IT for financial services

Research claims no link between high-frequency trading and market manipulation

Karl Flinders

Research commissioned by the Bank of England for the Foresight project on high-frequency trading shows no correlation between high-frequency trading (HFT) and increased market abuse.

According to a Finextra report, research using five years of data from the London Stock Exchange (LSE) and Euronext in Paris, carried out by Australia's Capital Markets Cooperative Research Centre (CMCRC), has found no link between HFT and manipulation of the market.

Investment companies use algorithmic software to automate share trading while trading exchanges enable trades to be completed in microseconds. When problems occur they quickly escalate. Regulators in the UK want to prevent this and the perceived link between increased market manipulation and high-frequency trading.

The CMCRC research found that high-frequency trading increased considerably during the five-year data collection, but that there was a "statistically significant negative correlation between it and market manipulation". Rather it suggested that more high-frequency trading equals less market abuse.

Professor Alex Frino, CEO at CMCRC, said there was not enough evidence on the effects of HFT available for regulators to make sound decisions. "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," he said.

In September, a paper put together by academics as part of the Foresight project recommended ways of reducing the risks associated with computerised trading. These recommendations included the use of new circuit-breaking technology to reduce the problems caused by market volatility.

Hugh Cumberland, payment and settlement services manager at investment sector connectivity supplier Colt, said reports consistently indicate that high-frequency trading does not boost market volatility. "In fact, there are clear indications that HFT brings some tangible benefits, such as reducing transaction costs," he said.

“We should take great care that ill-thought out regulation does not lead to unforeseen consequences. HFT firms have demonstrated their ability to change strategy rapidly as the markets move, and their likely response to restrictive controls will be to move rapidly in other less constrained areas of profitability," he added.

 

 


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