Transcript Larry Tabb - World Federation of Exchanges

High Frequency Trading
What Is It & Should I Be Worried?
Presented by
Larry Tabb (Founder & CEO)
World Federation of Exchanges
|
Cambridge, MA
|
Nov, 2009
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
High Frequency Trading accounts for 61% of Share Volume
Retail, 3%
Long Only, 13%
Hedge Funds, 7%
IB Prop, 16%
HFT Hedge Funds,
4%
HFT Broker/
Market Makers,
28%
Source: TABB Group Estimate
Independent HFT,
29%
The majority of trading is done by
professional traders / liquidity providers
US Equity Share Volume by Market Participant
High Frequency Trading accounts for 61% of Share Volume
Liquidity Providers 4%
Investors 3% 7%
28 %
13%
Investors
Retail
Hedge Funds
Long Only
Investment Bank Prop
Source: TABB Group Estimate
29%
16%
Liquidity Providers
HFT Hedge Funds
HFT Broker/ Market Makers
Independent HFT
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
Electronic Trading Has Caused Steep Decline in
Average Trade Size
40,000
1,600
35,000
1,400
30,000
1,200
25,000
1,000
20,000
800
15,000
600
10,000
400
5,000
200
0
0
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Avg Shares Per Day (mm)
Source: TABB Group and Exchange Data
Avg Trades Per Day
Shares / Trade
Avg. Shares / Trade
Avg. Shares (m), Avg. Trades(k)
US Equity Share volume and trades
Algos have broken up flow into much smaller
executions
Shares by Execution Venue (volume weighted)
2 Year CAGR
’07-’09
37%
Sales Desk
44%
1%
38%
Program Desk
Direct To
Exchange
12%
11%
11%
-5%
14%
9%
9%
-22%
22%
24%
Algorithms
18%
31%
Crossing
Network
2007
15%
11%
12%
2008
-10%
2009
Source: TABB Group – Institutional Equity Trading in America ’09/’10 – Preliminary
Capital usage is down because of credit
crisis and advanced trading technology
Percent of Firms Using Capital
% Firms
68%
Directionality of Capital Usage
Up
Percent of Firms Paying More
For Capital
100%
6%
84%
67%
63%
Same
Down
31%
Large
Medium
Small
Sales trader flow is declining – back to
on-trend levels
Percentage of Order Flow Firms Sent to Sales Trader
69%
3 Year CAGR
-19%
’07-’08
+19%
59%
47%
2 Year CAGR
-13%
44%
38%
37%
33%
2004
2005
2006
2007
2008
Source: TABB Group – Institutional Equity Trading in America ’09/’10 – Preliminary
2009
2010e
Should exchanges be worried?
20%
Ja
n07
2%
4%
M
ar 2
5%
-0 %
73
3%
%
M
ay 2
5%
-0 %
72
6%
%
Ju
7%
l-02%
73
8%
%
Se
p - 2%
9%
07
15
4%
N
%
ov 3
14
-0 %
%
73
14
%
%
Ja
14
n- 3%
%
08
13
4%
%
M
ar
14
5
-0 %
%
8 5
13
%
%
M
ay 4
15
-0 %
%
84
15
%
%
Ju
16
l-0 4%
%
84
18
%
%
Se
19
p - 4%
%
08
19
4
%
N
%
ov
19
5
-0 %
%
83
18
%
%
Ja
21
n- 3%
%
09
22
3%
%
M
ar 3
22
-0 %
%
94
24
%
M
%
ay
25
6
%
-0
%
9 5
27
%
%
Ju
27
l-0 6%
%
9 6
30
%
%
Se
29
p7%
%
09
28
8%
%
60%
0%
59
%
58
%
57
%
53
%
53
%
53
%
80%
73
%
76
%
77
%
76
%
77
%
73
%
74
%
72
%
72
%
71
%
70
%
67
%
69
%
69
%
69
%
67
%
66
%
66
%
62
%
82
%
83
%
89
%
87
%
88
%
86
%
85
%
85
%
In last 23months, exchanges have lost 20%
market share to dark pools and ECNs
Matched US Equity Flow as a Percentage of Total US Equity Matched Flow
100%
TM
NYSE,
NASDAQ, &
Arca
40%
BATS /
DirectEdge
11%
11%11%11% Crossing /
9% 9%9% 8%10%8%
9%9% 10%10%10%10%10%
8%
8%
8%
8%8%
7% 6%
7%
7%
7%
Dark Pools
5% 6% 6%6%6% 6%
Regional
Exchanges
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
35.00%
30%
30%
29%
29%
30%
27%
27%
26%
25.00%
23%
21%
19.90%20.10%19.90%
20%
20%
20%
19%
19%
18.00%17.90%18.30%
17%
17.20%
17%
16.40%
16% 16%
16.00%
16%
16%
16%
15.10%14.60%
15%
15%
15%
15%
15%
15%
14%
14%
14.00% 14%
14%
14%
14%
14%
13%
13.00%
13%13%
12%
12%
12%
11%
11%
11%
11%
11%
11%11%
11%10%
11%
10%
10%
10%
10%
10%10%
10%
10%10%
10%
10%
9%9%
9%
9%
9%
9%
9%
9%9% 9%
9%9% 8%
9%
8%
8%
7%
7%
7%
7%
7%
7%
6%
6%
6%
6%
5%
5%
5%
5%
5%
5%
4%5%
4%
4%
4%
3%
3%
3%
3%
3%
Regionals
Nasdaq
NYSE
Source: TABB Group LiquidityMatrixTM Exchanges, BATS
Arca
BATS
DirectEdge
Dark Pools
Se
p09
09
A
ug
-
Ju
l09
-0
9
Ju
n
M
ay
-0
9
A
pr
-0
9
M
ar
-0
9
9
Fe
b0
9
Ja
n0
8
ec
-0
D
N
ov
-0
8
-0
8
O
ct
-5.00%
Se
p08
Ju
l08
5.00%
A
ug
-
15.00%
08
18.10%18.00%
Internalized
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



Greater obfuscation
All of this tilts market toward larger brokers


Data, IT,& Bandwidth
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)
High Frequency Trading
What Is It & Should I Be Worried?
Presented by
Larry Tabb (Founder & CEO)
World Federation of Exchanges
|
Cambridge, MA
|
Nov, 2009