A new study from research firm Greenwich Associates has revealed that 57% of institutional investors would support new regulations governing high-frequency trading.
Much of the support for additional regulation is centered on trading practices associated with high-frequency firms, such as use of flash orders and indications of interest, Greenwich reported.
Despite the fact that more than a fifth of respondents (21%) said they would support an outright ban on high-frequency trading, 87% acknowledged that there is currently a lack of empirical evidence on whether high-frequency trading strategies have a negative or positive impact on trading costs. The survey was based on interviews with 78 institutional investors from the US, Europe and Canada.
Institutions appear sharply divided on the benefits to the broader market of high-frequency trading. A total of 45% of participating institutions think high-frequency trading poses a threat to the current market structure, while 36% believe it benefits the market and investors by increasing overall liquidity. “Both detractors and those touting the liquidity provision and spread-tightening benefits of high-frequency trading have very little data to back them up,” noted one US asset manager participant.
According to Greenwich, until there is more clarity around high-frequency trading practices, regulators should limit any new rules to narrow trading practices that have an obvious and proven negative impact on investors.
“Despite the lack of clarity surrounding high-frequency trading as defined as strategies that seek to take advantage of small market inefficiencies, the results suggest to us that institutional investors believe regulatory actions aimed at limiting the use of individual techniques like flash orders and IOIs to maintain a level playing field might be entirely appropriate at this time, as these are seen as unfair advantages,” says Greenwich Associates consultant John Colon. “However, the results also make it clear that additional research on high-frequency trading’s impact on investors and its net effect on the market structure is needed before regulators act to impose any broad new rules.”