High frequency traders (HFTs) have come in for their fair share of criticism in recent years, but much of it is likely unwarranted said several speakers at a policy forum hosted by the Investment Industry Regulatory Organization of Canada (IIROC) and the Capital Markets Institute (CMI) at the University of Toronto on Monday.
Attendees at the event — which featured presentations from several of the academics who have authored papers in this area based on detailed market data made available by IIROC, along with speakers from IIROC and the B.C. Securities Commission (BCSC) — heard evidence against the view that HFTs don’t contribute much to the price discovery process.
Ryan Riordan, Queen’s School of Business, noted that his research found, quite surprisingly, that HFT contributes more information to the price discovery process than other sorts of traders — not just on the Toronto Stock Exchange, but on all of the smaller venues, too. There’s little support for the view that HFTs pick-off slower traders, he said, or that they front run their orders.
Michael Brady, manager, derivatives at the British Columbia Securities Commission (BCSC), presented the results of the BCSC’s recently released survey into the impact of HFT on the venture markets. Here again, the research found that the industry’s view of HFT — that it adds volatility in the venture market and that short selling by HFTs in the wake of positive news is limiting price gains — is not supported by the data.
Other research discussed at the forum found that HFTs are a big source of market liquidty.
The one negative impact of HFT that did arise, in research presented by Dermot Murphy of the University of Illinois, is that HFTs appear to provide less liquidity in the face of large trades amid market stress; this, in turn, leads to higher trading costs in these circumstances.
Overall, the presenters had little in the way of policy advice for the regulators. In general, HFTs don’t appear to pose a major threat to market quality, they found.
Findings from his research likely conflicts with the conventional view of HFT, Riordan suggested, because that view is driven by concerns about the impact of HFT on the traditional trading business. The reason much of the industry is so vehemently opposed to HFT is that it is taking away their business, he speculated. “It used to be relatively easy in Canada, as a broker, to make an honest living, and now, with the introduction of HFT, I think it’s relatively more difficult for them to make an easy living,” he said.
One obvious explanation for this, from the industry’s perspective, Riordan suggested, is that HFTs must be doing something improper. However, they aren’t doing anything different than the industry has always done, he said, which is to look for technological advantages in the highly competitive business of stock trading.