‘Secretive’ firms dominate US share trading

[Joanne98]

A tiny minority of a new breed of electronic trading firm is driving almost three quarters of all US equities trading volume and generating $21bn in annual profits doing so, Tabb Group, a consultancy, said on Friday.

The disclosure is one of the first attempts to quantify the impact of so-called “high frequency” trading firms that have quietly grabbed a huge slice of trading in the world’s equity markets.

Some of the trading firms – such as Getco, Peak6, RGM Advisers and Hudson Bay Trading – are far from household names in the markets. Many are based in Chicago and grew out of the city’s options trading pits.

However, they appear to have built up such a significant presence in the markets that they look set to eclipse familiar Wall Street names in their collective influence. Such firms have grown especially quickly as they filled a gap in the markets left by hedge funds.

They typically employ trading strategies that are based not on company earnings prospects and other fundamentals, but on arbitraging minute differences in share prices and trading speeds – known as latency – between exchanges and other trading venues.

Robert Iati, partner at Tabb, said: “They are, as a rule, secretive, stealthy, smart, and relatively unknown.

“The incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize,” he added.

Tabb estimated that such firms, which include the new breed also known as “electronic liquidity providers”, represent about 2 per cent of the 20,000 or so trading firms operating in the US markets. But they accounted for 73 per cent of all US equity trading volume

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