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Trading on Speed

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The U.S. stock market conjures an image of adrenaline-fueled traders, yelling. That image is a memory. Now computers do most of the trading, silently — and very, very quickly. American equities change hands on about 50 mostly automated markets that exist in data centers in New Jersey and elsewhere. Microsecond reaction times have lowered investors’ costs and bestowed an advantage on trading firms that are primed for speed, while increasing the risk of errors that paralyze trading and shake investor confidence. But even as concern has grown over so-called flash crashes, high-frequency trading companies have gone from disruptive newcomers to established players in futures, currency and Treasury markets as well as stocks and even bitcoin. The future is not likely to be slow. 

The new problem facing high-speed traders is that when everybody’s fast, there’s less profit to be made.  Despite a chorus of critics arguing high-frequency trading firms have an unfair advantage, the traders  face new challenges in less turbulent markets with low trading volume. Market makers in U.S. stocks earned $1.1 billion in revenue in 2016, compared with $7.2 billion in 2009, according to estimates from Tabb Group LLC. The pressure has forced them to branch out. Virtu Financial Inc. purchased rival KCG Holdings Inc. for about $1.3 billion, adding a company with more than five times as many as employees, including a salesforce that Virtu plans to use to persuade other traders to license its technology. Global Trading Systems LLC bought a business on the floor of the New York Stock Exchange, which it expects to use as a jumping-off point to sell services directly to companies whose stock they manage. Others are retreating from the proprietary trading business altogether. Teza Technologies LLC swiveled to focus on its hedge fund, selling some assets to Quantlab Financial Inc. A broker that helped invent electronic trading, Interactive Brokers Group Inc., sold its options market-making business. Chopper Trading LLC sold assets to DRW Holdings.