High-Frequency Trading Jumps the Shark

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Rob Daly, Sell-Side Technology

The first rule in journalism is "follow the money." This is why, when I read this morning that a dozen traders had left Goldman Sachs’ government and derivatives desk over the past months, it felt like the final nail in the coffin for investment banking as we know it.

With new regulations taking hold—such as Dodd–Frank in the US, and the review of the Markets in Financial Instruments Directive (Mifid II) and Basel III in Europe—it seems there will be more liquidity in the Gobi Desert than in the markets.

Wall Street firms have adopted a bunker mentality, storing up as much cash on their books as possible to meet coming demands. To handle it, they are cutting unprofitable businesses and reducing headcount, as they did in 2008.

With new risk management rules taking effect, and the race to reduce message latency becoming absurdly expensive, are we witnessing the apex of high-frequency trading? For market access providers, which most broker-dealers are for the high-frequency trading clients, the cost versus the return is getting harder to justify than it was just a few years ago.

There always be firms serving the niche market, but larger firms just may look to invest their infrastructure dollars elsewhere, in places like the foreign exchange (FX) and over-the-counter (OTC) markets.

In the meantime, we're back to the belt-tightening times we saw just a couple of years ago.

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