New research finds HFT improves market fairness

  • New research from the Capital Markets Cooperative Research Centre (CMCRC) has found that the presence of high frequency traders improves market fairness by reducing end of day price dislocation
  • Based on study of data from 22 exchanges from around the world, from 2003-2011
  • Study found that the presence of HFT decreases the probability of end-of-day (EOD) price dislocation by 21%

Says:

  • End of Day (EOD) price dislocations are troublesome for markets and any market structure change which mitigates the incidence of such changes should be seen as a positive outcomes for the marketplace
  • HFT was associated with a decrease in the total trading value surrounding each suspected dislocation, by the most conservative estimate of 42% relative to the average size of the total trading value, suggesting that the mere presence of HFT participants in a marketplace may discourage EOD dislocation
  • The study also examined specific dates when EOD price dislocation was most likely to be manipulated, eg. dates when options expire and end of month/quarter calendar dates. The data showed that in the presence of HFT, EOD price dislocation was less pronounced on these dates as well
  • “There is an established negative relationship between liquidity and EOD prices (i.e. the higher the liquidity the harder it is to manipulate or the less prices will move) and that HFT by either providing additional liquidity at these points (or because market participants know that HFT are present in a marketplace) appears to reduce EOD dislocation”

The study is here: Does HFT Exacerbate End-of-Day (EOD) Price dislocation?

We find the presence of HFT has significantly mitigated the frequency and severity of price dislocation and the likelihood of manipulation, counter to recent concerns expressed in the media that HFT exacerbates market manipulation. Taken together with the existing evidence that HFT reduces transactions costs and enhances price discovery, we demonstrate not only how market fairness can be operationalized, but how it can be used in market structure decisions.