High-Frequency Trading Firms Outperforming Traditional Banks Amid Trade War Volatility

The escalating trade wars of the past decade have exposed stark divergences in the resilience of financial institutions. While traditional banks grapple with systemic risks tied to global supply chain disruptions and regulatory burdens, high-frequency trading (HFT) firms have leveraged advanced technology and reduced regulatory oversight to outperform in volatile markets. This dynamic presents a compelling case for strategic investment in non-bank liquidity providers, particularly HFTs, which are redefining market efficiency amid geopolitical uncertainty.

The Technological Edge of HFT Firms

HFT firms, such as Optiver and Virtu Financial, have capitalized on ultra-low latency systems and algorithmic precision to navigate trade war volatility. Unlike traditional banks, which rely on slower, capital-intensive models, HFTs process vast datasets in real time, enabling rapid arbitrage and liquidity provision. During trade wars, these firms adapt to shifting market conditions by narrowing bid-ask spreads and maintaining tight execution windows, even as traditional banks face liquidity crunches [1]. For instance, during the 2023–2025 trade war period, HFTs accounted for 72.3% of market-making activity in 2024, underscoring their dominance in stabilizing fragmented markets [2].

However, this technological edge is a double-edged sword. While HFTs amplify market efficiency in stable conditions, they risk exacerbating imbalances during extreme price shocks by amplifying directional trading pressure [3]. Yet, studies show they do not initiate such shocks, merely reacting to external events like tariff announcements [4]. This reactive behavior, combined with their ability to scale operations rapidly, positions HFTs as both a stabilizer and a potential amplifier of volatility—a duality that demands careful scrutiny for investors.

Traditional Banks: A Systemic Weakness Under Stress

Trade wars have exposed vulnerabilities in traditional banks’ balance sheets. Supply chain disruptions have eroded revenues for export-dependent sectors, increasing corporate loan defaults and straining capital buffers [5]. For example, Deutsche Bank reported a 5% rise in corporate loan loss allowances in H1 2025, reflecting heightened credit risk from tariff-exposed supply chains [6]. Meanwhile, Value-at-Risk (VaR) models, which banks rely on for risk assessment, have struggled to quantify tail risks during sudden trade policy shifts [5].

Regulatory compliance has further burdened banks. Stricter liquidity requirements and operational costs—such as those tied to Basel III—have compounded stress during trade wars. In contrast, HFTs operate in a less regulated space, allowing them to pivot swiftly without the bureaucratic inertia that hampers banks [7]. This regulatory asymmetry has created a competitive imbalance, with HFTs capturing market share while banks divert resources to compliance rather than innovation.

Strategic Investment in Non-Bank Liquidity Providers

The case for investing in HFTs hinges on their ability to thrive in environments where traditional banks falter. Their reliance on algorithmic trading and reduced regulatory constraints enables rapid adaptation to geopolitical shocks, making them attractive in a world of persistent trade tensions. For instance, during the 2010 Flash Crash, HFTs withdrew liquidity, exacerbating volatility [8]. Yet, in the 2023–2025 trade war, they maintained liquidity provision despite market stress, suggesting evolving resilience [9].

Investors should, however, remain cautious. HFT profitability is closely tied to market volatility, which can be both a catalyst and a risk. The expansion of HFT into fixed-income markets, such as Eurozone bonds, further complicates its impact on systemic stability [10]. Nevertheless, the sector’s technological agility and regulatory flexibility offer a compelling edge over traditional banks, particularly for investors seeking exposure to non-bank liquidity providers.

Conclusion

As trade wars reshape global financial landscapes, HFT firms are emerging as critical players in maintaining market liquidity and efficiency. Their technological superiority and regulatory agility position them to outperform traditional banks in volatile environments—a trend that underscores the strategic value of non-bank liquidity providers. For investors, the challenge lies in balancing the risks of algorithmic amplification with the rewards of a sector poised to redefine market dynamics in the 2020s and beyond.

Source:
[1] Revisiting the trading activity of high-frequency trading firms [https://jfin-swufe.springeropen.com/articles/10.1186/s40854-024-00726-z]
[2] High Frequency Trading Market Size | Industry Report, 2030 [https://www.grandviewresearch.com/industry-analysis/high-frequency-trading-market-report]
[3] Revisiting the trading activity of high-frequency trading firms [https://jfin-swufe.springeropen.com/articles/10.1186/s40854-024-00726-z]
[4] Revisiting the trading activity of high-frequency trading firms [https://jfin-swufe.springeropen.com/articles/10.1186/s40854-024-00726-z]
[5] Channels of Stress: How Trade Wars Hit Bank Balance Sheets [https://www.linkedin.com/pulse/channels-stress-how-trade-wars-hit-bank-balance-sheets-roy-qwz6f]
[6] Trade finance results: Banks avoid major tariff hit, for now [https://www.gtreview.com/news/global/trade-finance-results-banks-avoid-major-tariff-hit-for-now/]
[7] Algorithmic Trading and Market Volatility: Impact of High-Frequency Trading [https://sites.lsa.umich.edu/mje/2025/04/04/algorithmic-trading-and-market-volatility-impact-of-high-frequency-trading/]
[8] The Impact of High-Frequency Trading on Market Liquidity [https://www.ewadirect.com/proceedings/aemps/article/view/24020]
[9] The Impact of High-Frequency Trading on Market Liquidity [https://www.ewadirect.com/proceedings/aemps/article/view/24020]
[10] The Impact of High-Frequency Trading on Market Liquidity [https://www.ewadirect.com/proceedings/aemps/article/view/24020]