There is no rest in the search for the impact of high-frequency trading.
That’s the case at least in the Great North, where Canadian regulators are tapping two U.S. academics to propel their ongoing initiative to gather data and best understand the much publicized and vilified trading strategy into its last phase.
The Investment Industry Regulatory Organization of Canada (IIROC) 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. This new phase is tentatively titled, “High Frequency Market-Making during Times of Stress,” and is being run by Robert Korajczyk and Dermot Murphy.
Both Korajczyk and Murphy are professors from Chicago and have extensive experience studying, teaching and publishing reports about HFT, algorithmic trading and other market structure issues internationally. Korajczyk is a Harry G. Guthmann Professor of Finance at the Kellogg School of Management, Northwestern University while Murphy is from the University of Illinois at Chicago.
This last phase and team will examine items such as “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.
The goal of the study, which has already seen two project teams announced – to get a complete picture of the trading strategy, evaluate its effects on the marketplace, and possibly formulate rules and or regulations to best meld the practice into Canadian market structure.
“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.”
According to IIROC, 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.
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.
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.
