companies like Virtu Financial Inc. to seek out new businesses and pushing others out entirely. One stat helps boil it all down: Market makers in U.S. stocks produced $1.1 billion in revenue last year, compared with $7.2 billion in 2009, according to estimates from Tabb Group LLC.
Their struggles matter because market makers help investors buy or sell when they want to. The cutting-edge of market making now centers on high-speed data transmission -- beaming information across oceans with underwater fiber-optic cables and across continents with microwaves; in a bygone era it was people jostling for position in a trading pit.
Virtu, a New York-based firm that trades more than 12,000 securities and other financial instruments on over 235 markets around the world, is at the vanguard of automated trading, yet it’s embarked on a potentially company-altering acquisition. It’s buying rival KCG Holdings Inc. for about $1.3 billion, bolting on a company with more than five times as many employees.
One allure of the deal is KCG’s salesforce, which Virtu plans to deploy toward persuading other traders to license its state-of-the-art technology. Virtu already has a deal that allows JPMorgan Chase & Co. to access the Treasury market with its systems. Virtu Chief Executive Officer Doug Cifu and Bob Greifeld, Nasdaq Inc.’s former CEO who will become Virtu’s chairman after the KCG deal closes, see potential for the company to build a larger business selling trading technology....MUCH MORE
And from the outro of a June 30, 2007 post:
...One reason the big nodes (London, New York City, Hong Kong) are still the big nodes is that the speed of light is 11.8 inches per nanosecond. The greater the distance between nodes the slower your execution. Time is indeed money and it can be measured by the cesium-133 standard: 9,192,631,770 cycles (Hz), or turned around, every foot away from the node costs you 9.192 ticks on the atomic clock (and that's photons in a vacuum, in real life you're using fiber-optics or, worse, electrons in copper).
Personally, I think that basing your competitive advantage on execution speed is a mug's game. As IBM said in their Feb. 27 Financial Services newsletter:
"But what happens when every competing firm plugs into algorithmic trading and speed and execution become commodities? Are there other advantages algorithmic transactions can offer?"
Going forward, ideas matter more than money. The kind of intelligence that will be the in highest demand will be the ability to make, as James Burke put it, "Connections".