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[ M A R K E T A N A LY S I S | H F T ] “It has become more competitive for the HFT industry in general, and I wouldn’t be surprised to see more consolidation in that space.” CARL GILMORE, PRESIDENT, INTEGRITAS FINANCIAL CONSULTING. firms that are struggling will have to link up to find niches in the market to be profitable. This could be done by turning to a money managing approach.” Instead, gaining that competitive edge is shifting to data analytics, with a focus on extracting infor- mation from the vast flow of data generated in the derivatives and equities markets. Craig Pirrong, a professor at Huston University, ar- gued in a recent blog: “the margin for innovation will shift from hard- ware to data analytics software.” With this, HFT could turn away from its traditional arbi- trage trading models to more of a ‘quantamental trading’ model, which combines fundamental and algo-driven quantitative trading. This will involve the adoption of big data techniques and the use of predictive analytics tools in order to generate alpha. However, Peter Farley, senior marketing strategist for capital markets at Misys, argues that this might not be the most profitable tactic. “Many of these more fundamen- tal-led strategies are already the preferred tools of many hedge funds and it is in danger of be- coming a crowded (and hence less profitable) space. Profits from HFT are estimated to have peaked for the industry at close to $5 billion in 2009. It is thought that now it is probably less than a billion dollars, spread over many more players,” he says. Other market participants are seeing the increasing number of HFT mergers as the latest phase in the US financial markets, with consolidation in the HFT space a reflection of where business mod- els are in the innovation cycle. “It is in the maturity phase where M&A will happen to reduce cost, increase market share, and acquire talent to help diversify into new markets,” says Rob D’Arco, CEO of Rival Systems. “It is a natural process, and in changing business models, the most successful firms have a di- verse portfolio of strategies across assets classes. HFTs want to fur- ther capitalise on their investment in technology by diversifying into new products such as options and Issue 52 TheTradeNews.com 73