High Frequency Trading: Can Any Stock Replace Citigroup?

Citigroup Building
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Citigroup Building

Can any stock replace Citigroup at the top of the volume ticker?

Citigroup stock has been the darling of the high frequency trading (HFT) community. Big volume, big float, low volatility, low price—perfect attributes for a stock that is being traded for the sake of being traded, not for any kind of investment. As CNBC’s Bob Pisanihas been pointing out today—the goal of all this trading was at least in part, a rebate paid by exchanges to traders that sent volume their way.

Manoj Narang, Tradeworx Founder and CEO and perhaps… the personification of the high frequency trading market agrees.

“Rebate-capture on “C” is clearly a "bread-and-butter" trade for lots of HFT firms,” he says.

“There is no such thing as "taking its place", because HFTs are already trading other stocks— presumably at maximal levels—based on their suitability for such a strategy.”

Besides Citi, some of the most actively traded stocks in the U.S. include Bank of America , Ford and Sirius . But, none have all of the characteristics most desirable in a high frequency trading target in quite the way Citigroup does.

“Suitability” Narang says, “comes from low price and high volume. Low price is desirable because rebates are done on a PER SHARE basis, rather than on a percent-of-price basis. Thus, stocks with low price have a very high rebate as a percentage of their volatility (i.e. very high reward:risk ratio).”

”Citigroup exemplified both of these characteristics—extremely high share volume and extremely low price—in a way no other stock does. This was really a one-time anomaly created by the financial crisis, so it is not likely to be replicated in the future.”

But, don’t expect the high frequency traders to close up shop and go home. Over time, market watchers do expect another stock will become the "it" stock of the industry.


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