High frequency trading (HFT) provides vital support to liquidity in times when markets are stable and not volatile, the French regulator found in a recent study.
The Autorité des marchés financiers (AMF) analysed HFT activity on Euronext over a nine-month period - from November 2015 to July 2016 - during which market volatility varied widely.
The AMF found HFT is present more than 90% of the time at the best limit and represents on average 80% of the liquidity quantity present at the three best limits of Euronext’s order book.
“They gradually enter the order book and thus contribute to reducing the spread at the beginning of the day but clearly withdraw from the backlog of expected announcements that may impact courses,” the AMF said.
Michael Ourabah, chief executive officer at BSO, an Ethernet network provider company, explained a highly volatile geopolitical outlook “puts an even greater emphasis on retaining the cost and efficiency benefits high-speed traders bring to the market.”
“In order for all market participants to gain, a balanced approach of sensible regulation and increased connectivity to emerging liquidity centres is required,” he said.
The AMF also found HFT consumes more liquidity than it provides, particularly during times of market volatility.
Ourabah added the study “underlines the importance of having a strong underlying network infrastructure in order for market makers to continue to provide liquidity during times of market stress.”