The tremendous growth of high-frequency trading (HFT) appears to have reached its limit amid rising costs, heightened competition, and regulatory changes, argues a new report from Deutsche Bank Research.
The share of total equity trading accounted for by HFT has declined in the past couple of years, the report notes, and total revenues of HFT firms in the U.S. have dropped from about US$7.2 billion in 2009 to US$1.3 billion in 2014.
"The increasing cost of infrastructure and relentless competition within the industry are probably the first to blame," the report says, and the technological arms race among HFTs has raised costs and curbed profits in the industry.
"The bottom line is that HFTs have come under pressure on both the revenue as well as the cost front," the report adds.
As well, a greater share of trading has shifted to dark pools, the report notes, which limits the ability of HFTs to execute their arbitrage strategies.
Ongoing regulatory reforms also represent a headwind for HFT, the report adds. "Forthcoming stricter prudential regulatory oversight may result in an overhang of capacity in the HFT industry," it says.
"All in all, the glory days of HFT seem to be over and HFT will probably offer reduced opportunities in established equity markets in the future," the report concludes.