High frequency trading (HFT) continues to grow across the globe, particularly in Europe, due in large part to the fact that the technology required to start an HFT operation is getting cheaper and cheaper.
Many traders are setting up their own high frequency trading shops, backed either by the money they have made in bonuses from investment banks or by private equity. They can do this because, according to the High Frequency Trading Review, it is now 80% cheaper to set up a new HFT operation than it was just five years ago, when the practice first came about.
In fact, it’s not just traders who are getting funding to start these operations. Reports from various sources state that graduates are coming straight from universities like MIT and being given substantial sums of money by private equity firms and venture capitalists to set up high frequency trading desks.
As the debate around high frequency trading heats up, one of the areas where banks have to be careful is how they structure their operations. It is now being outlawed in the US to run a proprietary trading desk under the same umbrella organization as a broking unit. So the banks who do client business are having to surreptitiously set up independent firms with a pure focus on HFT. Of course these firms have to be seen as private and not owned by the banks in question, but there are many loopholes the banks can use to get around these rulings.
The net result is that there is now a myriad of new firms entering the high frequency trading space, and that is only set to grow as the barriers to entry get lower.
It stands to reason that not all these startups will be successful, but the HFT landscape is changing all the time, so it will be interesting to see how it all pans out.
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