When it comes high-frequency trading, many on the buyside are torn.
In a recent survey, more than half of the institutions that interact regularly with high-frequency traders–or 57 percent–said the strategies should be regulated, according to Greenwich Associates survey. But almost as many–or 55 percent–said that they do not feel others’ use of high-frequency trading practices leaves them at a disadvantage.
Mostly, the Greenwich survey showed that institutions are unsure whether high-frequency traders benefit or detract from the quality of liquidity and the marketplace. The buyside respondents were also mixed on whether there should be new regulation on high-frequency trading. Still, 87 percent of survey participants agreed on one thing: there is no hard data available currently to determine definitively whether high-frequency trading increases or decreases trading costs.
"Both detractors and those touting the liquidity provision and spread-tightening benefits of high-frequency trading have little data to back them up," said one survey participant from a U.S. asset management firm.
In the survey, Greenwich defines high-frequency trading as "strategies that seek to take advantage of small market inefficiencies." Their activity accounts for between 50 and 70 percent of all market liquidity, according to estimates used or quoted in the survey.
One hedge fund respondent, though, broke down high-frequency trading further. He divided the practice into electronic market makers and "others" who are involved with gaming and using "inappropriate exchange order types."
Another respondent from a large U.S. investment management firm was critical of high-frequency strategies. These traders create "false liquidity," he said, and routinely trade "in front of legitimate market participants." In addition, they use "predatory algorithms" that encourage legitimate participants to complete their orders by trading at slightly worse prices.
The Greenwich survey reported that there were added complexities to the answers of those respondents who said they’d support new regulations on high-frequency trading. They apparently focused on the use of flash orders and indications of interest, specific controversial practices that "are widely viewed as elements of front-running and may have inaccurately been lumped into the debate on the merits of high-frequency trading," the survey said.
The Securities and Exchange Commission last month adopted a proposal to ban flash orders. Additionally, the SEC earlier this month spoke out against the use of actionable IOIs that link dark pools to one another.
For its survey, Greenwich interviewed 78 institutional investors at banks, hedge funds, investment managers, mutual funds, insurance companies and pension funds in the U.S., Canada and Europe.
High-frequency trading has seeped into many industry analysts’ discussions. Both the research firm Tabb Group and agency broker Rosenblatt Securities have also released reports recently that examine the firms and strategies that constitute high-frequency trading.
