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September 12, 2011 8:58 am
More than two-thirds of traders at asset management firms around the world are worried about the impact of high-frequency trading on the equities market, according to a survey by Liquidnet, operator of trading platforms.
The finding, in a global survey of 630 of its own customers, comes as debate has been intensifying over the value of rapid electronic trading. That has pitted those who say it poses new challenges to traditional investors, who are less reliant on speed, against high-frequency traders who say they provide valuable liquidity to markets and improve prices for all investors.
The survey, to which over 300 firms responded, by Liquidnet found that two-thirds of asset managers believes their costs of trading were rising as high-frequency traders exchanged small lots of shares in microsecond intervals.
“Investors are clearly concerned that their long-term investment styles are at odds with the speculative, nano-second profit taking approach utilised by high frequency traders,” said Seth Merrin, chief executive of Liquidnet.
“We have two very different constituents in the markets. We have the investor class that cares about company fundamentals and the HFT speculative class that doesn’t,” he added.
The finding echoes concerns expressed by the Investment Company Institute, a trade body for the US asset management, mutual fund and exchange-traded fund industry, in a letter to the International Organisation of Securities Commisssions (Iosco) last month.
“We believe some trading practices utilised by high frequency trading firms (and other automated trading firms) may pose problems for long-term investors; we support action by regulators to clearly define practices that may constitute market abuse to ensure adequate regulatory consequences for these practices,” the ICI said.
Liquidnet operates a type of trading platform known as a “dark pool” in 39 equity markets around the world.
Dark pools are off-exchange facilities that allow trading of large blocks of shares, with prices posted publicly only after trades are done.
Their popularity has grown because electronic trading has caused the average size of orders on exchanges to fall.
Traders placing large orders run the risk that this signals they are a large buyer or seller – a process known as “information leakage” – prompting the market to move against them, known as “market impact”.
Over half of those surveyed by Liquidnet were worried about market impact costs.
Dark pools fall into three categories: those operated by exchanges, by independent companies or by banks. Banks refer to theirs as “crossing networks”.
Liquidnet tries to distinguish its dark pools from the others by saying it does not allow HFT into its facilities. It offers participants ways to filter out what kind of trading activity they want their orders to interact with.
In its survey of asset managers – which Liquidnet said collectively manage over $13,000bn in assets – Liquidnet found that global traders are significantly more concerned with HFT compared with those who only trade in their regions.
“At the top five global institutions, 73 per cent of the traders said they regarded high frequency trading as a high-priority market-structure issue,” Liquidnet said.
Traders worries about HFT ran highest among those based in North America, with two-thirds identifying themselves as concerned. Nearly 60 per cent of European respondents, and more than half in Asia, expressed concern regarding HFT’s impact on trading performance.
Asked if the results were as Liquidnet expected, Mr Merrin told FT Trading Room: “We didn’t know the extent of the concern about HFT. There are different opinions on this but for it to be such a majority that was interesting to us, certainly across the US and Europe.”
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