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The Trading Mesh

GETCO Knight Deal Signals End to HFT Profitability

Wed, 27 Feb 2013 13:28:21 GMT           

by Candyce Edelen


As you're probably aware, GETCO - one of the world's largest high frequency trading (HFT) prop shops, is buying Knight Capital. This came about after Knight nearly collapsed when a technical glitch on August 1, 2012 caused it to lose $440 million. While the acquisition is clearly opportunistic, since Knight was so crippled after its August losses, the move also signals GETCO's lack of confidence in the long term profitability of the HFT model, particularly in equities.


Sharply declining profits in HFT

GETCO and Knight are two of the largest market makers on the New York Stock Exchange. But apparently, GETCO's decision to purchase Knight is based partly on sharply declining profits in high frequency trading which is driving a decision to diversify away from pure prop trading. Knight is a market maker with substantial retail flow. They get huge equities flow from retail brokerages like Fidelity, E*Trade and TD Ameritrade. According to Traders, Knight makes markets in some 19,000 U.S. equities, handling 3.0 billion shares a day.


Is the HFT model running out of steam?

According to Traders Magazine, "GETCO, which began as a prop shop, intends to use Knight Capital Group's wholesaling connections along with large retail order flow to become a trading superpower. That, it hopes, will...attract new institutional clients." So if they're looking to attract institutional flow, then we can conclude that the high speed market making business isn't expected to make much of a recovery.


According to GETCO's public statements about the merger, they're looking "leverage Knight's deep customer franchise and GETCO's leading edge technology platform" to become a leader in marketing making and agency execution. If that's the case, then is the regulatory and congressional focus on curbing HFT in equities too late? Will it curb itself naturally as the business model runs out of steam? You can read the Trader's Magazine story here. What's your take? Do you think HFT in the equities markets has a healthy outlook?

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