Concerns about high-frequency trading (HFT) harboured by institutional trading firms are unlikely to be solved by regulators and will require the buy-side to take matters into their own hands.
The warning comes from Seth Merrin, founder and CEO of block trading venue Liquidnet, following a survey that polled buy-side members' opinions on HFT.
“I am not an advocate of relying on regulators to solve the problems posed by HFT,” Merrin told theTRADEnews.com. “High-frequency traders will likely be able to programme around new regulations very quickly so I don't think this is the answer. The problem affects institutions, which are sophisticated investors, so it is incumbent on them to protect their orders.”
The Liquidnet study found that worries over HFT were most prevalent in the US, with two-thirds expressing concern about the practice, compared to 60% in Europe and around half of Asian survey respondents.
A large majority of respondents (97%) also identified concerns relating to increased market impact costs and difficulties in finding liquidity – both of which Merrin considers to be directly linked to HFT.
“Our study – even though it isn't based on empirical evidence – shows that despite evidence to the contrary, institutions see and feel the negative impact of high-frequency trading on their orders,” explained Merrin.
He added that because HFT flow is agnostic, i.e. trades are not based on company performance or outlook, it can exacerbate intraday swings. Many HFT strategies work by detecting urgency in the market place, profiting from supply/demand imbalances in the market.
Liquidnet's survey was based on 300 responses to a questionnaire sent to its 630 institutional buy-side members, who manage over US$13 trillion in equity assets.
Merrin's comments come amid efforts from US and European authorities to better monitor and control HFT. US regulator the Securities and Exchange Commission recently approved the large trader rule, which requires traders or firms that trade high volumes of exchange-listed securities to report transactions via their brokers. This could be supplemented with the consolidated audit trail, which would require exchanges and their members to send quote and order information to a newly-created central repository as close to real-time as possible.
In Europe, the UK government and pan-European securities regulator the European Securities and Markets Authority are currently conducting research into the impact of HFT, with rules for controlling the practice expected in the final proposals for MiFID II, which are expected next month.