High frequency trading and trading costs

Question

What kind of deals do high frequency traders have with brokers or exchanges regarding commissions for stock trading? For an individual, it is nowadays possible to get to as low as 10 basis points per a round-trip trade. However, if one is buying and selling throughout the day, this quickly accumulates to enormous amounts.

Are hedge funds engaging in high frequency trading immune to this, i.e. are we talking about trading costs that are in a completely different ballpark? Or is it that even after considerable trading costs, the trading strategies are still profitable? Any studies or surveys published about this?

Answer 1

Well you have a few alternatives to lower your commissions.

You can get your own broker number in which case you don't go through anyone, you go direct to the exchange so you just pay/get the active/passive rebate. If you are really HFT then this is often the route you take.

For the case where you pay a commission to your broker, they are eating/taking the active/passive fee, SEC fee, other assorted per trade fees on your behalf and betting that the commission you pay lets them eeek out a profit.

Most brokers will let their clients trade through them and get the active/passive rebate and be responsible for the exchange fees for a very minimal per trade commission or a monthly flat fee.

Other brokers take a holistic approach to fees and take into account how much you pay in prime broker fees per month. If its enough you won't pay any per trade commissions with the broker and just pass on the fees/rebates directly to you.