Exclusive Online Only ContentHigh- Frequency Trading: New Study Finds Divide on Impact
October 26, 2009
Institutional investors are of mixed mind about the impact of high-frequency trading activities on their business, according to research conducted by Greenwich Associates.
While 55% of investors think high-frequency trading does not have a negative impact on their trading operations, viewing the phenomenon as the latest development in a constantly evolving market, 46% think that their institutions are placed at a disadvantage by traders who employ such strategies.
Those who perceive a negative impact cite the “predatory activity,” of high-frequency traders, complain about the use of sniffer algorithms to trade ahead of client orders, and reveal that they view such traders as the cause of short-term volatility in pricing spreads.
The findings are the result of a survey conducted by Greenwich Associates, a Stamford, Ct.-based research firm that surveyed 78 institutional investors in Canada, the U.S. and Europe in early October.
Other findings of the survey: Forty five percent of institutional investors believe that high-frequency trading poses a threat to the current market structure and in some instances, involves preying on traditional stock investors; Thirty six percent believe it actually benefits the market, adding liquidity to global markets and 20% say they do not know enough about the activities of high-frequency traders to make a judgment about its overall market impact.
Where there is agreement is on the lack of data: Institutional investors -- 85% -- believe they do not have enough information to make any final judgments about high frequency trading. As one survey respondent put it: “Both detractors and those touting the liquidity provision and spread-tightening benefits of high frequency trading have very little data to back them up.”
Despite the uncertainty, a clear majority of institutional investors – 57% - - favor new regulations on high-frequency trading while 21% would support a high-frequency trading ban.
Due to the survey findings and lack of hard data, the Greenwich Associates report recommends that the U.S. Securities and Exchange Commission and other regulators delay the imposition of any sweeping new rules until the market has hard data demonstrating how the various trading strategies and practices lumped under the label “high-frequency trading” affect investors and the market as a whole.
These would include activities such as the use of flash orders, the provision of sponsored or “naked” access, the use of indications of interest or (IOIs) and dark pool trading, including the amount of trading volume such pools are permitted to execute before they are required to display the trades publicly.
“Despite the lack of clarity surrounding high-frequency trading as defined as strategies that seek to take advantage of small market inefficiencies, (the Greenwich Associates’ survey) results suggest to us that institutional investors believe regulatory actions aimed at limiting the use of individual techniques like flash orders and IOIs to maintain a level playing field might be entirely appropriate at this time as these are seen as unfair advantages,” said Greenwich Associates consultant John Colon.
“However, the results also make it clear that additional research on high-frequency trading’s impact on investors and its net effect on the market structure is needed before regulators act to impose any broad new rules,” he added.
The Greenwich survey follows the release on Oct. 9 of the findings of an interactive survey on the impact of high-frequency trading, conducted by Thomson Reuters among over 100 buy-side and sell-side members of the trading community during an event in New York.
