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According to the Wall Street Journal (non-paywalled version), hedge funds run by quantitative analysts ("quants"), some of whom are utilizing supercomputers, are now dominating stock trading:
In case you didn't know, The Quants Run Wall Street Now, or so says a headline in today's Wall Street Journal. Quant-run hedge funds now control the largest share (27 percent) of stock trading of any investor type, according to the article. That's up from 2010 when quant-based trading was tied with bank trades for the bottom share. Algorithm-based trading is, of course, the 'sine qua non' of hedge funds and has helped lift them to the top of the investing crowd. [...]
Guggenheim Partners LLC built what it calls a "supercomputing cluster" for $1 million at the Lawrence Berkeley National Laboratory in California to help crunch numbers for Guggenheim's quant investment funds, says Marcos Lopez de Prado, a Guggenheim senior managing director. Electricity for the computers costs another $1 million a year.
(Score: 2) by bootsy on Wednesday May 24 2017, @12:18PM (1 child)
Of course Hedge Funds and Fin Tech start ups will beat banks. They don't have to spend 70% of their IT budget on keeping up with Compliance rules such as MIFID II, Dodd Frank, Sarbanes Oxley etc. The legal requirement are necessary to operate as a bank but they add no business advantage whatsoever.
Hedge Funds cannot act as market makers though so who will add liquidity and hold onto positions to create a flow business?
They also often trade derivatives that give leverage and mean they don't need capital funding upfront. When it works it is great. When it doesn't you can get a Long Term Capital Management situation with their leverage taking down the whole system.
(Score: 1) by khallow on Thursday May 25 2017, @04:15AM
Well, despite your assertion, hedge funds are an obvious choice for market maker. You have to remember that there are two kinds of market makers. There's the official ones who are tasked with providing orders in order to provide liquidity. Those guys are almost useless. Then there's the huge horde of traders from day traders on up to high frequency trade (HFT) who frequently trade stock, but don't hold onto it. Those guys are market makers too and provide far more liquidity.
You can have highly leveraged derivatives without requiring margin - for example, a derivative that is worth $1 with some small increase or better in some security's trade price, and $0 otherwise is highly leveraged, but you'll never lose more than the money you put into it. Similarly, the people on the other side of that particular bet are similarly limited in what they can lose. It's when you can potentially lose far more than you own, that things get interesting in the LTCM kind of way.