A vital enabler of these firms is leverage through margin financing. There wouldn't be quant trading firms without leverage, extended by a prime broker. Larger firms deploy fairly interesting, complex arrangements across multiple prime brokers. You don't want a pb to know your entire trading strategy. The PB, on the other hand, wants self-funding accounts, featuring hard-to-borrows and other types of valuable securities as collateral that can be rehypothecated and used by its securities lending businesses. Finding a viable leverage policy across multiple prime brokers is a nice, juicy challenge for the problem solvers.
> There wouldn't be quant trading firms without leverage, extended by a prime broker.
Please allow me to disagree :) Most larger pure-algo HFT prop shops are self-clearing, they are exchange members (possibly with more favorable fees due to market making) and don't use pbs, instead relying on their own co-located execution infrastructure and funding.
This is true for, as you said, large hft shops. But there are thousands of quant trading firms that are not on this scale and will not be an exchange member. You can see all the NYSE exhchange members here [0], and it's a very small portion of all quant funds.
Managing margin and leverage between prime brokers is an important job for the backoffice at the fund I work for. These numbers are watched very closely, and we have strong, multiyear relationships with the people who work at these PBs.
It really depends on the trade, and what margin offsets you can use. Simplest case is everything in a single exchange, with full margin offsets. If it is split in a way that several exchanges or regulators require capital to be posted, then you need to sort out financing somehow.
A lot of that trading activity is still leveraged even if self-clearing. Futures/options trades are based on margin for instance, e.g. $4800 ES margin vs. $140,000 (50x2800) notional means 29:1 leverage.
And how could you trust them? Trades are fairly anonymous at exchanges. All you could see is that your strategy doesn't work as good anymore, but you couldn't tell why exactly and how they got this strategy.
Like copying a good book, copying a successful strategy is labor intensive, takes a lot of time to get right, and is rather large and involved. (This is true of copying a strategy; copying a particular set of trades is trivial if you know the trades).
Being a good prime broker is also a lot of work, and is an elaborate and involved process.
Now for the firm to take on two jobs, and then keep it secret... I wouldn't worry about it. It's like worrying your accountant is going to take your successful startup idea and run with it because they know how much money you make.
On Canadian exchanges, both counterparties are part of the market trade data, by law.
And in all markets, that's one reason why many firms invest in transaction cost and best execution analysis, to make sure they're not getting front-run when they see abnormal dips in broker quality.
