The electronic trading market making phenomenon may not be able to withstand too many more punches and the firms that once paid handsomely for top talent are now struggling to hang onto dwindling market share. But new opportunities are on the horizon, including slapping a hefty price tag on access to market moving data minutes and seconds before it's made public and finding ongoing value in volatility.
“Over 30 years I have seen cycles and I would say we are pretty close to the bottom of the electronic trading market making cycle,” says Ilya Talman who founded Roy Talman & Associates in 1982. “What is next cycle? People who take advantage of the next new thing are already in business.”
Much to ire of Bloomberg, Deutsche Börse bought the right to produce and distribute the The Chicago Business Barometer two years ago and now sells early access to the monthly index of economic activity based on a survey of companies. For $2,600 a year, subscribers get the market moving data three minutes before public release.
Thomson Reuters is selling results of the University of Michigan Consumer Confidence Index five minutes before the data is released, CNBC reported last week, without saying how much Wall Street banks are paying. The highest-level subscribers reportedly get an edge by receiving the information two seconds earlier.
Talman expects other firms will follow and that selling a sneak peek into news and analysis will be the next big wave in high-speed big data.
“One could say world is propagating where opinion of one researcher becomes news,” he says. “You have vendors like the Wall Street Journal or Dow Jones, anybody who can generate market moving news, realizing they want to monetize content into machine readable formats and charging for that access.”
Another potentially prosperous market would be capitalizing on the success of the CBOE Volatility Index (VIX), Talman says. In an agreement with CME Group, the Chicago Board Options Exchange last month starting disseminating values for a new volatility benchmark index using futures options data on CME Group's 10-year U.S. Treasury note contract.
“Maybe that’s where the future is,” Talman said.
One things’ for certain: the big money is no longer pumping out of proprietary trading shops and hedge funds that leverage high-frequency strategies as well as agency brokers doing low-latency algorithmic trading.
“In the prop trading universe it seems it is impossible to combine prop businesses … Anytime there is any kind of business combination it’s a distressed and not really consolidation. It’s more of attrition,” says Talman.
“We see a lot of ‘looking,’ not so much hiring. (There is) no clear pattern, whatever hiring is occurring is very deliberate and narrow,” he adds. “While prop trading firms’ business seems to have stabilized this year, we do not see an overall expansion to this whole area. On the hedge fund side firms are either fortifying their long running areas of expertise with very little net hiring or putting toe in the water exploring new types of trades and/or assets for them. This might result in net hiring, but so far we have not seen much of it.”
With so many opponents in the ring, from big banks creating their own algorithms to regulators waving a heavier fist, high frequency traders have steadily lost volume since 2009.
Royal Bank of Canada expects to win a U.S. patent for THOR, its own technology weapon to take high-frequency traders. Canada lags behind the U.S. in the fast trading space and banks are now stepping up efforts to reclaim a greater share of volumes. First deployed in 2010, THOR “solves market structure challenges” posed by lightning-fast electronic trades that can result in “disappearing” liquidity, the bank says.
Of course there are always job out there, it’s just nobody’s hiring in droves for any particular talent at this time.
“Somebody’s garbage is somebody else new-found treasure,” Talman said. “Some say we are not doing this kind of trade while others who are new to it say ‘this is great.’”
For now, most firms are “sticking to their knitting,” he says. Money managers, for example, are “looking to expand in areas they are familiar with.”
“I think that everybody is sitting and waiting for things to happen and they have been waiting for two years for Japan to blow, for Europe to blow, for interest rate markets to blow, and it might still happen and (firms) will need to have capabilities for that.”
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