Chief economist of CFTC co-authors study showing HFT firms profit from retail and institutional investors
High-frequency traders take profits at the expense of retail investors as well as other institutional investors and speculators, according to a study co-written by the chief economist of the US Commodity Futures Trading Commission (CFTC).
The study by CFTC chief economist Andrei Kirilenko closely examines a month of trading in the E-mini S&P 500 Futures contract and finds that high-frequency trading (HFT) firms made $23 mn in profit at the expense of various categories of traders. Most of the profit was made at the expense of ‘opportunistic’ traders although it also came from trading with retail investors, institutional investors and non-HFT money makers, according to the study.
‘Small traders in particular suffer the highest short-term losses from HFT on a per-contract basis,’ the study concludes. Analyzing trades of 65 HFT firms through the month of October 2010, the study shows that aggressive high-frequency traders made $3.49 per contract traded with small traders compared with $1.92 on trades with institutional investors and $2.49 when trading with ‘opportunistic’ investors.
The study categorizes high-frequency traders as ‘aggressive, mixed or passive’, and finds that the aggressive traders earned an average of $45,267 per day in gross trading profits in October 2010, while mixed traders earned $19,466 a day and passive traders $2,461.
‘These stylized facts mask a wide dispersion of profitability on the individual account level, in particular that the distribution of profits is highly concentrated toward a small number of firms,’ notes the study, adding that profit is most concentrated among the highly aggressive trading firms. ‘Furthermore, we find the distribution of total profits across HFT firms is widest within the aggressive HFT category, with profits highly concentrated toward a small number of these firms.’
The study further indicates that the world of HFT is dominated by a few firms and it’s increasingly difficult for new companies to enter the trade. New entrants to the market are less likely to make a profit and are more likely to leave the market altogether, the study points out.
‘Something other than chance could drive the higher profitability of established firms relative to entrants,’ the study authors write. ‘A small competitive advantage early on, perhaps from experience or ability, could determine whether an HFT firm can consistently invest in ever-more sophisticated technology and thus maintain a competitive advantage over rival firms.’
