Fast trading rakes in cash

NEW YORK: Frank Troise, the head of electronic equity trading products at Barclays Plc, says using computers to execute orders in milliseconds is no different than brokers jockeying for position years ago on the floor of the New York Stock Exchange.

"This has been going on for quite awhile, and it's now at a fever pitch," said Troise, 43, who is based in New York.

Policymakers are asking whether that advantage has become too great for so-called high-frequency traders, whose programs buy and sell shares up to 1,000 times faster than the blink of an eye. Defenders say the competition for profits that gave rise to today's rapid-fire execution has roots that span decades and has helped reduce costs for investors.

About 46 percent of daily volume is handled through high-frequency strategies, according to estimates by NYSE Euronext, the world's largest owner of stock exchanges. The transactions are made by about 400 of the 20,000 firms trading stocks in the US, according to Tabb Group LLC, a New York-based financial services consultant.

Each makes bets in hundredths of a second to exploit tiny price swings in equities and discrepancies in futures, options and exchange-traded funds.

The firms compete for a slice of $21.8 billion in annual profits from equities and derivatives market making and arbitrage, according to Tabb. Rapid-fire strategies helped equity volume more than double in the US since 2006 to a record 10.8 billion shares a day last year, NASDAQ OMX Group Inc data show.

US equity exchanges have catered to such clients since at least 1997, when the NYSE ended its century-old practice of quoting stocks in eighths of a dollar. It shifted to penny increments in 2000.

That eroded earnings for NYSE and NASDAQ market makers, who profit from the difference between bids and offers. For investors, it helped reduce trading costs.

The exchanges sought to compensate for the lost business by paying rebates to high-frequency brokerages that buy shares at the best public prices.

Partha Mohanram, a finance professor at Columbia University in New York, said that instead of imposing limits on the use of technology, exchanges should ensure everyone gets trading data at the same time.

"The key is a level playing field, but you should not lower the playing field to make it level," he said.

Bloomberg News

(China Daily 08/03/2009 page11)