IIROC announces third project team to study impact of HFT

Experts to study HFT impact on market quality and integrity

TORONTO, May 27, 2014 /CNW/ - The Investment Industry Regulatory Organization of Canada (IIROC) today announced the selection of a third project team to assess the impact of high frequency trading (HFT) and related activity on Canadian equity markets as part of the final phase of its HFT Study.

In April 2014, IIROC announced the selection of the first two project teams. All the teams will, as part of their research, have access to secure and "masked" data for the period of January 1, 2012 to June 30, 2013. IIROC expects to have the final phase of the three-part HFT Study completed by the end of 2014.

"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, IIROC President and Chief Executive Officer. "This research, combined with IIROC's ongoing work, will help to inform any further policy making or regulatory interventions."

This impact analysis is the third phase of IIROC's HFT Study. It follows the publication of the first two phases of the study in December 2012 which objectively identified a study group of traders and offered a detailed, statistical analysis of their activity. IIROC's HFT Study will complement other initiatives already adopted by IIROC to govern high frequency and algorithmic trading. In particular, in 20I3 IIROC issued guidance on manipulative and deceptive trading. Surveillance alerts have been implemented and IIROC is actively monitoring to detect these rule violations.

The third team is comprised of two professors at renowned educational institutions in Chicago, who have extensive experience studying, teaching and publishing reports about HFT, algorithmic trading and other market structure issues internationally.

This team will examine the role of high-frequency traders as (non-designated) "market makers" in providing liquidity during periods of market stress, and how that compares to the liquidity offered by designated market makers and other traders during these periods. Because HFTs have no obligation to provide liquidity, it is unclear whether market stability is improved during stressful periods when liquidity is needed most.

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Background on Project Team

Project Title
"High Frequency Market-Making during Times of Stress" – Robert Korajczyk and Dermot Murphy

Brief Description:
This team will examine the role of high-frequency traders as (non-designated) "market makers" in providing liquidity during periods of market stress. An increased prevalence of high-frequency trading is often associated with improvements in market quality and a more liquid market. Liquidity is especially needed during stressful periods to maintain market stability, and it is unclear what effect high-frequency "market makers" have on market stability during these periods, given that they have no strict obligation to make markets.

That is, the team plans to examine so-called "phantom liquidity" and whether it adversely affects the implementation shortfall of program trades by large institutional traders, in addition to market stability during periods of permanent price movements or increased volatility. This liquidity provision will then be compared to that offered by designated market makers and other traders, both within and outside of stressful periods. This in turn may shed light on the stability of financial markets in which de-facto market makers may quickly withdraw.

Backgrounds:

Robert Korajczyk:

• Harry G. Guthmann Professor of Finance at the Kellogg School of Management, Northwestern University
• Ph.D., University of Chicago (Finance), August 1983
• M.B.A., University of Chicago (Finance, Econometrics), June 1977
• Recent publications:
  • "Are you trading predictably?" (with Steven L. Heston, Ronnie Sadka, and Lewis D. Thorson). Financial Analysts Journal, 67 (March/April 2011): 36-44.
  • Portfolio Risk Analysis (with Gregory Connor and Lisa Goldberg). Princeton: Princeton University Press, 2010.
  • "Intraday Patters in the Cross-Section of Stock Returns" (with Steven L. Heston and Ronnie Sadka), Journal of Finance 65 (August 2010): 1369-1407. Awarded the Crowell Memorial Research Paper Prize: First Place from PanAgora Asset Management Quantitative Research Institute, 2009.
  • "Factor Models in Portfolio and Asset Pricing Theory" (with Gregory Connor). In Handbook of Portfolio Construction: Contemporary Applications of Markowitz Techniques, edited by John Guerard, Jr. New York: Springer, 2010.
  • "Factor Models of Asset Returns" (with Gregory Connor), Encyclopedia of Quantitative Finance, edited by Rama Cont. Chicester: Wiley, 2010.
  • "Pricing the Commonality Across Alternative Measures of Liquidity" (with Ronnie Sadka). Journal of Financial Economics 87 (January 2008): 45-72.
  • "The Common and Specific Components of Dynamic Volatility" (With Gregory Connor and Oliver Linton). Journal of Econometrics 132 (May 2006): 231-255.

Dermot Murphy:

• Assistant Professor of Finance, University of Illinois at Chicago
• Ph.D., Finance, Kellogg School of Management, Northwestern University, 2013
• M.Sc., Sauder School of Business, University of British Columbia, 2007
• Research Interests: Market Microstructure, Electronic Markets, Trader Behaviour, Liquidity, Empirical Asset Pricing, Corporate Bonds
• Current Research:
  • "The Specific Details of Trading Activity and Volatility around Stock Splits" (with Ramabhadran Thirumalai).
  • "Continuation of Daily Returns and Slow Diffusion of Information" (with Ramabhadran Thirumalai).
  • "The Impact of High-Frequency Trading on Stock Market Liquidity Measures" (with Soohun Kim).

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IIROC is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.  Created in 2008 through the consolidation of the Investment Dealers Association of Canada and Market Regulation Services Inc., IIROC sets high quality regulatory and investment industry standards, protects investors and strengthens market integrity while maintaining efficient and competitive capital markets. 

IIROC carries out its regulatory responsibilities by creating and enforcing rules regarding the proficiency, business and financial conduct of dealer firms and their registered employees and through the creation and enforcement of market integrity rules regarding trading activity on Canadian marketplaces.

SOURCE: Investment Industry Regulatory Organization of Canada (IIROC) - General News

For further information: Karen Archer, Senior Media and Public Affairs Specialist, 416-865-3046, [e-mail]; June Yee, Manager, Corporate Communications, 416-943-6921, [e-mail]