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Blame High Frequency Trading? No.

Monday, 8 Aug 2011 | 7:35 PM ET

More on high frequency trading (HFT). I called a fairly large HFT toward the close and asked how much money he had made today.

"It's pretty simple," he said. "About 53 percent of my trades are winners, 47 percent are losers...we make a penny [gross revenue] on each winner, so you can figure out my profits if you know the volume...but on any given trade, it's a coin toss as to whether we make anything."

As for the volume...his firm was trading about 400 million shares going into the close (likely his biggest volume day ever).

You also need to know what the cost of trading is to figure out profits. This high-frequency trader estimates he is making 6 cents profit per 100 shares. In that case, 6 cents per 100 shares x 400 million shares = $240,000 profit. A very good day indeed, but a very rare one.

Man vs. Machine - A CNBC Special Report
Man vs. Machine - A CNBC Special Report

That's on the low side. Tabb Group, which tracks high frequency trading, estimates that the typical HFT makes about 15 to 20 cents profit per 100 shares.

More importantly: is he and other HFTs exacerbating the downtrend? "In any 5 minute period, I am buying as much as I will sell," he said. "By the end of the day, I will be flat...if my selling pushes the market down, why didn't my buying push it back up?"

"All we are doing is facilitating immediacy. Right now is the time when long term investors want liquidity; right now it is profitable to be a provider of that."

As for the profitability of HFTs, it has not been a great year for trading in cash equities. Volume and volatility — the core around which HFT profit is based — have been terrible until the past two weeks, here and in Europe. Last week, Getco — one of the largest firms engaged in HFT (as well as market making), announced that its European trading profits were down 11 percent in 2010 due to lower trading volumes. This year is certainly worse than last — volumes are much lower.

Tabb Group also believes that profits will be down this year for HFTs. Their trading revenue numbers are as follows: 2009: $7.2 billion, 2010: $5.7 billion, 2011 (est.) $4.8 billion.

No one should shed any tears for these guys — on the whole, this is still a profitable business. I have no particular sympathy for these guys either — but with many prop desks shutting down or downsizing, and retail guys sitting on the sideline, who exactly should anyone be trading with?

Looking around and blaming high frequency trading for the market's problems is not the way out of this mess.

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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