European traders retain doubts over value of HFT
High-frequency trading is expected to continue its rise in Europe over the next year, but buy-side traders still seem to be unsure about its effect on the quality of liquidity.
The findings come as part of ”European equity trading 2010: Manoeuvring in the markets', the fourth annual European study by consultancy TABB Group.
The report predicts that high-frequency trading (HFT) will account for 40% of all European equity trading turnover in 2011, up from 38% currently. Buy-side views were mixed on the pros and cons of HFT. Of the buy-side traders interviewed, 47% identified the main benefit of HFT to be the provision of liquidity to the market, but 45% considered the main disadvantage of HFT to be that the liquidity it provides is irrelevant to them.
Furthermore, 72% of interviewees from the UK and 76% from the rest of Europe considered high-frequency trading to have a neutral impact on their trading costs, rather than having a positive or negative effect.
The report observes that there are four differences in how high-frequency trading is regarded in Europe compared to the US.
These comprised: best execution obligations in Europe, which allow a wider range of execution strategies to be deployed compared to the US; the ”flash crash' on 6 May, which further divided political and public opinion on HFT in the US; the lack of definitive measurements and analysis on HFT in Europe; and the restrictions posed by post-trade inefficiencies in Europe.
TABB's study also examined other buy-side trends including use of high-touch versus low-touch execution methods, algorithmic usage and dark trading.
It said that use of high-touch channels was expected to decline by 4% this year, to account for 58% of buy-side flow in 2011, with low-touch executions expected to rise to 42% next year from 38% this year.
When asked about dark trading 37% of respondents called for an improvement in transparency in non-displayed post-trade data, while 21% of those questioned were not told where their dark executions took place. In Europe, post-trade data currently bundles together executions conducted over-the-counter and trades completed in broker dark pools, which can limit the usefulness of this data for buy-side firms looking to make investment decisions.
“These low volume markets have slowed the trend towards low-touch channels,” said Miranda Mizen, principal and head of European research at TABB, and author of the report. “Throughout our interviews, buy-side traders told us they need the colour, trading expertise, flow and access to risk capital offered by their brokers' sales trading desks.
However, they are sceptical about the lack of improvements in the post-trade environment, concerned that changes to dark trading will work against them if dark pool flow is restricted or if unfinished business is suddenly exposed.”
The European Commission is in the process of revising MiFID, following suggestions that were put forward by the Committee of European Securities Regulators (CESR) earlier this year.
As part of the suggestions, CESR, which aims to harmonise securities legislation on a European basis, proposed that broker dark pools should be reclassified as multilateral trading facilities should they reach a certain size, and that the waivers used to exempt trading venues from pre-trade transparency should be reviewed.
Buy-side traders gave upbeat reviews on the quality of algorithms in Europe and the ability to create customisable strategies was chosen by 63% of respondents as the most popular feature of algos available today. Performance monitoring was identified by 85% of respondents as the most significant service the sell-side could provide around algos, and the requirement for algos to have a wide liquidity reach was identified by 31% of buy-side traders.
TABB's study questioned 53 buy-side traders, comprising 59% from the UK, 30% from continental Europe and 11% from the Nordic region.