Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive.
“Our firm is made for this kind of market,” said the CEO, Douglas Cifu.
Virtu and other such trading firms, along with exchanges, emerged as early beneficiaries of the heightened volatility and volume caused by investor unease over China’s economy and a growing belief that the U.S. Federal Reserve might not raise interest rates at its meeting next month.
The U.S. stock market fell sharply in early trading, but regained most of its losses over the morning. The Dow Jones Industrial Average was down 3.9% to 15,815.49 points as of about 3:30 p.m. EDT.
“These are the kinds of days that everyone here is working for,” said Brian Donnelly, CEO and founder of the options-focused firm Volant Trading. “It’s probably our best day since” the 2010 flash crash, when markets fell sharply before recovering quickly.
Firms that make markets–meaning they simultaneously offer to buy and sell stocks, bonds, currencies or futures with the hope of collecting the difference between those prices–often perform especially well in choppy market conditions.
Such firms have been controversial among some investors and investigated by regulators because of a perception that they have an unfair advantage over other investors. High-frequency trading firms vary in their approach, but they usually rely on high-speed data connections and use algorithms to trade automatically using their own capital. They have grown in the past decade to be a major force in trading exchange-traded securities and derivatives around the world.
Executives from high-frequency trading firms have argued they provide liquidity to investors and have made trading cheaper by reducing the spreads between bids and offers across the markets.
“The very best conditions for [high-frequency trading firms] is when markets are going up and down with high volume,” said Rich Repetto, an analyst at Sandler O’Neill + Partners, L.P.
Exchanges would also benefit from the increased trading, he said. CBOE Holdings Inc. was especially well positioned because it is the only venue where investors can buy and sell the Chicago Board Options Exchange Volatility Index, or VIX, which was up more than 20% to 33.77 midafternoon.
At Virtu, Mr. Cifu started taking calls about big trading in Asia on Sunday afternoon. After going to bed at 1 a.m., he woke at 4:30 a.m. to prepare for what was promising to be a major day in Europe and the U.S. Virtu is purely focused on market making and trades on more than 200 markets around the world, including most recently on China’s commodity market.
As of Monday the firm was on track to trade in the high hundreds of millions of shares and millions of futures contracts around the world, Mr. Cifu said. It bought and sold securities and derivatives from Shanghai to Chicago.
Some high-frequency trading firms fine-tuned their algorithms Monday to handle the flood of trading and stood ready to buy from an onslaught of sellers. The other large high-frequency trading firms include Jump Trading LLC, Hudson River Trading LLC, Quantlab Financial LLC, Tower Research LLC, and Global Trading Systems Inc.
“We were catching those falling knives,” said Ari Rubenstein, co-founder of Global Trading Systems.