Preliminary results from an Investment Industry Regulatory Organization of Canada (IIROC) study on high frequency trading (HFT) support previous research on its impact on liquidity, but questions remain as to HFT’s effect on volatility.
Victoria Pinnington, vice president, trading review and analysis, IIROC, discussed the early results of the regulator’s third phase of a study into HFT at the Canadian Equity Market: Structural Challenges Amidst Rapid Change conference hosted by IIROC and the Ontario Securities Commission (OSC) in Toronto on Thursday.
This phase in IIROC’s research used a more refined definition of HFT than the two preceding reports. The previous research, known as the HOT study, included all participants using high order-to-trade (HOT) ratios.
This time IIROC used an Advance Segmentation Methodology (ASM), which initially filtered out user ids that had minimum orders in trades and then measured the HOT ratios, fast order amendment speed and number of order entered of the remaining user ids. The study took place between January 2012 and June 2013. As a result of the new criteria, there were only 60 user ids classified as HFT as part of this study, down from 182 in the previous reports.
In terms of liquidity and HFT, IIROC’s finding follows other industry research. Active trades tend to reduce liquidity whereas passive trades provide liquidity. The early results show that 69% of HFT traded volume on the Toronto Stock Exchange was passive during the study period compared to 27% active. Pinnington noted that the percentages do not total 100% as some trades could not be differentiated.
“Really there’s no surprise here,” says Pinnington. “It supports other research. HFT trades more passively than actively.”
Other findings focused on what percentage of HFT volume was made as stabilizing or destabilizing trades. Stabilizing buys, according to Pinnington, are a buy on a downtick or zero-minus tick while destabilizing buys are the opposite. Results show that HFT executed over $45 billion in stabilizing trades during the study period compared to just over $30 billion in destabilizing trends. Furthermore, 84% of those stabilizing trades were passive.
“If it is true that HFT executes more stabilizing than destabilizing, what does this say on their impact on volatility?” said Pinnington. “More research is needed but it is food for thought.”