High-Frequency Traders Feast on Volatile Market

Profits climb sharply with help from sophisticated computer algorithms and strategies that take advantage of rips and dips; ‘a quarter for the record books’

By Scott Patterson and Alexander Osipovich

PHOTO ILLUSTRATION BY EMIL LENDOF/THE WALL STREET JOURNAL; PHOTOS: ISTOCK


Fast-trading investors have made big profits during the market’s volatility, with strategies ranging from sophisticated computer algorithms to ones as simple as “selling the rips and buying the dips.”

High-frequency traders, which typically deploy sophisticated algorithms and powerful computers to move in and out of markets at lightning speeds, tend to do well when markets are volatile.

Virtu Financial Inc., one of the largest high-speed traders, last week said it expects to post trading income of between $509 million and $519 million in the first quarter, more than double the amount from the same period last year and its highest quarterly trading income since the company went public in 2015.


Virtu’s results are “a quarter for the record books,” Piper Sandler analyst Richard Repetto wrote in a note. Virtu’s stock is up 41% this year while the S&P 500 is down 21%. The only other publicly traded high-speed trading firm, Amsterdam-based Flow Traders NV, is up 28% year to date.

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High-frequency firms have struggled in recent years amid a period of low volatility and steadily rising markets. Still, they are estimated to account for around half the trading volume of the U.S. stock market, having largely replaced the floor traders who once controlled exchanges’ ebb and flow. Virtu is a designated market maker for the New York Stock Exchange.

Like market makers, high-speed traders often make money on the difference between buy and sell orders, known as the spread, by selling high and buying low as stocks tick up and down. Spreads in heavily traded stocks, such as Apple Inc., which are typically 1 or 2 cents, have ballooned to 30 cents or more in recent weeks because of the highly volatile, fast-moving markets. 

While wide spreads indicate riskier market conditions, firms that can exploit the difference can earn sizable profits.

Some plain-vanilla rapid-trading strategies are also faring well, traders said.

“Our traders are having some of their best months in years,” said Dennis Dick, a trader at Bright Trading, a Las Vegas broker dealer that provides computer-driven trading platforms for day traders. He said one of the strategies that has worked best is “selling the rips and buying the dips”—selling stocks after big moves higher and buying after sharp downturns.

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Mr. Dick said traders are looking for stocks that get pushed too low or too high during big market swings that drag the entire market up or down. Right now, he said, many are buying stocks that are low in debt and selling stocks with lots of debt that will likely suffer as the economy deteriorates. 

If a low-debt stock gets pummeled during a big selloff, traders will swoop in and buy, expecting it to rebound.

Thomas Peterffy, chairman of Interactive Brokers Group, an electronic brokerage popular among day traders, said daily volume handled by his firm has more than doubled to more than two million trades a day in the past three weeks. New accounts are also surging, he said, a sign that people confined to their homes might be turning to trading.

The losers among the computerized trading strategies, at least so far, are those that bet on longstanding correlations between different financial instruments. Such dislocations can cause losses in statistical arbitrage, or stat arb, strategies.

Since the financial crisis, the Cboe Volatility Index — also known as the VIX — has been considered an early warning signal for market distress. But how does it work? WSJ explains. Photo Composite: Tom McCarten for The Wall Street Journal.

Among the correlations that broke down during the worst of the selloff last week were between stocks and Treasury-bond prices, which usually move in opposite directions. But during the recent selloff, investors fled both. “Treasury selloffs on big down equity days mean that correlation is finally getting challenged,” said Pav Sethi, chief investment officer at Gladius Capital Management, a Chicago trading firm.


Mr. Sethi said another breakdown in correlations has been between stocks and a broad measure of market volatility, the Cboe Volatility Index, or VIX, known as the fear index. 

Typically the VIX rises when stocks fall as fear spreads through Wall Street, and vice versa. While the VIX soared to record levels as the market plunged in recent weeks, the link hasn’t always worked as expected.

Such haywire trading patterns mean trouble for quantitative investment firms, said David Magerman, a former executive at Renaissance Technologies, one of the biggest and most successful of what are known as quant firms. 

The models the firms deploy, often based on years of returns, get scrambled as investors head for the exits all at once.

“The big jolts to the markets are a coin flip for quant funds,” Mr. Magerman said. “Once the markets calm…quant funds that are still around should clean up.”

Although volatility has mostly benefited electronic trading firms, “you can still be caught by surprise,” said Rob Creamer, CEO of Chicago-based firm Geneva Trading. 

“There are a lot of markets that have been so dislocated that it’s been incredibly challenging.”

One victim of the extreme moves was Ronin Capital LLC, a Chicago-based trading firm that incurred hundreds of millions of dollars in losses on strategies tied to the VIX, people familiar with the matter said. Futures-exchange operator CME Group Inc. said March 20 that it auctioned off some of Ronin’s portfolios after it failed to meet capital requirements.

A person reached at Ronin’s office didn’t respond to requests for comment.

Some quick-draw traders that don’t use complex algorithms are also benefiting from the market’s swings. Daniel Schlaepfer, CEO of Select Vantage, which has more than 2,000 day traders world-wide, said his firm’s top 10 record days have occurred this month. 

Daily trading volumes across the firm have doubled since markets began their slide, he said.

Traders at Select Vantage typically hold stocks for less than 15 minutes and never sit on positions overnight, he said. 

In ways, the firm acts like a vast, human-driven high-frequency firm that rapidly buys and sells stocks throughout the day.

“We’re way up. We’re up full-force,” Mr. Schlaepfer said. 

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