The first study to examine the impact of a speed bump has found that TSX Alpha’s speed bump is doing more harm than good for investors.
Read the full study here:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2860359
A summary of the report as put forth by Professor Foley follows below:
At the time of Alphas launch in September 2015, NEO warned not all speed bumps are created equal and flagged the potential consequences caused by the new Alpha model that would actually advantage HFTs.
A year later, Foleyconfidently says that the TMX Group is the biggest enabler of predatory HFT behaviour in Canada.HFTs leverage TMX Alpha to gain faster access to information that they then use to take advantage of long-term investors on other markets. The behaviour on Alpha is detrimental to the Canadian markets as a whole.
And Foley sayshe hasthe smoking gun.He reports:
- Alpha fill rates drop dramatically
- Rebates attract retail liquidity takers (i.e./uninformed retail flow) and HFT willing to pay to access retail flow
- Significant increase in small orders which execute at only one venue
- Significant reduction in larger orders which execute across multiple venues
- Increase in market wide order flow toxicity
- Reduction in market wide liquidity provider profits (market makers)
- Overall increase in Canadian transaction costs
- Increase in overall quoted spreads
- Decrease in overall order book resiliency
- HFT are able to reduce adverse selection on Alpha. Non-HFT suffer a detriment
In other words, Alphas speed bump has been detrimental to market quality and has only benefited HFTs. HFTs have been able to utilize the Post Only order type to gain critical information on likely future price movements occurring within the next millisecond. While long-term investors orders are held up in the Alpha speed bump, HFTs are able to remove, or fade, their quotes and profit to the detriment of the markets as a whole.
Foley presented a draft paper to the OSC during the summer and was asked to extend the data (from 3 months to one year). His updated paper and summary is attached. He was in Toronto last week where he addressed a room full of traders, buy-side investors and market makers to discuss his findings and the overall toxicity of Alpha. The street was eager to hear his findings and welcomed an unbiased expert.
The full study and presentation slides can be found here:https://www.dropbox.com/sh/n7qboo23bixmzts/AADKoTmniE4h8jkeCCGgXx7Aa?dl=0
Professor Sean Foley at the University of Sydney (has a PHD in finance on Canadian micro market structure)
