HFT ‘represents up to 43% of European equity trading’
High frequency trading (HFT) accounts for up to 43 per cent of the value traded on European equities markets. That’s the finding of a new study by the European Securities and Markets Authority (ESMA), in the first real empirical study of its kind.
The report found HFT accounts for between 24 and 43 per cent of activity, depending on how it is measured. While a legal definition is provided by MiFID II, the actual academic research is more limited and so far has been focused on US equity markets.
Two separate proxies were used for the study. Estimations for HFT activity were based on the primary business of firms, also called the direct or flag approach; and on the lifetime of orders, the indirect approach.
The first is an “institution-based measure”, in other words each institution is either HFT or not. The second is stock-based - an institution may be HFT for one stock but not for another one. This produced a big difference in the figures for each measure.
“The results based on the primary business of firms provide a lower bound for HFT activity, as they do not capture HFT activity by investment banks, whereas the results based on the lifetime of orders are likely to be an upper bound for HFT activity,” ESMA says in the detailed 31-page report.
HFT activity accounts for 24 per cent of value traded for the direct approach and 43 per cent for the lifetime of orders approach.
For the number of trades the corresponding numbers for HFT activity are 30 per cent and 49 per cent. The number of orders were respectively 58 per cent and 76 per cent.
“The difference in the results is mainly explained by HFT activity of investment banks which is captured under a lifetime of orders approach, but not under a HFT flag approach,” saysESMA.
As the regulator points out, this discrepancy in measurement is “an important issue for the analysis of HFT activity and its impacts … and is a significant challenge for regulators who need to define what constitutes HFT activity”.
The study also noted that HFT firms are members of more trading platforms than other types of market participants, which the authors suggest may indicate that they are more likely to perform cross-venue arbitrage.