Several years ago Michael Lewis wrote “Flash Boys: A Wall Street Revolt” and created a populist backlash that rocked the world of High-Frequency Trading (HFT). Lewis had publicly pulled back the curtain and shared his perspective on how our financial markets worked. Right or wrong, he sensationalized an industry that most people didn’t understand, and yet one in which nearly all of us have invested our life savings.
Several months after Flash Boys Peter Kovac, a Trader with EWT, authored “Flash Boys: Not So Fast” where he refuted a number of the sensationalistic claims in Lewis’s book. While I’ve not yet read Kovacs book, it’s behind “Dark Pools: The Rise of Machine Traders and the Rigging of the U.S. Stock Market” in my reading list, from the reviews it appears he did an excellent job of covering the other side of this argument.
All that aside, earlier today I came across an article by Joe Parsons in “The Trade” titled “HFT: Not so flashy anymore.” Parsons makes several very salient points:
- Making money in HFT today is no longer as easy as it once was. As a result, big players are rapidly gobbling up little ones. For example in April Virtu picked up KCG and Quantlab recently acquired Teza Technologies.
- Speed is no longer the primary driving differentiator between HFT shops. As someone in the speed business, I can tell you that today one microsecond for a network 1/2 round trip in trading is table stakes. Some shops are deploying leading-edge technologies that can reduce this to under 200 nanoseconds. Speed as the only value proposition an HFT offers hasn’t been the case for a rather long time. This is one of the key assertions that was made five years ago in the “Dark Pools” book mentioned above.
- MiFID II is having a greater impact on HFT then most people are aware. It brings with it new, and more stringent regulations governing dark pools and block trades.
- Perhaps the most important point though that Parsons makes is that the shift today is away from arbitrage as a primary revenue source and towards analytics and artificial intelligence (AI). He downplays this point by offering it up as a possible future.
AI is the future of HFT as shops look for new and clever ways to push intelligence as close as possible to the exchanges. Companies like Xilinx, the leader in FPGAs, Nvidia with their P40 GPU, and Google, yes Google, with their Tensorflow Processing Unit (TPU) will define the hardware roadmap moving forward. How this will all unfold is still to be determined, but it will be one wild ride.