Data & Studies
Collected academic and industry studies, statements and data on issues of modern market structure.
This report by the Bank for International Settlements (BIS) examines the Sterling Flash Crash of October 2016. Drawing on analysis from the Bank of England, as well as information from the BIS Markets Committee, the analysis points to ‘a confluence of factors catalysing the move, rather than to a single clear driver.’ The report also finds that the time of day was a significant factor in increasing the vulnerability of the Sterling Foreign Exchange market. It notes that events such as this have been short lived and have not significantly impacted financial stability.
Published: January 2017
This report by the Bank of England looks at the market impacts of the decision by the Swiss National Bank to discontinue the Swiss franc’s floor of 1.20 Swiss francs per euro. The report examines the effects of the move on the market in the short and long term. In the short term, it found that the removal of the floor led to extreme price moves. It found evidence that the “rapid intraday price fluctuation was associated with poor underlying market liquidity conditions.” In the longer term, it found a reduced level of liquidity, associated with an increased level of market fragmentation and higher market volatility.
Author: Bank of England
Published: January 2017
Working Paper Series: The stock market effects of a securities transaction tax: quasiexperimental evidence from Italy
This working paper by the ECB focuses on the impact of the Financial Transaction Tax (FTT)/Security Transaction Tax (STT) on Italian markets. The paper finds the FTT in Italy has impacted negatively on the markets. The study explains that "overall the introduction of the STT induced a reduction in liquidity for the stocks hit by the reform. We also find some evidence that volatility of the "treated" stocks increased." The study also finds that the introduction of FTT has led to a wider bid-ask spread. It notes that there was insufficient empirical data to make a full assessment of the effects of the tax on OTC markets.
Published: August 2016
In this report the AFM looked at two often expressed critiques of HFT: that HFT is accused of ghost liquidity and that HFT strategies can make riskless profits at the expense of investors. For the first part of the report, the AFM found that ‘underlying trading patterns are a logical consequence of the application of market making strategies in a fragmented marketplace.’ For the second part of its report, the AFM, having analysed large orders at several venues, could not find any evidence to support that HFT make unfair profits at the expense of investors. They say ‘we did not find any evidence of HFT executing the liquidity detection strategy in our case studies.’
Published: June 2016
In this report, Menkveld states that HFTs ‘helped us migrate quickly to electronic trading which, in turn, yielded lower transaction cost and more volume’ and that being well-informed they become market makers. He also concludes that HFTs provide venue competition with more innovation and lower trading costs. Overall, Menkveld says that ‘bottom line: I believe economic benefits outweigh costs’ and outlining what he believes are the three main benefits of HFTs which are ‘market making, venue competition, more trading opportunities.’
Author: Albert J. Menkveld
Published: June 2016
This report focuses on the change in the trading landscape of equity markets over the last decade. The study used unique data collected by ESMA and covers a sample of 100 stocks on 12 trading venues in nine EU countries. The study found that order duplication, used by traders to ensure execution across multiple trading venues, contributes positively to liquidity. It concludes that that overall multi-venue trading has increased the liquidity in EU equity markets.
Published: June 2016
This paper looks at who provides liquidity in the limit order books, by using data from Euronext and the AMF to observe how traders and the market connect. Their research found that liquidity supply by proprietary traders ‘does not evaporate when it is most needed.’ It found that proprietary traders, fast or slow, provide liquidity with contrarian marketable orders, thus helping the market to absorb shocks, even during a crisis. It also concludes that market reforms may have negative consequences, stating that: ‘new banking regulations, making it more difficult and costly for banks to engage in proprietary trading, might also reduce market liquidity.’
Published: May 2016
Algorithms have improved liquidity in securities trading at Nasdaq Copenhagen with no evidence of increased price volatility or flash crashes caused by erroneous programming, according to the Danish FSA in its report. “The widespread use of computerized trading looks, according to our research, to have resulted in improved liquidity in the market. There is no evidence of greater risk for example, from greater fluctuations in prices as a result of algorithm trading.” Algorithms were found to account for 50% of all trading with high frequency trading amounting to 15% of total volume. The FSA found no evidence of market abuse by algorithm-based trading strategies.
Author: FSA, Denmark
Published: February 2016
High-frequency traders (HFTs) have received a mixed reaction from academics and practitioners with some people underlining their role as liquidity providers and others highlighting the problems that they could bring to the market. A specific allegation that has been made is that by exploiting their speed advantage, HFTs can predict when orders are going to arrive at different trading venues and trade in advance of slower traders. Using order book data from the UK equity market, the FCA investigated this specific allegation by looking for patterns compatible with HFTs anticipating the order flow of other participants on lit venues.
Published: April 2016
This paper examines the interactions between different HFTs and the impact of such interactions on price discovery. The study finds that correlated trading by HFT firms are associated with permanent price impact but that it is information based and that firms are ‘reacting simultaneously and quickly to new information as it arrives at the market place, which makes prices more efficient.’ The paper also found that correlated trading by HFT firms ‘does not appear to contribute to undue price pressure and price dislocations on a systematic basis in the UK equity market.’ The paper also states that commonality among the trading strategies of algorithmic trades in the foreign exchange market does not create ‘price pressures and excess volatility that would be detrimental to market quality.’
Author: Bank of England
Published: February 2015
How fair and effective are the fixed income, foreign exchange and commodities markets?
Published: January 2015
The impact of “high frequency trading” or “HFT” on U.S. equity markets has generated significant attention in recent years and increasingly in the last few months. Although HFT strategies now execute approximately 50% of the volume in U.S. - listed equities, there is still a limited understanding of how these strategies work in practice. Through this report, 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.
Author: Committee on Capital Markets Regulation
Published: 29 December 2014
Investors trade in various types of venues. When demanding immediacy, they trade off price impact and execution uncertainty. The “pecking order” hypothesis (POH) states that investors rank venues accordingly, with low-cost-low-immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, midpoint dark pools on top, non-midpoint pools in the middle, and lit markets at the bottom. When urgency increases, investors tilt their flow from top to bottom. We document such pattern for U.S. data, confirming POH. A simple model obtains POH in equilibrium and suggests that the availability of dark pools reduces investor (utility) cost by $1.43 billion annually.
Author: Albert J. Menkveld, Bart Z. Yueshen, Haoxiang Zhu
Published: 23 December 2014
This paper examines the relation between high-frequency trading (HFT) and extreme price movements (jumps). Some market observers allege that HFT causes and exacerbates price jumps thus contributing to market instability. Contrary to these allegations, we find that during extreme price movements high-frequency traders act as net liquidity suppliers, while non-high-frequency traders act as net liquidity demanders. Moreover, high-frequency traders are particularly active providing liquidity 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.
Author: Jonathan Brogaard, Ryan Riordan, Andriy Shkilko, Konstanin Sokolov
Date: 26 November 2014
We study the intersection of the literatures on HFT and fragmentation to help understand the role HFT have in enhancing or harming market quality via market integration/ fragmentation. This includes examining several topics related to cross-market behavior of HFT including: (a) their role in cross-market liquidity; (b) multi-market risk (inventory) management; and (c) information transmission across exchanges. Our goal is tofulfill IIROC's desire to better understand how HFT firms affect overall market quality and other investors through their integrated market activity. Early results show HFT are integral in tying markets together.
Author: Jonathan Brogaard,Terrence Hendershott, Ryan Riordan
Published: November 2014
CFA Institute staff have tracked the evolution of high-frequency trading (HFT) in global capital markets over the last five years, with a view toward understanding potential impacts on market integrity and efficiency, to avoid potential unintended consequences,as well as to inform our perspectives on public policy and regulatory initiatives.
Author: CFA Institute
Date: April 2014
Views on the integrity of the global capital markets.
Author: CFA Institute
A working paper published by the European Central Bank
The authors find that high-frequency traders 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. This is done through their liquidity demanding orders. In contrast, HFTs’ liquidity supplying orders are adversely selected. The direction of buying and selling by HFTs predicts price changes over short horizons measured in seconds. The direction of HFTs’ trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances.
Date: November 2013
High-frequency trading behaviour and its impact on market quality: evidence from the UK equity market
We analyse the intraday behaviour of high-frequency traders (HFTs) and its impact on aspects of market quality such as liquidity, price discovery and excess volatility.
Author: Evangelos Benos and Satchit Sagade
Date: December 2012