Deal would combine one of the largest U.S. high-frequency traders with Chicago rival Hudson River Trading, one of the largest U.S. high-speed traders, is exploring a deal to buy rival Sun Trading. PHOTO: BRYAN R. SMITH/AGENCE FRANCE-PRESSE/GETTY IMAGES By Alexander Osipovich Updated Sept. 29, 2017 2:00 p.m. ET 0 COMMENTS Hudson River Trading LLC, one of the largest U.S. high-speed traders, is exploring a deal to buy rival Sun Trading LLC, people familiar with the situation said, as the once-lucrative business of high-frequency trading is pressured by low volatility and rising costs. New York-based Hudson River Trading, which has said it trades around 5% of the shares that change hands in U.S. equities markets each day, was among the firms that showed interest in Sun Trading after the Chicago-based firm put itself up for sale in recent months, the people said. No deal has been finalized, and it is possible that talks between the companies could fall through. Sun Trading Chief Financial Officer Michael Deaton declined to comment in a telephone call. He and other Sun Trading executives didn’t respond to subsequent calls or emails. At least four other U.S. and international trading firms had earlier eyed a purchase of Sun Trading, which hired boutique investment bank Keefe, Bruyette & Woods Inc. to run the sale process, other people with knowledge of the process said. A KBW spokesman declined to comment. High-frequency traders make money by using sophisticated computer algorithms to zip in and out of stocks, futures and other financial instruments in fractions of a second. The industry has suffered in recent years because of a protracted slump in volatility, which has fueled a series of consolidation deals. Revenues at high-frequency trading firms from U.S. equities trading are projected to be just $850 million this year, compared with $7.2 billion in 2009, according to research firm Tabb Group LLC. Profits have also been squeezed by mounting expenses such as stock-exchange market data feeds and microwave-transmission networks used to send trading data at light speed around the country and abroad, traders say. Sinking fastHigh-speed firms' U.S. stock-trading revenueTHE WALL STREET JOURNALSource: Tabb Group estimatesNote: 2017 data is projected .billion2009’10’11’12’13’14’15’16’1701234567$8 In a flurry of deals this year, larger high-speed traders have snapped up weaker competitors. DRW Holdings LLC, a Chicago-based firm with one of the largest high-frequency trading platforms, agreed last month to buy RGM Advisors LLC, based in Austin, Texas. In July, Virtu Financial Inc. completed a $1.4 billion acquisition of rival KCG Holdings. Hudson River Trading and Sun Trading, like many firms in the secretive industry, are private companies that don’t report their financials and reveal little about their trading strategies. Founded in 2002 by five graduates of elite East Coast universities with degrees in mathematics, physics and computer science, Hudson River Trading now has around 180 employees globally. It was among the prospective suitors to explore a purchase of RGM this summer before the Texas firm agreed to be bought by DRW, people familiar with the situation said. Sun Trading was founded in 2003 by Jeff Wigley, a former floor trader at the Chicago Board Options Exchange , who remains the firm’s executive chairman and majority shareholder. The firm trades stocks in North America, Europe and Asia as well as currencies, bonds and futures, according to its website. Besides trading on the New York Stock Exchange, Nasdaq Inc. and other exchanges, Sun Trading was among the first high-frequency trading firms to connect to the off-exchange platforms called “dark pools,” people close to the firm said. One of its most lucrative trading strategies involved exploiting tiny price differences between prices available on dark pools and on exchanges, said one of those people, a former executive. Sun Trading was mentioned in a 2014 lawsuit filed against Barclays by New York State Attorney General Eric Schneiderman, who accused the bank of misleading customers about the extent to which “predatory” high-frequency trading was allowed in its dark pool. An analysis cited in the lawsuit called Sun Trading’s trading activity in the pool “very toxic.” Barclays last year admitted wrongdoing and paid $70 million to settle Mr. Schneiderman’s allegations and a parallel action by the Securities and Exchange Commission. Sun Trading wasn’t accused of any violation. Hudson River Trading does less than 1% of its trading in dark pools, the firm said in a 2014 interview with The Wall Street Journal.
Alexander Osipovich joins WSJ as a reporter covering the futures market and major exchanges. He previously served as commodities editor at Risk.net.