The days of latency arbitrage has hit the wall of physics, and there is little the industry can do to address the issue, according to a panel discussion hosted by New York University and Security and Exchange Commission's Division of Economic and Risk Analysis and Division of Trading and Markets.
"I think we have squeezed just about as much as we can out of the speed game," said John Ramsay, chief market policy officer at the Investors Exchange (IEX).
The industry should measure trading in microseconds and not think of nanosecond even if exchanges time stamp matches in nanoseconds, according to fellow panelist Adam Nunes, head of business development at Hudson River Trading.
"It doesn't mean that they can match orders in nanoseconds," he said. "We are in a microsecond world."
Nunes also noted that additional consolidation in the high-frequency trading space is likely to continue, especially as more trading firms gain access to enabling technologies, such as microwave networks.
"With some of the providers, you can log into a website, click 'I want microwave data here and here,' and get it," he added.
When asked by Brett Redfearn, director of the Division of Markets and Trading at the SEC, whether hitting such a latency performance plateau would drive HFT firms into other asset classes and geographies, Nunes responded that niche firms already had made moves.
"From my perspective, I think that scale is important and will continue to be important," he said. "Thinking about diversifying your strategies and how you approach trading will be increasingly important."
Technology change will not go away, added Ramsay. "I think there will be opportunities for using technology whether it is artificial intelligence or machine learning, to inform and affect the way that trading happens."
Whether continued HFT consolidation is good or bad for the industry is hard to tell, according to fellow panelist Terrence Hendershott, a professor in finance & operations and information technology at UC Berkeley’s Haas School of Business.
"On the one hand, fewer HFTs means that the remaining firms can amortize their fixed costs over a larger trading volume, he suggested. "On the other hand, it is like competition in the exchange space: How much is a good thing? If there is too much consolidation, they start to have too much market power."
Hendershott concluded that much depends on the decisions the Commission will need to make on what sort of market structures it will allow.