FCA has published an occasional paper that looks at whether high-frequency traders (HFTs) anticipate the order flows. The paper addresses allegations that HFTs:

  • prey on other market participants and only intermediate trades that would have taken place without their involvement; and
  • can predict when orders are going to arrive at different trading venues and so trade in advance of slower traders by exploiting their speed advantage.

As a result, some allege HFTs can make profits without taking risks due to their latency advantages. FCA’s researchers used a novel dataset with full order-book data on 120 stocks traded on lit venues in the UK in 2013. They found no evidence that HFTs can “see the true market” and trade in front of other participants at a millisecond frequency. However they did find patterns consistent with HFTs being able to anticipate the order flow over longer time periods, particularly for those market participants that adopt pure non-HFT strategies. FCA observes it cannot say whether this is due to HFTs reacting more rapidly to new information, or to order-flow anticipation. It also concludes it is not simple to assess the implications of anticipatory behaviour for society as a whole, and whether it is detrimental and, if so, when. Also, FCA says other market participants, not just HFTs, may also engage in these behaviours. (Source: FCA reports on HFTs anticipating the order flow)