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The revelation came shortly before publication
of Michael Lewis' "Flash Boys," about how Wall Street is rigged
to the benefit of high-speed traders. Public reaction to the
book dashed Virtu's plans to go public at the time.
Now, an astrophysicist who is fascinated with order of magnitude
problems has determined that a big part of Virtu's seeming Midas
touch is because the number of its trades that break even are
about the same as its losses.
Virtu has said it wins 51 percent or 52 percent of its trades,
leading most people to figure the remainder are losses. That
begs the question how the firm, considered one of the most
efficient and profitable on Wall Street, could be doing so well.
This way of thinking also initially sidetracked Gregory
Laughlin, chairman of the department of Astronomy and
Astrophysics at the University of California, Santa Cruz.
"I did my little calculation, it wasn't working out. I thought
to myself, am I making a mistake?" Laughlin said.
Laughlin soon realized that not all trades will be losses or
wins, but will break even or be slightly lower because of
exchange and regulatory fees.
Laughlin wrote a four-page essay using data from Virtu's
prospectus in which he calculated the firm makes about 0.027
cents per share on a trade, and that income from high-frequency
trading in the U.S. stock market is about $2.5 billion a year.
Laughlin, who said he has thought deeply about the stock
market's structure for several years, said the chances that
Virtu suffers a single day of losses at "effectively zero."
(Reporting by Herbert Lash. Editing by Andre Grenon)
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