Risk and Return in High-Frequency Trading

We study performance, concentration, and competition in the high-frequency trading (HFT) industry. Small differences in HFT firms’ latencies are associated with large differences in trading revenues. The fastest HFT firms capture a higher quantity of profitable trades and perform better in strategies such as liquidity provision and cross-market arbitrage. Consistent with theory suggesting that competition on relative latency leads to a concentrated industry, concentration of HFT revenues and trading volume is high and non-declining over the five-year sample. New entrants are typically slower, earn lower revenues and are more likely to exit, which likely reinforces concentration in the HFT industry.

The paper can be found at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2433118