The US futures markets is set to be the next battleground for high frequency traders, as rapid uptake of algorithmic strategies leads to a surge in the proportion of volume traded on an automated basis, according to Tabb Group.
Tabb forecasts that total future volumes traded on an automated basis will increase to nearly 60% by the end of 2010, up from 43% at the end of the third quarter, 2009, as electronic market makers, hedge funds and long-only asset managers forge algorithmic trading strategies with futures woven deep into their core
This surge in demand means brokers, exchanges and software vendors need to deliver automation to ensure the long-term growth of the futures markets, which, through new levels of speed, liquidity and strategy, are now on a par with cash equities, says Tabb.
The main drivers of this increase in futures volume executed algorithmically are the growth of high-speed trading, adoption of automation by hedge funds, and traditional managers shifting orders from traditional high-touch to low-touch channels, says report author Paul Rowady.
He says high frequency trading in futures is a natural extension of the expertise accumulated in the equities market but it is surprising how quickly high speed players have moved in.
"Having the expertise to interact quickly, efficiently and intelligently with the futures markets, while maintaining close harmony with other asset-class positions, is now a fundamental competitive imperative," says Rowady.
Automation of the entire alpha "assembly line" is where the competitive advantages now reside, he says, and today's market pioneers are focusing intently on rapid data assimilation, alpha discovery and strategy deployment in concert with low-latency execution as a key requirement.
High frequency futures trading is already a mainstay in Chicago prop shops and elite East Coast hedge funds while many of the leading brokers have extended their execution algo suites and advanced technical infrastructures to the broader hedge fund community.
The trade automation now firmly embedded in the futures markets will provide these markets with continued impressive growth, even in bearish markets, predicts Rowady. However, the biggest impact will be seen when traditional asset managers adopt automation for accessing the futures market.
Says Rowady: "Unlike their more proprietary peers, these players will need to lean heavily on a short, but expanding, list of brokers capable of offering advanced algorithmic capabilities across asset classes, as well as vendors capable of seamlessly integrating futures algorithms with existing systems and ultimately a consistent, consolidated multi-asset market view."