TORONTO, Oct. 10, 2013 /CNW/ - High frequency trading is not the bane of
capital markets that critics make it out to be, according to a report
released today by the C.D. Howe Institute. In "High Frequency Traders:
Angels or Devils?" author Jeffrey G. MacIntosh weighs the effects of
lightening fast, automated trading on capital markets and finds that,
overall, it is having beneficial effects.
High frequency trading is taking world capital markets by storm," says
the author, "notably in the United States and the United Kingdom, where
it accounted for about 50 percent of equities trading in 2012, and to a
growing extent in other parts of Europe and in Canada. But are high
frequency traders angels or devils in terms of the impact on capital
markets? That is the question I address."
Critics claim high frequency trading (HFT) puts retail and institutional
investors at a speed disadvantage. They also blame high frequency
trading for the US "flash crash" of May 6, 2010 and say it has
increased the likelihood of such events happening again.
After examining what HF traders do and how HFT differs from traditional
market making, MacIntosh explores the empirical evidence relating to
the effect of HFT on capital markets, and the policy issues that HFT
He concludes that HFT enhances market quality. It lowers bid/ask
spreads, reduces volatility, improves short-term price discovery, and
helps create competitive pressures that reduce broker commissions.
Retail traders, despite being at a speed disadvantage, realize a net
gain from HF trading in the world's capital markets, says MacIntosh.
Macintosh provides recommendations to address the issues raised by HFT
Maintain the Order Protection Rule and Contain the Spread of Dark Pools:
To prevent abusive trading practices, protect client interests, and
create a level playing field among different trading venues,
policymakers should defend the consolidated order book by maintaining
and policing the order protection rule and minimizing the leakage of
trading from the "lit" markets to "internalizers" and "dark pools."
Do Not Interfere with Maker/Taker Pricing Models: Some observers say maker/taker pricing raises trading costs for retail
traders, because retail trade orders are typically on the active side
of the market, and associated fees are passed on to customers. However,
it is likely that much or all of the increased cost that results from
being on the active side of the market has been absorbed by retail
brokers. In addition, any increased cost that is passed on to the
retail customer is more than made up for by lower bid/ask spreads on
Focus on Circuit Breakers to Prevent "Flash Crashes": HF traders did not cause the "flash crash," and are less likely than
traditional market makers to withdraw liquidity supply when markets
become volatile. Canadian regulators concerned with preventing similar
events should focus on circuit breakers to stop market anomalies before
they turn into "flash crashes," in addition to ensuring that liquidity
is not drained out of the "lit" markets by internalizers and dark
For the report go to: http://www.cdhowe.org/high-frequency-traders-angels-or-devils/23081
SOURCE: C.D. Howe Institute
For further information:
Jeffrey G. MacIntosh, Toronto Stock Exchange Professor of Capital Markets, Faculty of Law, University of Toronto; or Finn Poschmann, Vice-President Research, C.D. Howe Institute, 416-865-1904; email: email@example.com.