HFT Explained: Risks, Benefits and Impact on Markets

High Frequency Trading What Is It & Should I Be Worried? Presented by Larry Tabb (Founder & CEO)

Agenda ,[object Object],[object Object],[object Object],[object Object]

What is high frequency trading? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Who does it? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Who trades? US Equity Share Volume by Market Participant High Frequency Trading accounts for 61% of Share Volume Source: TABB Group Estimate

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 Source: TABB Group Estimate 3% 7% 13% 16% 4% 28 % 29% Investors Liquidity Providers Investment Bank Prop Investors Liquidity Providers Retail Hedge Funds Long Only HFT Hedge Funds HFT Broker/ Market Makers Independent HFT

Goal of HFT - first to spot an opportunity & first to take advantage of it ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

The floor is empty – most trading is done by machines

Source: TABB Group and Exchange Data Electronic Trading Has Caused Steep Decline in Average Trade Size US Equity Share volume and trades

Shares by Execution Venue (volume weighted) 2 Year CAGR ’ 07-’09 Algos have broken up flow into much smaller executions Source: TABB Group – Institutional Equity Trading in America ’09/’10 – Preliminary

Capital usage is down because of credit crisis and advanced trading technology Directionality of Capital Usage Percent of Firms Paying More For Capital Percent of Firms Using Capital Source: TABB Group – Institutional Equity Trading 2008

Sales trader flow is declining – back to on-trend levels Percentage of Order Flow Firms Sent to Sales Trader 3 Year CAGR -19% ’ 07-’08 +19% 2 Year CAGR -13% Source: TABB Group – Institutional Equity Trading in America ’09/’10 – Preliminary

In last 23months, exchanges have lost 20% market share to dark pools and ECNs NYSE, NASDAQ, & Arca BATS / DirectEdge Crossing / Dark Pools Regional Exchanges Source: TABB Group LiquidityMatrix TM Matched US Equity Flow as a Percentage of Total US Equity Matched Flow

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 Source: TABB Group LiquidityMatrix TM Exchanges, BATS

Is it worth it? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

HFT Explained: Risks, Benefits and Impact on Markets

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Editor's Notes