Think JPM’s zero trading day losses in 2013 was impressive? Prepare to have your mind blown. The chart below shows the chart of daily net trading income by High Frequency Trading titan Virtu, taken from its just filed IPO prospectus. The punchline: in 4 years of trading Virtu has had one, one, day in which it lost money.
From the S-1: “The chart below illustrates our daily Adjusted Net Trading Income from January 1, 2009 through December 31, 2013. As a result of our real-time risk management strategy and technology, we had only one losing trading day during the period depicted, a total of 1,238 trading days. “
Let that sink in: one trading loss day and 1237 days of profits. And that, ladies and gentlemen, is the Holy Grail of the New Normal broken, manipulated markets.
How is this statistical anomaly possible? For those who have been following our narrative on the market-manipulating, endless crime that is HFT will know all too well. When you have a “strategy” whose only mission is to frontrun order flow, and scalp pennies from every market order – that would be billions of market orders in a period of four years – there is no risk, as confirmed by the chart above. Furthermore, since all HFT really does is accentuate momentum but making the bid chase NBBO ever higher, in a market that is manipulated top down by the Fed itself, all HFTs really do is simply enable the Fed’s policy at the micro level, and thus such crimes are not only ignored, but welcomed by the New Normal overlords.
It also explains why fundamentals haven’t mattered in years – the only thing that does matter is to quickly open one’s own HFT stop, frontrun as much order flow as possible, and scalp pennies ahead of the bid and ask… billions and billions of times, leading to the statistically improbable chart pictured above.
This, ladies and gentlemen, is why retail has given up – when companies want to go public and no longer even hide the “secret sauce” which confirms beyond a reasonable doubt that there is a two-tier market: one in which the HFTs just never lose, and one for everyone else, well: who would want to play in a casino so explicitly rigged?
And while there are countless losers, there are also few winners: such as the billionaire founder of Virtu Vincent Viola, who was recently selling his NYC mansion for $114 million, who just made $270 million in 2013 adjusted EBITDA courtesy of the Virtu “can’t lose” money machine.
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There is one last thing to note – in 2013 Virtu made the least amount of trading days in its most successful bucket over the past 4 years, the $1.3-$1.5 million daily net income range, when “only” 57 days made that amount of money, compared to 85 in 2012 and 168 in 2009-2011. What stands out is that Virtu is increasingly making more money in the higher net income buckets. HFT by definition makes the most money on the low end of the distribution – the fact that it made increasingly more profits in the higher bucket indicates that the traditional strategy is no longer working, and instead Virtu has been making greater profits not thanks to its organic business model but because it has been taking market share away from other, less profitable firms. This works in the short-term but always fails over the longer run, especially if market volumes continue to collapse as they have for the past five years.
This also explains why the gigaHFT firm has finally stepped out of the shadows and its founder and equity owners are finally willing to cash out – the music is slowly ending. Even for those who have discovered the Holy Grail of the New Normal market.