The closure of IMC’s Hong Kong trading desk late last month has highlighted the cost pressures faced by high-frequency trading firms. The company is following an emerging trend of moving to a model in which one office serves multiple markets across one time-zone.
Traders recently let go by the Amsterdam-based firm told AsianInvestor that IMC had made two-thirds of its Hong Kong staff redundant, or about 40 of a 60-strong headcount. Those exiting were trading Hong Kong-listed options, as well as operations and support staff.
The remainder, mostly heads of trading and risk management executives, are being reassigned to positions in the firm’s Sydney or Amsterdam offices.
IMC management confirms that some staff in Hong Kong were offered jobs in Sydney, but declined. According to the firm’s 2010 annual report, there were 44 staff under the high frequency derivatives market-making team in Sydney. After the merger that will increase to about 70.
But Brian Hitchcock, managing director for IMC Asia-Pacific based in Sydney, denies that the decision to scale back in Hong Kong was a cost-saving measure.
He tells AsianInvestor the firm has been trying to merge the two offices into one virtual office since 2009. He has been overseeing both entities, but says over time the structure proved challenging.
"We found that the best people are not always sitting together in the same physical location, which is something that is very important if you want to have good communication within the team," he adds. "We want to have the best people sitting together."
He confirms that IMC's Hong Kong office will be reduced to a team of three over time, comprising a compliance manager, an executive responsible for finance and a responsible officer.
In Hong Kong, high-frequency market-makers are required to have just one responsible officer present in the city to be able to trade Hong Kong-listed stocks or derivatives.
But Hitchcock adds that IMC has no plans to reduce trading volume on Hong Kong-listed options. "By having everybody in the same location, I believe that our market share in Hong Kong-listed options trading will increase," he says. "We remain committed to the Hong Kong market."
Industry insiders confirm discussions had been going on for months between IMC's Sydney and Hong Kong office about streamlining the two trading desks into one. They indicate that office politics created tension between senior management of the two camps.
The Hong Kong trading desk closure makes IMC the latest to follow the remote-trading operating model, with firms such as Tibra Capital and Optiver also trading Hong Kong-listed derivatives out of their Australia hubs, notes one industry source.
“Many of the high frequency trading firms that were originated from options trading firms don’t have a real Hong Kong office,” says an industry player based in Hong Kong.
“It means that if connectivity is disrupted between Hong Kong and Sydney, for example, no one will be on the ground to maintain contact with the local exchange or continue with the trading.”
Hong Kong has long been viewed as an unattractive market for high-frequency traders. Industry players note that the stamp duty imposed on each cash equity trade, at 0.2% shared between buyer and seller, makes it prohibitively expensive for traders who seek to capture alpha via a high number of low-latency orders.
Ashley Alder, chief executive of the Securities and Futures Commission, said last year that it had detected a style of trading “very close to HFT” in the warrants market, where no stamp duty applies, with about 28% of warrants market turnover being done in such high-frequency fashion.
He noted the SFC is seeking to determine if HFT drives liquidity away from the Hong Kong Stock Exchange onto alternative dark-pool venues, and whether its high-speed nature is detrimental to the interests of retail investors, among others. He confirmed that the SFC is monitoring global developments closely.
At present, the 15 licensed dark pool operators in Hong Kong are understood to account for just 2% of total equities market turnover.
According to Hong Kong Exchanges and Clearing there are eight proprietary trading firms that provide liquidity on listed stock options and products traded on the Hong Kong Futures Exchange. One industry source says many high-frequency market-makers trade the HK market offshore.
Former employees of IMC, which does not publish operating figures on its website, say the firm profited most from trading derivatives tracking the Nikkei and Kospi indices. “Hong Kong trading has never been a big part of its Asia derivatives market-making business,” says one.
So from a cost perspective it makes sense for IMC to consolidate into a model where one office serves multiple markets across one time-zone, even though the firm denies cost is the reason.
IMC started its Hong Kong trading desk in 2006. Globally, it employs 600 staff.