Just as the debate over high-frequency trading intensifies alongside the SEC’s inquiry into the structure of the US equity market, a new study from research firm Greenwich Associates provides further evidence that institutional investors are divided about regulating HFT.
A survey of 78 institutions from the US, Canada and Europe showed 57 per cent would support new regulations on HFT, while 21 per cent would support a total ban.
It appears as if almost no one seems to know for sure whether HFT helps or hurts their own trading operations and outcomes, nor do they know whether the practice increases or decreases their trading costs.
However, support for more HFT regulation seems centred on specific practices such as the use of flash orders and indications of interest, which are widely seen as elements of front-running, and “may inaccurately be lumped into the debate on the merits of HFT”. Such trading practices, notes Greenwich, have “an obvious and proven negative impact on investors”, Greenwich note.
Greenwich also found deep divisions over the broader question of whether HFT strategies place traditional long-only institutional and retail investors at a disadvantage. The reason, they explain, is that:
[t]here is little empirical data to demonstrate whether HFT benefits the market as a whole by providing liquidity or unfairly increases trading costs for investors. Even some of the most active institutional stock traders cannot agree about whether HFT helps or hurts institutions, retail investors and the companies with publicly trading stock. Until these questions are answered, regulators should limit any new rules to narrow trading practices that have an obvious and proven negative impact on investors.
More specifically, proposes Greenwich – and if the SEC hasn’t yet thought of this, it’s certainly not a bad idea – the US regulator should commission an academic study on the short-term and mid-term effects of HFT on a company’s stock.
Opinion, notes Greenwich, is “evenly divided as to prospective benefits vs negatives, with fully half of institutional investors claiming uncertainty”.
The institutions surveyed interact with high-frequency traders on a near constant basis, and would be affected more than anyone else by any negative or positive influence from HFT strategies, it adds, noting:
…These institutions are sharply divided between those that see HFT practices as malevolent or benign, as adding liquidity to global markets or preying on traditional stock investors. Forty-five per cent … think HFT poses a threat to the current market structure, while 36 per cent believe it actually benefits the market and investors by increasing overall liquidity.
Interestingly, almost 20 per cent of the participants said they did not know enough about HFT to make a judgment about its overall impact on the market, much less on specific stock prices.
The participating institutions did, however, agree on one thing:
They do not have enough information to make any final judgements about HFT. As a survey participant from a US asset management company puts it, “Both detractors and those touting the liquidity provision and spread-tightening benefits of HFT have very little data to back them up.” The market seems to agree: Eighty-seven percent of the institutional investors … say that at the present moment, there is no hard data to definitively determine whether HFT increases or decreases trading costs.
Related links:
Dark pools and HFT finally catch Schapiro’s eye – FT Alphaville
The Daily Show takes on HFT – FT Alphaville