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 market manipulation.
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 trades.
“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 and volatility.
“This may suggest that some of the ticking being blamed on HFT is in fact just a feature of normal market activity,” Frino wrote.