Marin County, north of Silicon Valley. Good call: Revenue climbed to $13 million that year.
Tchetvertnykh says revenue for 2009 will likely reach $100 million. That’s still small: The full-service investment banking divisions of several Big Five Canadian banks each generate more than $1 billion a year in revenue. And privately owned Getco LLC, one of the largest U.S. high-frequency trading firms, employs more than 200 traders, and earned an estimated profit of $400 million (U.S.) in 2008.
“When you listen to vested interests complaining about something, it must be good.” — Alan Grujic, co-CEO of Infinium Group
Grujic and Tchetvertnykh say Infinium’s next step is further geographic expansion. The London office, which opened in 2008, gives them a beachhead in Europe, and they’re looking at other countries around the world.
Yet they aren’t certain how big Infinium will get. Grujic says that “2,000 employees seems to be a natural place we could go.” Tchetvertnykh says he’d at least consider going public. “It would give us equity to bring in the best people.” He’d also consider selling out—he points out that Citigroup paid $680 million (U.S.) for South Carolina-based Automated Trading Desk LLC in 2007.
Meanwhile, regulators and traditional investment dealers are struggling to assess what high-frequency traders have already done. At a conference in late October, SEC chairman Mary Schapiro said that new rules may be needed “to address new types of market professionals whose activities may not be sufficiently regulated.”
High-frequency traders argue that regulators will first have to find problems, and so far, there don’t appear to be any. In a study of high-frequency trading in Canada published in September, New York-based Investment Technology Group Inc. made the same argument as the Infinium principals that their kind benefit the market: Bid-ask spreads and share-price volatility in Canadian stock markets is down over the past two years, and order depth—which measures share availability—is up.
Even bank-owned dealers agree with some of that. In October, CIBC published a white paper by six of its senior traders on high-frequency trading and the TSX’s rebate program for electronic liquidity
providers, which was introduced in 2008. Much of the impact has been obvious: “faster-moving quotes, more bids and offers, more volume, and in some cases, frustration.” The CIBC traders also say they believe that high-frequency traders “are not predatory, simply very fast and very good at what they do.”
But critics like Thomas Caldwell say that such overall numbers don’t tell the whole story. They question whether high-frequency traders are providing “real liquidity” to the market. In fact, argues Caldwell, high-frequency traders are also removing it. How? Large institutional investors know that if they start trying to push through a large block of shares at a certain price—even if the block is broken into many small trades on several ATSs and markets—they can trigger a flood of high-frequency orders that immediately move market prices to the institution’s disadvantage. (This is the source of the “frustration” mentioned in the paper by the CIBC traders.)
That’s why institutions have flocked to so-called dark pools operated by ATSs such as Instinet, and individual dealers like Goldman Sachs. The pools allow traders to offer prices without publicly revealing their identities and tipping their hand. Caldwell says the best markets for all participants, and for regulators, are “central, open and transparent auction markets,” like the old stock exchanges. But the dark pools mean that “all the big orders are now sitting somewhere else.”
Risk is also a complex question. The high-frequency traders’ supercharged computers haven’t blown up markets—yet—but Caldwell says they have blown up individual stocks. Exhibit A: the investment bank Bear Stearns, which folded after its share price plummeted in March, 2008, even though then-SEC chairman Christopher Cox assured the markets that the firm was sound. “Bear Stearns did not commit suicide,” says Caldwell. “It was murdered.”
Gripes like Caldwell’s make Grujic chuckle a bit. “When you listen to vested interests complaining about something, it must be good.”
