FCA publishes paper indicating HFTs do not prey on other market participants
The UK Financial Conduct Authority (FCA) today published an Occasional Paper, dedicated to high-frequency trading (HFT) and examining whether high-frequency traders (HFTs) prey on other market participants.
The paper, authored by Matteo Aquilina and Carla Ysusi, both working in the Chief Economist’s Department of the Financial Conduct Authority, examines claims that HFTs can predict when orders are going to arrive at different trading venues and trade in advance of slower traders by exploiting their speed advantage. These claims imply that HFTs can generate profits without taking risks thanks to their latency advantages.
- Data and subjects
The study uses a novel dataset with full order-book data on 120 stocks traded on lit venues in the UK for the year 2013.
The data include all the information recorded by the matching engine of three UK trading venues at the millisecond level. The trading venues covered are the London Stock Exchange (LSE), BATS, and Chi-X. These venues account for approximately 85% of all FTSE on- exchange traded volume in the UK. The one major UK venue that is not part of the dataset is Turquoise, which accounts for the bulk of the remaining 15% of traded volume.
The sample is made up of 60 stocks from the FTSE 100 and 60 stocks from the FTSE 250 index.
The study observes 26 direct members of the trading venues that are classified as HFTs.
- Two questions
The paper investigates two related questions:
- Firstly, whether HFTs exploit their small (milliseconds) latency advantages to anticipate orders arriving in very quick succession at different trading venues from other market participants.
- Secondly, whether HFTs can anticipate the order flow over longer timeframes (seconds or tens of seconds).