High-frequency trading will expand its share of the U.S. stock market by almost a third in the next year, undeterred by planned regulation, according to a report by Celent, a financial and consulting firm in Boston.
The practice, in which hedge funds and other firms use computers to execute orders in milliseconds to profit from tiny price discrepancies, will account for 54 percent of the market by the fourth quarter of next year, Celent said in the report today. The company estimates high frequency trading now accounts for 42 percent of the market, less than the 61 percent share in 2009 estimated by Tabb Group LLC, a New York-based consultant.
"HFT has been accepted as an irreversible trading trend in the U.S.," wrote David Easthope, a San Francisco-based analyst. "The growth will be driven by an expansion of quantitative hedge fund strategies and the growth of independent proprietary firms."
The U.S. Securities and Exchange Commission said on Dec. 3 that it may propose new restrictions on high speed trading as soon as next month, after lawmakers including Democratic Senators Charles Schumer and Ted Kaufman pressed for a review of whether it gives unfair advantages to firms with the fastest technology.
"We expect this process will lead to some market refinements but not a wholesale review and alteration of U.S. equities market structure," Easthope wrote. "There is no way to put the technology genie (and hence the market innovations) back in the bottle."
Proprietary trading firms account for the largest portion of high frequency trades at 48 percent, followed by hedge funds with 28 percent and automated market makers at 24 percent, according to the Celent report.
Celent said benefits of high frequency trading include more liquidity, tighter spreads in the most available stocks and more volume. Conversely, the practice increases the volatility of less liquid stocks and can hurt market participants through adverse selection.