Foresight Report: "The Impact of High-Frequency Trading on Market Integrity: An Empirical Examination" (with Lofchie Comment)

A recently issued report on the impact of high-frequency trading on market integrity, which was commissioned by the Bank of England and authored by Alex Frino and Andrew Lepone, found no link between high-frequency trading ("HFT"), or at least the proxy used by the authors to measure HFT, and #8220;ticking#8221; and #8220;end-of-day price dislocations#8221; - the proxies used by the report to measure market manipulation. The report examined five years of trading data on the London Stock Exchange and Euronext Paris during the period from 2006 to 2011. Specifically, while the report found a positive and statistically significant relationship between the proxy for HFT and #8220;ticking#8221; - incidences of one-share executions moving prices - this relationship disappeared when the data was controlled for variations in volume, volatility and returns. The report also found a statistically negative correlation between the proxy for HFT and end-of-day price dislocations, suggesting a negative correlation between HFT and market manipulation.

Lofchie Comment: It will be interesting to see how much the regulatory studies of HFT coming largely from UK regulators and European academics influence the debate over HFT, given that none of the studies has been materially critical of HFT. The debate as to the regulation of HFT is heated, not only in the securities markets, but also in the futures markets. As to the CFTC Commissioners, Commissioner Chilton has been a frequent critic of high-frequency traders (whom he refers to as "cheetahs"); however, Commissioner O'Malia, who has also lately shown interest in the issue, seems most interested in the academic research being done on the subject, as reflected in the attached news item.

Click here to view study in full (links externally to q2forum.com).