I think you may be mistaken. High-frequency trading is becoming less profitable as an industry, but algorithmic trading in general is most definitely not.
Really? As I understand it the world is quickly becoming saturated and major players are starting to take their chips and leave the table. The risk is quickly catching up to the reward and consolidation into a type of commodity equilibrium is inevitable.
What areas of algorithmic trading are escaping the Great Chill?
"Algorithmic trading" is just a broad umbrella that encompasses any trading system where a computer algorithm is making the trades based upon pre-defined rules. Buying the S&P every Tuesday can be considered "algorithmic trading."
And of course, the answer to your question about which algorithms are working, they are the ones on the opposite side of the trades of the ones that are losing. (Or, alternatively, the ones you can't read about in academic papers or books.)
I am not talking about 'warehouse picking order' style algorithmic trades that are designed to make transactions cheaper or more automated merely for convenience.
Equilibrium is coming.
But that is Ok. Quants can go into material science and model new and useful materials by studying their higher dimensional black hole equivalents [1].
So yields, returns, and inflation are finally stabilizing as the market matures and approaches its "true value"? Nope, because equilibrium is a concept which works well in the natural sciences, but quite erroneous as applied in economics. This is George Soros's argument in his books about the Principle of Reflexivity, which differentiates social systems from natural ones.
What is happening, is merely that trading volume/volatility has tapered off since the '08 crisis. That's expected; empirically, volatility continues to be clustered and autoregressive (a self-exciting process). Its a cycle that will pick up again (one can expect), eventually.
But I am not talking about the level of social systems. Of course the market itself is not approaching equilibrium. But the liquidity enhancement market is. There will always be money to be made there but not the bonanza that's existed up to about two years ago.
But that's mostly due to the much lower volume and volatility (rather than more competition). When its low, so is the demand for liquidity provision. But that demand will come back with the next volatility cycle.
Actually, volatility is only clustered when measured in calendar time. Its much more constant when measured in event/transaction time (plot price against cumulative volume, rather than date/time).
