Turner agreed — and reminded participants that regulators are fully aware of the benefits that HFT theoretically delivers in terms of liquidity, but wondered aloud whether we may have gone too far.
“We know from the efficient-market hypothesis that the more markets you have, the more allocative efficiency there will be, the more risk will be shared, the better price discovery we will have,” he said. “But once you’ve got a reasonably active, liquid market, is there any real value? It’s quite reasonable of us to ask searching questions in a way we didn’t before the crisis on whether this is limitlessly good.”
In February, the Swedish regulatory agency Finansinspektionen (FI) issued a long-awaited report on HFT that concluded the practice is mostly harmless — not a condemnation, but hardly a ringing endorsement.
Then, in March, we saw the release of the “Interim Review of UK Equity Markets and Long-Term Decision Making.” Coordinated by London School of Economics Professor John Kay, the report is based on a survey of British asset managers, pension funds and corporate treasurers — most of whom, it turns out, doubt that HFT even makes markets more liquid, let alone whether it has any real benefit to the larger economy.
“The purposes of equity markets are to generate returns for savers and to improve the performance of companies,” wrote Kay. “Many respondents to this Review thought that equity markets have lost sight of these goals.”
The Association of Chartered Certified Accountants (ACCA) was one such respondent.
“It is sometimes forgotten that equity markets exist not solely to enrich speculators, market makers and intermediaries,” said the ACCA in its official response. “It would seem fair to say that equity markets today serve the needs of the players in these markets better than they serve either those who put up the money or the businesses.”
It’s not just HFT that came under fire, but the entire concept of fostering competition among equities platforms, which has resulted in fragmented platforms synchronized by high-frequency arbitrage.
“In a number of discussions, participants… expressed the regret that the older model — in which the exchange was a utility, existing to serve the needs of market participants in the first instance and then the economy more generally — had been displaced by one in which exchange services were a standalone business,” Kay wrote.
One thing everyone agrees on is that some HFTs are gunking up the system by flooding it with scores of orders for every executed trade. U.S. Securities and Exchange Commission (SEC) Chairman Mary Schapiro wants to implement a fee on companies that generate high “order-to-trade” ratios — something that exchanges already are doing on their own. The Intercontinental Exchange (ICE) has implemented a more complicated “high-frequency messaging policy” that combines ratios with the distance of orders from the market.