Amid an ongoing debate over the impact of high-frequency trading (HFT) on capital markets, the Investment Industry Regulatory Organization of Canada (IIROC) is embarking on the final stage of its groundbreaking research into HFT. (See Investment Executive, HFT and volatility: questions remain, November 21, 2013.)

IIROC announced that it has selected two project teams to assess the impact of HFT on Canadian equity markets as part of its long-running study into HFT, which began back in 2012. The research teams are comprised of academics from various North American institutions that have experience studying, teaching and publishing reports about HFT, algorithmic trading and other market structure issues.

One of the teams will focus on the impact of HFT in the provision of cross-market liquidity, risk management and information transmission. It will try to better understand if HFT firms are integrating markets, and whether or not their activities are beneficial, IIROC says.

The other team will focus on the effects of short-selling by high-frequency traders and other market participants on market liquidity, stability, price efficiency, and price discovery on Canadian securities markets.

As part of their research, the researchers will have access to secure and “masked” data for the period of January 1, 2012 to June 30, 2013.

“We believe it’s important to address identified regulatory concerns relating to HFT using empirical data and objective study to better understand its impact on market integrity and quality, as well as overall investor confidence,” said Susan Wolburgh Jenah, president and CEO of IIROC. “This research, combined with IIROC’s ongoing work, will help to inform any further policy making or regulatory interventions.”

IIROC published the results of first two phases of the research in December 2012, which initially attempted to define highly active traders and to analyze their trading activity.

This third phase aims to examine the impact of this trading activity on markets themselves. It expects to have this phase of the research completed by the end of 2014.

The two teams were selected in response to a call for research assistance from IIROC, which it says generated 19 comprehensive proposals from seven groups. IIROC says that it expects to announce other teams to join in this review in the near future.

The research team on the first project includes: Terrence Hendershott, associate professor at the University of California at Berkeley; Jonathan Brogaard, assistant professor of finance at the University of Washington and Ryan Riordan, assistant professor at the University of Ontario Institute of Technology.

The team for the second project includes Riordan and Andriy Shkilko, associate professor of finance at Wilfrid Laurier University.