In a soon-to-be released study, the chief economist of the Commodity Futures Trading Commission (CFTC) has found that high-speed traders (HFT) are moving in on the profits of traditional investors in financial markets.
Economist Andrei Kirilenko, one of the study’s three authors, estimated that HFTs make an average of $5.05 in profits each time they go up against small traders seeking to buy or sell financial contracts. The study defined small traders as firms that trade less than a median of 20 contracts a day, adding that the majority of traders fall into this group. HFTs are traders that use powerful computers to transact large numbers of trades at very fast speeds.
The CFTC has not endorsed Kirilenko’s findings, which are being reviewed by peers, and they are encountering some resistance from academics, The New York Times reported Monday. CFTC Commissioner Bart Chilton said that “what the study shows is that high-frequency traders are really the new middleman in exchange trading, and they’re taken some of the cream off the top.”
The “HFTs are profitable, especially aggressive (liquidity-taking) HFTs, and generate high…ratios. HFTs generate their profits from all other market participants and do so mainly in the short- and medium-run (seconds to minutes)…Firm concentration in the HFT industry is not decreasing over time, nor is profitability,” the study said.
It divides HFTs into three groups: aggressive HFTs (if more than 60% of their trades are liquidity-taking); mixed (if between 20% and 60% of their trades are liquidity-taking; and passive (if fewer than 20% of their trades are liquidity-taking.” The aggressive HFTs earned $45,267 in gross trading profits in August 2010, while mixed and passive HFTs earned significantly less, only $19,466 and $2,461, respectively.
For the entire month of August 2010, HFTs earned an aggregate of $23.6 million in gross trading. Annual profits for HFTs that year were $280 million, according to the report.
“We find that HFT firms’ profits are mainly derived from opportunistic traders, but also to a smaller extent from fundamental (institutional) traders, small (retail) traders, and non-HFT market makers…We find that aggressive HFTs make profits mainly on positions that they hold in the 1,000-100,000 transaction range, while mixed and passive HFTs lose money in this range but earn profits in the very short term,” the study said.
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