Investors depend on an orderly market with rational outcomes and reliable intermediaries are essential to the investor confidence which helps make our markets an effective engine for economic growth and prosperity. High Frequency Trading (HFT) strategies have been identified in studies and reports to be responsible market participants providing continuous quotes in calm and crisis markets.By contrast, evidence suggests larger, more traditional intermediaries recede from markets in times of uncertainty. We believe this is because HFT firms have developed protocols that are nimble and adaptable regardless of market conditions.
Industry Support for the Role of HFT in Promoting Market Stability
“During the (treasury market liquidity crisis in October 2014) event window, bank dealers tended to widen their bid-ask spreads (cost to trade) … At the same time, PTFs tended to reduce the quantity of orders they supplied … but maintained tight bid-ask spreads.”
– Multi-agency government report “The U.S. Treasury Market on October 15, 2014”
“Proprietary traders, be they fast or slow, provide liquidity with contrarian marketable orders, thus helping the market absorb shocks, even during crisis …”
– Toulouse School of Economics Study “Who supplies liquidity, how and when?”
“…our results indicate that HFT limit orders exert a stabilizing influence on markets.”
– Limit Order Placement by High-Frequency Traders by Professors Avanidhar Subrahmanyam and Hui Zheng
“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.”
– Paper: “High Frequency Trading and End-of-Day Price Dislocation by Professors Douglas J. Cumming, Feng Zhan and Michael J. Aitken
“By having a lot of fast trading, spreads have come way down, volumes have gone up and therefore it’s easier to get off a trade … and I think it’s actually brought short term volatility down, not up. So I think it’s been good for the markets.”
– James Simons, Billionaire Investor and Renaissance Technologies founder
“HFTs lean against the wind by trading in the opposite direction of rapid extreme price movements and supplying liquidity to non-HFTs.”
– Paper: High Frequency Trading and Extreme Price Movements by Professors Jonathan Brogaard, Allen Carrion, et al
“HFTs: generally provide more liquidity, contribute substantially to price discovery, improve the best price or match the prevailing best prices; and (do not) take advantage of slower non-HFTs or front-run non-HFTs.”
– Multi-Phase Study of High Frequency Trading by the Investment Industry Regulatory Organization of Canada (IIROC)
February 28, 2016: Correlated High-Frequency Trading
Professors Ekkehart Boehmer, Dan Li and Gideon Saar analyze data from the Investment Industry Regulatory Organization of Canada and find the greater the HFT competition within a trading venue helps smaller trading venues become more competitive or viable in terms of posting better prices and narrower spreads. It also found that competition between HFT firms helps investors by lowering the volatility of stocks.
December 9, 2015: IIROC Study of High Frequency Trading
The Investment Industry Regulatory Organization of Canada published the last of a three-phase, multi-year study on market structure. It concluded that HFTs: generally provide more liquidity, contribute in a substantial way to price discovery, improve the best price or match the prevailing best prices; and (do not) take advantage of slower non-HFTs or front-run non-HFTs.
November 2015: Limit Order Placement by High-Frequency Traders
Professors Avanidhar Subrahmanyam of the University of California, Los Angeles (UCLA) and Hui Zheng of The University of Sydney conclude that when providing liquidity, HFT firms net increase the supply of liquidity when market volatility increases and their liquidity is less affected by swings in order imbalances.
July 2015: Joint Staff Report: The U.S. Treasury Market on October 15, 2014
A multi U.S. government agency report that found HFT continued to intermediate a volatile market when other market participants pulled back.
June 2015: Who supplies liquidity, how and when?
Professors Bruno Biais, Fany Declerck, and Sophie Moinas of the Toulouse School of Economics find “Proprietary traders, be they fast or slow, provide liquidity with contrarian marketable orders, thus helping the market absorb shocks, even during crisis …”
February 2015: HFT and Extreme Price Movements
Professors Jonathan Brogaard, Ryan Riordan, Andriy Shkilko, Konstantin Sokolo determine high-frequency traders are “active liquidity providers during price jumps that result in permanent price changes, absorbing the most informed order flow. Our evidence is consistent with HFT performing a stabilizing function in modern markets.”
November 2014: What is High Frequency Trading?
The Committee on Capital Markets Regulation seeks to shed further light on HFT to inform public debate and form a basis for future policy reforms.Among its research findings: “others have more recently shown that HFT market makers in aggregate are net suppliers of liquidity during market disruptions, thus improving market stability.”
May 14, 2014: High-Frequency Trading and Price Discovery
Professors Jonathan Brogaard, Terrence Hendershott and Ryan Riordan paper Bloomberg calls the “most-cited” on HFT, finds that overall HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors, both on average and on the highest volatility days.
October 2009: Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market
Authors Alain Chaboud, Clara Vega and Erik Hjalmarsson of the Division of International Finance, Federal Reserve Board and Benjamin Chiquoine of the Investment Fund for Foundations, look at algorithmic trading’s impact on the foreign exchange market, finding evidence that the presence of algorithmic trading reduces market volatility.
TIMOTHY MASSAD, CFTC Chairman
June 3, 2015 Speech