Adding Strategies

The Tactical Trading fund has morphed over the years from being a pure high-frequency trading vehicle to getting about a quarter of its profits, on average, from the strategy, according to one of the people. In 2008, it engaged exclusively in high- frequency trading of stocks and futures.

In 2009, the fund added traditional market-neutral long- short equity trading, according to the person, and the following year, it also started using statistical arbitrage -- making money off of small price differences in correlated securities. The high-frequency trading is now exclusively in non-equity futures.

Earnings for high-frequency trading firms from U.S. stocks have been falling as more competitors entered the market, dropping to $810 million in 2012 from $4.9 billion in 2009, according to estimates from Rosenblatt Securities Inc., a New York-based brokerage firm.

Lewis’s Book

To combat the lower returns, firms have started to add other kinds of trading much in the way Citadel has.

“In order to stay ahead you need to diversify your source of income and strategies,” said Sang Lee, managing partner at Boston-based research firm Aite Group LLC. “By introducing non- HFT strategies, they are looking to get more consistency in their returns.”

Lewis, an author who also writes for Bloomberg View, argues that the $23 trillion U.S. stock market is rigged in favor of speed traders, who he says prey on slower investors by getting early access to nonpublic information. The book and the media attention it has received have revived and magnified concerns that have circulated for years.

The FBI had already been probing potential criminal activity associated with high-speed trading. On April 4, U.S. Attorney General Eric Holder said the Justice Department is investigating whether the strategy violates insider trading laws. So is New York Attorney General Eric Schneiderman. In a March 31 interview on Bloomberg TV, Schneiderman urged the U.S. Securities and Exchange Commission to speed up its review and quickly issue new regulations.

Lowering Costs