Register  
High frequency trading improves market fairness
Monday, 9 December 2013 11:55am

High frequency traders (HFTs) improve market fairness by reducing end-of-day price dislocation, new research from the Capital Markets Cooperative Research Centre (CMCRC) has found.

CMCRC examined data from 22 exchanges from around the world, from 2003-2011 and found that the presence of HFT decreases the probability of end-of-day (EOD) dislocation by 21%.

The report also found that HFT was associated with a decrease in the total trading value surrounding each suspected dislocation, by at least 42% relative to the average size of the total trading value, suggesting that the mere presence of HFT participants in a marketplace may discourage EOD dislocation.

"EOD prices are often used to determine the expiration value of directors' options, the price of seasoned equity issues, evaluate broker performance, calculate net asset values of mutual funds, and compute stock indices," CMCRC chief executive and co-authors of the report Professor Mike Aitken said.

"So on the one hand there's clear incentive to manipulate the closing price by ramping end-of-day trading to push the closing price to an artificial level. However, EOD dislocation could also simply reflect price pressure brought on by the fact that the market is about to close for 18 hours. Either way, EOD dislocation of prices is not a good look for markets."

The data showed that in the presence of HFT, EOD price dislocation was also less pronounced on specific dates when EOD price dislocation was most likely to experience manipulation, including dates when options expire and the end of month/quarter calendar dates.

According to CMCRC, HFT accounts for around 50%-70% of equity trades in the US, 40% in Canada, and 35% in London.

Electronic, algorithm-based trading has been in use since the 1970s but concerns have escalated in recent years as improvements in technology have allowed trades to happen ever-faster rates speeds.

Opponents of the practice say that it gives traders an unfair advantage, manipulates markets and causes unexplained crashes.

While an Australian Securities and Investments Commission (ASIC) taskforce into HFT said in March that fears are unfounded, the regulator has recently introduced new disclosure rules in a bid to improve transparency.

Professor Aitken said that policy mechanisms, including trading rules, surveillance and enforcement, appeared to have had less of an effect in mitigating EOD price dislocation than HFT, suggesting that the market may indeed be capable of disciplining itself.

"There is an established negative relationship between liquidity and EOD prices (i.e. the higher the liquidity the harder it is to manipulate or the less prices will move) and that HFT by either providing additional liquidity at these points (or because market participants know that HFT are present in a marketplace) appears to reduce EOD dislocation, whether it is caused by fair means or foul."

1 comment on this article
Christopher J Tubby from T 1 Con Ltd wrote:
It is the responsibility of Market Makers, whether they are HFTs or other, to prevent price dislocation. However, Exchanges seem to favour those (HFTs) with the shortest investment horizon at the expense of those with the longest, purely because of the volume they produce. Where were HFTs before electronic trading was introduced, and the markets were probably better priced then!
9 December 2013 10:57pm
Blogs
Follow the industry experts.
Christopher Page
Christopher Page
Managing Director

Breaking out from the FoFA catch-22
Ever since the first draft of the Future of Financial Advice (FoFA) legislation came out, the advice sector has been trapped in a very ...read more
 
Benjamin Ong
Benjamin Ong
Chief Economist

Reflation, rotation and the taper
'Tis being my final type (drivel, to some gentle readers) for the year, we'll take a look back at the 2013 that was to seek the lessons ... read more
 
Alex Dunnin
Alex Dunnin
Director of Research & Editorial Services

MySuper: our verdict is in
Has MySuper worked? Has it lowered fees, simplified superannuation products, lifted returns and made people better off? Yes, yes ... read more
News Search   
VideoBrought to you by
The New Neutral
At this year's PIMCO Secular Forum, the company's global executives set themselves the challenge of taking a three to five year view and anticipate where the market would be against what investors would ... Watch video
Why Multi-Asset Solutions?
Joe Fernandes, Head of Global Investment Solutions at Colonial First State Global Asset Management talks about the advantages of objective-based investing in the multi-asset space. Watch video
Introduction to Series #07
What are the key challenges advisers face when building retirement portfolios for clients? Watch Joe Fernandes, Head of Global Investment Solutions at Colonial First State Global Asset Management. Watch video
Managed Accounts Forum 2014 Highlights
Around 150 delegates attended Financial Standard's inaugural Best Practice Forum in Managed Accounts held in Sydney in August. Financial Standard also launched a new magazine: FS Managed ... Watch video
Colonial First State Multi-Asset Real Return Fund
Find out more about the investment philosophy and objective of the Colonial First State Multi-Asset Real Return Fund. Senior Portfolio Manager, Kej Somaia explains. Watch video
Get it
Daily
FREE to your inbox, get the Financial Standard Daily Email.
Get the Free
iPad app
Download the Financial Standard iPad app for FREE
Industry
Events
SEP
16
OCT
07
Major Market Players Symposium
14
Unlock the value of diversification with mFund
15
Investment Performance Measurement, Attribution & Risk Management
16
Unlock the value of diversification with mFund
20
Family Office Forum
News
Bites
Advertisement

$245 (inc GST) for 1 year
 
 
Copyright © 1992-2014 Rainmaker Group
All material on this site is subject to copyright. All rights reserved. No part of this material may be reproduced, translated, transmitted, framed or stored in a retrieval system for public or private use without the written permission of the publisher.
Link to something nFCNSw3y