Large institutional traders around the world are concerned about the impact that high-frequency trading has on the equity markets, according to a new survey by Liquidnet Inc., an alternative-trading service.
Two-thirds of mutual, pension and
hedge fund traders said that they are concerned about the impact that high-frequency trading has on trading performance, and 23% of those labeled themselves as “very concerned” about the issue, according to the survey — of 630 institutional asset management firms managing $13 trillion in assets.
High-frequency trading involves using supercomputers to trade shares at speeds of about one-millionth of a second to try to catch brief moves in stock prices. It can also apply to currencies and commodities.
Critics of high-frequency trading, which mostly has been perfected by independent firms though it is practiced by some Wall Street banks and hedge funds, blame it for exacerbating extreme market volatility.
“There is strong conviction among the vast majority of long-only traders that HFT is a negative for institutional investors trading in large size,” said Seth Merrin, founder of Liquidnet. “Investors are clearly concerned that their long-term investment styles are at odds with the speculative, nanosecond profit-taking approach utilized by high-frequency traders.”
About 73% of traders from the top five firms tagged high-frequency trading as a high-priority market structure issue, the survey said.
James Overdahl, a vice president of NERA Economic Consulting and adviser to the FIA Principal Traders Group, a unit of the Futures Industry Association, said that high-frequency trading is a tool that can be used for many purposes, including identifying opportunities from one market to another.
The process helps keep prices of related products in alignment between markets, he said.
“Although there may be traders trading in the short term, long-term investors benefit from market quality improvements such as lower bid-ask spreads, and better trade execution and better price discovery,” Mr. Overdahl said.
FIA-PTG members trade for their own account, not on behalf of customers.
The Securities and Exchange Commission has said that it is looking at further regulating high-frequency traders and requiring standards as part of its efforts to prevent a repeat of the May 2010 flash crash, when stocks dropped more than 700 points in minutes before recovering.
Although regulators didn't blame the flash crash on high-frequency trading, the SEC found that during the flash crash, such traders represented more than 50% of the market volume and that some firms may have worsened the event by withdrawing from the market. As buyers shrank, stock prices fell quickly.
SEC Chairman Mary Schapiro said that the commission is examining whether high-frequency traders should have obligations similar to market makers, given the large implications of their actions on the markets.
