Published On: Tue, Aug 16th, 2011

New Research Busts High-Frequency Trading Myths – CMCRC

Alex FrinoCapital Markets Cooperative Research Centre (CMCRC), the Australian independent academic centre for capital market research, has found that high frequency trading (HFT) actually benefits global capital market structures and performance, contrary to popular belief.

The project found that HFT activity adds real liquidity to markets and reduces price volatility – surprising findings, as HFT has regularly been accused of negatively impacting these market features.

Under the leadership of Professor Alex Frino, PhD, researchers examined detailed market data provided by the SGX; NASDAQ; Euronext Paris, ASX and LSE. The team looked at the impact of HFT on liquidity provision and volatility, and were surprised by the results.

“At the beginning of the project I spoke extensively to the buy-side to gather their views on HFT,” said Professor Frino. “Those views were fairly negative, so I expected to find negative effects, but to my surprise that wasn’t the case at all.”

While HFT liquidity has been described as ‘artificial’, Professor Frino’s research found that the liquidity they provide is both real and substantial. “We looked at ‘make’ and ‘take’ decisions of HFTs, that is, how often they offer a quote that is hit, and how often they hit existing quotes,” he said. “We found that overall they are net providers of liquidity – and this liquidity is as readily used by other market participants as any other kind.”

Professor Frino’s research also examined the relationship between price volatility and HFT.

“We find no evidence of a positive relationship between HFT and price volatility. To the contrary the data suggests that rather than exacerbating price volatility as many have claimed, HFTs may actually play a role in decreasing excessive price volatility,” he said. “Part of this function is the way HFT algorithms identify trading opportunities – they’re built to recognise when prices are abnormally high or low, and their response to this naturally pushes prices back towards equilibrium.”

Professor Frino’s current research looks at the impact of HFT liquidity during times of stress.

His team is expected to release reports looking at this issue specifically on the London Stock Exchange, NASDAQ and ASX over the coming weeks.

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