Capital Markets Cooperative Research Centre (CMCRC), the Australian independent academic centre for capital market research, has shown that there is no link between high-frequency trading (HFT) and market manipulation, based on a new report using mathematical models for market abuse.
The study analysed large quantities of data to carry out an empirical study that examined the relation between the increased incidence of HFT and metrics that proxy for market abuse, particularly market manipulation.
The report found that HFT does not correlate with an increase in market abuse, using five years’ worth of data, 2006-2011, from the London Stock Exchange (LSE) and Euronext Paris.
Report author Professor Alex Frino, chief executive of CMCRC, says that despite intense interest in HFT and algo trading over more than two years, there still remained a lack of empirical research directly examining the impact of these developments on market quality and integrity.
“The debate on HFT has become almost hysterical in some regions, yet it’s characterised by an excess of opinion and deficit of proof,” he says. “Some progress is being made in producing real research based on real exchange data, and we’re pleased to add to that today.”
The analysis used a proxy for HFT based on the rate of electronic message traffic in an electronic limit order market and the ratio between messages and executed trades.
“Because orders aren’t tagged as such, you can’t look at any one order and say ‘that’s HFT’,” says Frino. “What you can do though is look at volumes and ratios and that’s proved a very effective way of identifying levels of HFT in the market.”
Professor Frino says the report strongly suggests that HFT is not deserving of the level of criticism being levelled at it.
“In an environment of such low returns, everyone is going to be looking for a scapegoat,” he says. “However HFT and its relationship to market fabric is very complex, and needs to be analysed as such before any conclusions can be drawn. It’s not good enough just to have an opinion, when regulations are being drawn up that will affect the way markets work around the world.”