High-frequency traders are moving past the race to be the fastest, as regulation, competition and physics all impact their profitability.
The automation of intraday trading has frightened politicians and regulators so much that, despite having little more than distaste to hold against it, rules are being drafted to limit it as a business model. Known as high-frequency trading, it is a system that makes profit or loss based on the price movements of a large volume of assets during individual market sessions, with positions closed out at the end of business.
Alan Dickinson, who according to author David Kynaston became the first millionaire trader on London derivatives market LIFFE, used the intraday model before automated trading ever existed, saying of it in 1988: "I have enough worry during the day; I don't want to take it home as well."
Intraday trading has fallen victim to a modern phenomenon. Like ‘trading upstairs' - the crossing of client trades with a broker's proprietary book - it has recently become a large scale business, expanded by the application of technology. It is its size that has concerned the rule-makers.
In proposed revisions to the Markets in Financial Instruments Directive, HFT firms were defined by Marcus Ferber MEP, in the Economic and Monetary Affairs Committee of the European Parliament, as market participants that trade on their own account and exhibit four out of five of these behaviours: using co-location facilities; a daily portfolio turnover of 50% or more; an order-to-trade ratio that exceeds 4:1; half of all orders being placed on trading venues that have rebates for liquidity provision; and cancellation of a fifth of all orders.
The new proposals seek to clamp down on unregulated trading firms, which some HFTs are, while attempting to limit the strategies that these businesses can use.
"There are commercial pressures on HFT firms. We have seen some give up on Europe and some decided not to enter as there is still uncertainty over things like transaction taxes," says Andrew Bowley, managing director for electronic trading product management at Nomura. "Right now there's a lot of interest in where the current environment will leave HFTs. Will regulation force them to become exchange members, or regulated entities?"