The Inconsistencies In The Latest Pro-HFT Study
We’re sorry to have to do this to you again but today we have to debunk yet another academic high frequency trading study. We know that these debunking notes could get a bit monotonous but we feel it is important to point out the inconsistencies in these studies.
The study that we are referring to has been circulating in the pro-HFT wing and is titled “Interactions Among High-Frequency Traders” . It was written by two employees of the Bank of England and two European academics and concludes that HFT’s have a positive influence on price formation:
“We interpret this as evidence that HFT correlated trading is information-based; in other words, HFT firms appear to be reacting simultaneously and quickly to new information as it arrives at the market place, which makes prices more efficient. This suggests 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.”
Here are some of the inconsistencies that we found with this paper:
1) While some reports have claimed that the paper represents the views of the Bank of England, this is simply not true. This footnote clearly states that the folks on Threadneedle Street do not want to take responsibility for the contents of the paper:
“Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the Bank of England or to state Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of the Monetary Policy Committee or Financial Policy Committee.”
2) The study proclaims to use “unique transactional data” but only analyzes the activity executed on the London Stock Exchange in the largest 20 stocks of the FTSE 100 for the 10 largest HFT firms. What about all of the proprietary trading departments of the large investment banks? Nope, not included and in fact are lumped into the studies comparison group:
“Whereas the proprietary trading activities might involve high-frequency strategies, the overall activities of investment banks are quite distinct from that of pure HFT firms. We therefore view IBs as a relevant comparison group, proxying for the behaviour of informed traders in the market.”
“We also cannot identify the activity of individual HFT desks of larger institutions—with multiple trading desks operating in the same market—since all trades from such an institution are reported under a single name. Similarly, it is not feasible to identify the trades of individual HFTs that trade through a broker. ”
“Similarly, we only count the market share of a set of purely proprietary HFTs. “
3) We believe that any attempt to translate the results of this study into a global theme would be inaccurate since the market center fragmentation that exists in some markets (like the US) does not exist in London. The London Stock Exchange actually maintains a market share of over 60% of the market .
4) The authors fail to reveal the names of the 10 HFT firms that they use in the study and give a very vague definition of what high frequency trading is:
“Automated high-frequency trading is made possible by the direct interaction between electronic trading platforms and pre-programmed computers. “
5) Data was analyzed in seconds. This seems odd being that most HFT’s tend to talk about trades in microseconds.
“As mentioned above, each trade report is time- stamped to the second and we are therefore able to create time series of trade variables observed at a second-by-second frequency.”
We believe that the conclusions in this paper are drawn based on insufficient and incomplete data and therefore we must toss this paper into our bin of trashed HFT studies (by the way, this bin is getting quite full and may be used for some fuel for our fireplace so we can keep warm during these negative degree days).