profits in August 2010, while Mixed and Passive HFTs earn significantly less: only $19,466 and $2,461per day, respectively.These stylized facts mask a wide dispersion of profitability on the individual account level, inparticular that the distribution of profits is highly concentrated toward a small number of firms, inparticular towards Aggressive HFTs. Furthermore, we find that the distribution of total profits acrossHFT firms is widest within the Aggressive HFT category, with profits highly concentrated toward asmall number of these firms; in contrast, Passive HFTs have less dispersion and lower profits. WhileHFTs bear some risk, they generate unusually high average Sharpe ratios in the range of 3 to 20, with amedian of 4.5 across firms in August 2010.Next we study how HFTs generate these profits.
We decompose traders’
profits by their tradingpartners. We find that
profits are mainly derived from Opportunistic traders, but also to asmaller extent from Fundamental (institutional) traders, Small (retail) traders, and Non-HFT MarketMakers. Second, we perform a spectral analysis
on HFT firms’ profits. We find
that Aggressive HFTsmake profits mainly on positions that they hold in the 1,000
100,000 transactions range, while Mixedand Passive HFTs lose money in this range but earn profits in the very-short term (the 1
1,000transactions range), perhaps reflecting the capturing of the bid-ask spread. We evaluate further by considering the performance of individual firms. While the earlierresults show that HFTs on average outperform, the results do not track a single HFT firm. It could be
that while HFTs as a whole outperform, each particular HFT firm’s profits are random. We test forpersistence in profits at the firm level. We find that a firm’s profits
yesterday positively predict itsprofits today, in addition to its profits even months later. Persistent profits over time suggest that
something other than luck is driving a firm’s performance.
Persistent performance may lead toconcentration as strongly performing firms will continue to perform well, but less successful firms willexit the industry.Next we analyze the profitability of new entrants and find they are not as profitable as existingfirms. In addition, they have a higher probability of exiting the market. Something other than chance