High-frequency trading (HFT) activity on exchanges reduces end-of-day (EOD) price dislocation, stabilising markets during a crucial daily period of trading, research from the Capital Markets Cooperative Research Centre (CMCRC) has found.
EOD prices, which are used to evaluative broker performance, calculate net asset values of mutual funds and compute stock indices, are often subject to activity aimed at dislocating their true value, a trend HFT has reversed, the research has found.
By examining data from 22 exchanges globally between 2003 and 2011, research authors Douglas Cumming and Feng Zhan from York University and Michael Aitken, CMCRC CEO and also a professor, found the presence of HFT decreased the probability of EOD dislocation by 21%.
“EOD dislocation of prices if not a good look for markets,” Aitken said. “There’s a clear incentive to manipulate the closing price by ramping end-of-day trading to push the close price to an artificial level.”
Aitken added that policy mechanisms including trading rules, surveillance and
enforcement, appeared to have had less of an effect in mitigating EOD price dislocation than HFT, suggesting that the market may be capable of disciplining itself.
“The higher liquidity the harder it is to manipulate. HFT, by either providing additional liquidity at these points, or because market participants know that HFT is present in a market place, appears to reduce EOD dislocation, whether it is caused by fair means or foul,” he said.
The report authors noted that HFT activity represents an estimated 50-70% of equity trades in the US, 40% in Canada and 35% in the UK. They found that HFT was associated with a decrease in the total trading value surrounding each suspected dislocation, by the most conservative estimate of 42% relative to the average size of the total trading value, suggesting that the mere presence of HFT participants in a marketplace may discourage EOD dislocation.