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No Link Between High-Frequency Trading and Market Abuse: Study

After combing through five years of data spanning 2006 to 2011, Sydney-based Capital Markets Cooperative Research Center says there's no link between HFTs and market abuse.

There's no link between high-frequency trading and market manipulation, according to a new report that used mathematical models to mimic abusive trading techniques.

In a study conducted by the Sydney-based Capital Markets Cooperative Research Center (CMRC), researchers analyzed large quantities of data to carry out a study that examined the relationship between high-frequency trading and metrics which stood as a proxy for market abuse.

The study, which was based on five years of data spanning 2006 through 2011, concluded that high-frequency trading doesn't correlate with an increase in market abuse. CMRC Chief Executive Alex Frio, who authored the report, said that despite the widespread global interest in high-frequency and algorithmic trading over the last two years, there's still a lack of empirical research directly examining the impact of these developments on market quality and integrity.

"The debate on HFT has become almost hysterical in some regions, yet it's characterized by an excess of opinion and deficit of proof," Frino said. "Some progress is being made in producing real research based on real exchange data, and we're pleased to add to that today."

The analysis used a proxy for HFT based on the rate of electronic message traffic in a 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'," Frino said of the research. "What you can do though is look at volumes and ratios and that's proved a very effective way of identifying levels of HFT in the market."

The study also found that high-frequency trading is negatively correlated with end-of-day price dislocation, meaning that more high-frequency trading equals less market abuse. Also, the report initially found a correlation between high-frequency trading and "ticking" – incidences of one-share executions moving prices.

This correlation vanished when the data was controlled for variations and volatility, which suggests that some of the ticking that's being blamed on high-frequency trading is actually just a feature of normal market activity, according to the study.

Ultimately, Frino says high-frequency trading isn't deserving of the criticism its experienced, much of which came as a result of the May, 6 2010 Flash Crash. "In an environment of such low returns, everyone is going to be looking for a scapegoat," he said.

"However HFT and its relationship to market fabric is very complex, and needs to be analyzed as such before any conclusions can be drawn. 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."

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio

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11/12/2012 | 9:06:02 PM
re: No Link Between High-Frequency Trading and Market Abuse: Study
Most academic studies seem to conclude that HFT is beneficial to markets. I would be curious to know if this report examined any of the events known as "mini (or micro) flash crashes that occur in U.S. stocks? In these situations, stocks move sharply up or down, for an unknown reason, only to rebound in seconds.
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