high frequency - HFT: What is the big differentiator in comparison to other time scales?

High Frequency Trading (HFT) seems to be the big money making mystery machine these days. The purported source of unlimited floods of gelt pouring into the investment shops using it.

For me, HFT is first of all nothing else but trading on a different (i.e. ultra short) time scale. You can make a fast buck, but you can also ruin yourself within seconds. Fast doesn't mean smart, right!

There are not too many players there at the moment so markets are not completely efficient? Fine but the players that are there are the best quants with the finest pieces of technology available on this planet.

My question
What is the biggest differentiator of HFT at the moment (apart form the fact that it is faster)? What can you do here to outperform what you can't do on other time scales? Or is it just like it is with all the other time scales: A few winners and many losers (survivorship bias)? In short: Does quantity turn into quality because it is faster - and if yes, when and why?

Answer

HFT seems to be the big money making mystery machine these days.

That's not correct. By its very nature, HFT can only produce a limited amount of revenue. The big money makers are still the large hedge funds that charge 2-and-20 on their \$10B worth of assets.

There are not too many players there at the moment so markets are not completely efficient?

There are tons of players in this space. Feel free to look at any job board.

What is the biggest differentiator of HFT at the moment?

HFT strategies operate at the tick level, and many shops use the full order book data (TotalView, OpenBook etc). That means they can act as market makers, and therefore provide liquidity to the market. There are many equity shops in the US that live off the exchange rebates; search for exchange fee schedule to see the structure at each venue.

That said, it's not easy money. With gross returns often under 1 bps, it's a really tight model and one mistake can seriously injure the firm. There's also the "arms race" to out-do the competitors in speed, which is really tough by itself.

I think we're in a period of over-expansion at the moment and we should expect to see consolidation (either bankruptcies or mergers) in the coming years, just as with any other "hot" industry.