On April 15, the UK Financial Conduct Authority (FCA) published an occasional paper (Paper) in relation to high-frequency traders (HFT). The Paper reports on a study that was conducted by the FCA to test whether or not HFTs were anticipating order flow on a systemic basis, and focused on two key questions:
- Whether HFTs capitalize on latency advantages to anticipate orders arriving in quick succession at different trading venues?
- Whether HFTs anticipate orders over longer time periods (seconds or tens of seconds)?
The FCA used 2013 order book data from the London Stock Exchange, BATS and Chi-X for its study and took a sample of 120 stocks (60 from the FTSE 100 and 60 from the FTSE 250 index). The Paper, authored by staff in the FCA Chief Economist’s Department, found:
- There was no evidence of HFTs anticipating orders or trading in front of other participants. The FCA speculates that this is likely to be due to the regulatory set-up in the United Kingdom, as well as to the fact that UK venues are physically close together, and hence the speed advantage is not as important as in other jurisdictions.
- There were some patterns of HFT which may be consistent with an ability to anticipate orders over longer time periods. However, the FCA noted that there could be alternative explanations for the patterns—namely, that HFTs may simply be reacting more quickly to news and other public information. Additional research will be needed to eliminate the possibility that the driver of such patterns is a faster reaction to public information and the FCA does not draw any conclusions on whether strategies different from those analysed in the Paper are employed by HFTs and other market participants in the UK market and whether or not they are detrimental.
The Paper—and its timing—may be seen as of some significant support to the HFT industry. In the United Kingdom, unlike in the United States where similar allegations originally arose, there is no requirement for an order to be routed according to the best available price on every venue. It remains the case that brokers are free to use routing strategies that cannot easily be predicted—as long as the principle of “best execution” is complied with. The FCA’s conclusion that HFTs do not systematically anticipate near-simultaneous marketable orders sent to different trading venues by pure non-HFTs should be of some comfort to HFTs in their businesses as they become drawn more and more into the EU regulatory sphere and as they prepare for the implementation of MiFID II/ MiFIR in January 2018.
A copy of the Paper is available here.
A copy of the FCA’s accompanying press release is available here.