A leading capital markets expert from Australia insists he has found proof
high-frequency trading (HFT) does not manipulate markets. In fact, more HFT
could equal less market abuse.
Analysis by professor Alex Frino, CEO of Australian
independent think tank Capital Markets Cooperative Research Centre (CMCRC), suggests
that while there has been a significant increase in HFT, the strategy
negatively correlates with end-of-day price dislocation, which is a proxy for
The research, commissioned for the
Foresight project, used mathematical models to
determine HFT did not correlate with an increase in market abuse.
“The debate on HFT has become almost hysterical in some
regions, yet it’s characterised by an excess of opinion and deficit of proof,”
said Frino. “Some progress is being made in producing real research based on
real exchange data, and we’re pleased to add to that.”
Frino analysed five years of London Stock Exchange (LSE) and
Euronext Paris data (2006-2011) for an empirical study examining the relation
between the increased incidence of HFT and metrics which proxy for market abuse.
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
“Because orders aren’t tagged as such, you can’t look at any
one order and say ‘that’s HFT’,” said Frino. “What you can do is look at
volumes and ratios, and that has proved a very effective way of identifying
levels of HFT in the market.”
HFT and its relationship to market fabric is very complex,
and needs to be analysed as such before any conclusions can be drawn, warned Frino.
“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,” he said.
According to Frino, the report initially found a correlation
between HFT and ‘ticking’ – one-share executions moving prices. But the
correlation disappeared when the data was controlled for variations in volume
“This may suggest that some of the ticking being blamed on
HFT is in fact just a feature of normal market activity,” Frino wrote.