Market Manipulation? Not in High-Frequency Trading, Report Says
November 12, 2012
An Australian research cooperative has come to the defense of high-frequency trading.
The Capital Markets Cooperative Research Centre (CMCRC), an academic producer of capital market research, said it used a variety of mathematical models designed to detect market abuse in high-speed markets.
Its conclusion: There is no link between high-frequency trading and market manipulation, based on a new report using mathematical models for market abuse.
The study analysed large quantities of data to carry out an empirical study that examined the relation between HFT and metrics that identify market abuse, particularly market manipulation. The report found that HFT does not correlate with an increase in market abuse, using five years’ worth of data, 2006-2011, from the London Stock Exchange (LSE) and Euronext Paris.
Report author Professor Alex Frino, CEO of CMCRC, said that despite intense interest in HFT and algo trading over more than two years, there still remained 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,” he 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, among other models, looked at 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 though is look at volumes and ratios and that’s proved a very effective way of identifying levels of HFT in the market.”
According to the report, HFT:
• Grew rapidly between 2006-11.
• Does not produce “end-of-day price dislocation”
• Does not cause ‘ticking’ – incidences of one-share executions moving prices – when data is reviewed for variations in volume and volatility.
“In an environment of such low returns, everyone is going to be looking for a scapegoat,” Professor Frino 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.”