Hedge fund slump and regulation could hit US prop shops

While US high-frequency traders enjoyed a bumper year in 2008 and now account for the majority of average daily trading volume in the US, declining hedge funds volumes and regulatory change could threaten future performance, according to Sang Lee, co-founder of research consultancy Aite Group.

A new report from Aite, ‘New world order: the high frequency trading community and its impact on market structure’, found that high-frequency traders accounted for more that 60% of average daily trading volume in the US in 2008 and estimates this will rise to around 70% in 2009. It defined high-frequency traders as: market makers relying on automated trading technology; low-latency agency brokers; statistical arbitrage hedge funds; and high-frequency proprietary trading firms – so called ‘prop shops’.

Prop shops in particular thrived amid the market turmoil of 2008. “All of the prop shops did incredibly well last year, but the hedge fund side has taken a hit and it will be interesting to see what impact that has on the overall market,” Lee told theTRADEnews.com. “Maintaining a certain level of volume in the market is going to be very important. If that volume goes away, it will not be an ideal situation for some of these high-frequency trading firms.”