Risk and Return in High-Frequency Trading

We study performance, concentration, and competition in the high-frequency trading (HFT) industry. Small differences in HFT firms’ latencies are associated with large differences in trading revenues. The fastest HFT firms capture a higher quantity of profitable trades and perform better in strategies such as liquidity provision and cross-market arbitrage. Consistent with theory suggesting that competition on relative latency leads to a concentrated industry, concentration of HFT revenues and trading volume is high and non-declining over the five-year sample. New entrants are typically slower, earn lower revenues and are more likely to exit, which likely reinforces concentration in the HFT industry.