According to consultancy firm TABB Group, in the last eight years, high-frequency traders in the U.S. have witnessed their revenue plummeted from a peak of $7.2 billion to under $1 billion in 2017.
There are various reasons why revenue plummeted over the last decade. Increased competition, higher costs, and low volatility are the major reasons for the crash of the market. HFT firms have been pressed from both revenue and cost perspective, and the outcome of that is worsened considering millions of trades need to be completed daily for the practice to be worthwhile.
But algorithm trading is a zero-sum game which is based on how fast current technology can be evolved. The magic of high-frequency trading evaporates when everyone will be on the same page. This means HFTs will have to constantly upgrade data and tools that they are using, that translate into increased expenditure.
Co-location allows a company to rent space in the trading venue’s data center or server to secure a direct link to the swathe of price movements and other data as it emerges. The higher cost of data has been one of the reasons why HFT volumes have plummeted.
The relentless desire of the HFTs to gain the slightest edge over the competition has pushed them to move their physical location closer to the data servers. That helps HFTs gain the amount of time the information that is sent through the internet. The push to reduce the time taken to retrieve and process the data has given rise to data centers. That has spurred on a new breed of infrastructure provider aiming to connect trading venues and HFT with ever-faster cabling, which has increased the cost for HFT and ultimately made them less attractive in the industry.
Finally, HFTs must recognize that like any other technology, petty traders can abuse high-frequency trading and manipulate the markets. Given the power and speed of technology, they can do so with more effectiveness. However, that is not the fault of the technology but the user who is using it in a way that is either illegal or manipulative. The regulator and exchanges should be ever vigilant about such misuse as they are today with non-HFT.