Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

When Goldman Sachs and Bank of America Stumble, High-Frequency Trading Steals Spotlight

Today Goldman Sachs reported profit of $1.05 billion, a weak showing that reflected the firm’s costly move to reduce risk and cut back trading activities. As reported by The New York Times, the second-quarter profit of $1.85 a share fell short of analysts’ expectations of $2.27 a share, according to Thomson Reuters. The fixed-income department took a big hit in the quarter. The unit, which includes fixed income, currency and commodities client execution, logged net revenue of $1.60 billion, 53 percent lower than in the second quarter of 2010; results were down in mortgages, commodities and interest rate products.

Later The Wall Street Journal reported that Bank of America posted its third loss in four quarters, as mortgage-related problems continued to overshadow any improvements in other operations. Loans at the bank failed to grow from the prior year. Three weeks ago the bank had announced a $8.5 billion proposed settlement with a group of high-profile institutional investors that lost money on mortgage-backed securities purchased before the collapse of the housing market. That and various other mortgage-related hits, totaling $20.7 billion in charges before taxes, were the reason for the quarter's loss. The loss came in at $8.83 billion, compared with prior-year net income of $3.12 billion.
The mood was certainly different at last May’s High-Frequency Trading Leaders Forum 2011 (http://www.HFTLeadersForum.com) in New York, where traders, quants and investors were discussing being consistently profitable. Manoj Narang, Chief Executive Officer of Tradeworx, commented that consistency is what makes high-frequency trading so appealing. A successful high-frequency trading strategy will generally have a Sharpe ratio higher than four, and a successful high-frequency trading operation which runs multiple high-frequency strategies will generally have a double-digit Sharpe ratio. Such high Sharpe ratios are unheard of in traditional investment styles ran by major institutions. To get this high level of consistency, you must exploit the ‘law of large numbers’, which is the most fundamental principle of statistics, to the maximum possible degree. That means making as many independent bets as possible within a single trading day. In order to do that with a finite set of tradable securities, you must turn your positions over very quickly. So, the most consistently profitable high-frequency trading strategies are therefore the ones that have the shortest holding periods. Dave Cummings, founder of Tradebot,, one of the biggest high-frequency traders around, told students in 2008 that his firm, had not had a losing day in four years,. Truthfully, that is just how the law of large numbers works. Because the speed market makers can calculate where they want their orders placed much more accurately and quickly than their human counter-parts, they are able to profit from razor thin margins at high volume and offer much tighter spreads, which helps everyone.

Now the world's most influential practitioners and experts in high-frequency trading are set to return to High-Frequency Trading Leaders Forum 2011, to be held in four key geographies for the industry:

·       High-Frequency Trading Leaders Forum 2011 Hong Kong , "How Speed Traders Leverage Cutting-Edge Strategies in the Post-Flash Crash World" (http://hftleadersforumhongkong.eventbrite.com), September, 19-21, Hong Kong

·       High-Frequency Trading Leaders Forum 2011 Chicago, "How Speed Traders Leverage Cutting-Edge Strategies in the Post-Flash Crash World" (http://hftleadersforumchicago.eventbrite.com), October 3-5, Chicago

·       High-Frequency Trading Leaders Forum 2011 Sao Paulo, "How Speed Traders Leverage Cutting-Edge Strategies in the Post-Flash Crash World" (http://hftleadersforumsaopaulo.eventbrite.com), October 24-26, Sao Paulo, Brazil

·       High-Frequency Trading Leaders Forum 2011 Singapore, "How Speed Traders Leverage Cutting-Edge Strategies in the Post-Flash Crash World" (http://hftleadersforumsingapore.eventbrite.com), November 13-15, Singapore

High-Frequency Trading Leaders Forum 2011 is produced by Golden Networking (http://www.goldennetworking.net), the premier networking community for business executives, entrepreneurs and investors. Panelists, speakers and sponsors are invited to contact Golden Networking by sending an email to info@goldennetworking.net. Golden Networking has been frequently featured in the press, including recent articles in The Wall Street Journal, The New York Times, Los Angeles Times and Reuters.

# # #