September 28, 2011
High Frequency Trading Doesn't Harm Markets says BIS and TSE Reports
Reports by the Bank of International Settlements and the Tokyo Stock Exchange refute claims that high frequency trading has detrimental effects on the markets.
The BIS study ‘High frequency trading in the foreign exchange market’ was based on research from representatives of a number of national banks. It looked to identify areas in the HFT foreign exchange market that may warrant further investigation.
While the report does raise some concerns about HFT, mainly related to the comparative immaturity of the business, it undercuts those who see it as the source of all the market’s woes. Quite the contrary, in some cases the study showed that HFT can have a demonstrably positive impact.
According to the report: “Notwithstanding complaints about the competition brought about by HFT, bank contacts generally concede that the increased presence of HFT firms has had some beneficial effects on the market: spreads are undoubtedly tighter and some HFT firms appear to enhance liquidity in normal market conditions. Some contacts agree that such firms are efficient in mobilising liquidity around the system and between different venues, which is important in a fragmented marketplace. They note that price behaviour has become more granular, with fewer big-figure moves and instances of gapping than in the days of manual-only trading.”
Meanwhile, the Tokyo Stock Exchange’s first ever study of the impact of HFT showed that rapid-fire sell orders have a neutral net effect on prices. The research saw the TSE define high frequency trading as orders placed through its collocation service, which is responsible for almost a third of its stock trading.
Data gleaned from the study showed that, during the market turmoil kicked off by the US sovereign credit downgrade on 9 August, high frequency orders were balanced roughly equally between buying and selling for around 90 percent of the Nikkei Stock Average. On low volatility days, these figures were roughly the same.
Whether these pieces of research will quell disquiet over HFT remains to be seen, but they do at least point towards a more reasoned approach to the business.
link
