A Perspective about the Future of the HFT Sector

Authored by Vitthal Dhingra. Based in Bangalore, Vitthal is a Consultant with The Edge Partnership specializing in Information Technology and he is responsible for mid to senior level positions with Telecom, Semiconductor, Networking, Product and Consumer Internet as well as E-Commerce clients.

Machines do not understand feelings but humans have succeeded in transferring their emotions onto machines and IT infrastructures by programming them in ways they want them to act. There is an old saying on Wall Street that the market is driven by two emotions: fear and greed. These same emotions have been the driving forces for markets all over the world to act the way they do. This is the age of electronic trading where modern day traders express these emotions through their algorithms. In a high frequency trading space strategies act on market fluctuations which vary within seconds or less.

We at The Edge Partnership have been working with some of the well-known names in the HFT market and have observed the below mentioned trends in the market.

The most basic challenge that any trading firm faces is the volatility of market and which direction it will take. Although this factor cannot be overcome completely but in a high frequency trading space this factor can be minimized to a good extent. Data researchers in HFT play a key role here by working on market trends, which helps traders make better decisions while designing their algorithms. Markets did perform badly early this year in Feb dropping by 10% and has been slow in the month of April too but volatility is a trader’s friend and has enabled them to start making improved returns.

There are no doubts around the fact that the potential profits are huge for companies in the HFT business and is luring enough for experienced and talented IIT/IIM graduates to have an HFT start-up of their own. This brings us to another huge challenge HFT firms are facing, the increasing number of new entrants in market. This has led to a significant decrease in returns and margins. And not just that, this has also led to a fierce competition among companies for the right talent. Increases in the number of new entrants in the previous years has partly been the reason for the mergers and acquisitions we saw in the recent past, such as Virtu completing its acquisition of KCG Holdings in 2017. Some of the HFTs also played safe by diversifying their asset classes and strategies to keep their company afloat. Experts suggest that we can expect lot more consolidations of firms in the future, as the competition is likely to get fiercer.  

The key challenge has been the dearth of talent in the market. HFT companies demand the best talent from the market but there is only a finite number of people graduating from top five IITs in India. 

The HFT scenario in India is on a clear upward curve, and companies are looking at it as the provider of accessible and top tier tech talent, not just domestically but also across the Asia region. The Edge Partnership, with its strategic office network across the Asia region, sees this as an opportunity to introduce alternative and equally competitive talent into the HFT market regionally, to meet the increasing talent requirement of HFTs.